Some 18 months after a report called the current system unfair and inequitable and three months after a court halted a substitute plan, the Massachusetts Division of Insurance has approved a modification in the way high risk private passenger auto business is distributed among the state’s insurance companies.
Commissioner Julianne Bowler has signed off on a revised Rule 13 submitted by the board of the high risk organization, Commonwealth Auto Reinsurers. The revised rule is designed to more equitably distribute among servicing carriers the high risk policies that are written by CAR’s exclusive representative producers (ERPs). ERPs have contracts to place business with CAR but do not have voluntary contracts with auto insurance carriers.
However, in addition to green-lighting the ERP redistribution, Bowler is requiring that the shifting of ERP business take into consideration the quality as well as the quantity of risks for which each insurer is responmsible. CAR had proposed a random redistribution process that weighed the size of the books of business held by ERPs, but not their loss ratios.
Each servicing carrier is required to handle a certain amount of ERP business under a market share-based formula. Rule 13 governs the assignment of ERPs to servicing carrier insurers and sets procedures for maintaining equitable assignments over time. A carrier’s ERP business can affect the its portion of CAR’s deficit to the tune of millions of dollars.
“We conclude that CAR’s proposed changes to Rule 13, while they may help to correct some inequities in the current system, will be more effective if applied after a qualitative assessment has been made of all ERP business and ERPs have been physically redistributed to servicing carriers in a manner that will achieve both quantitative and qualitative parity,” the decision stated.
Bowler ordered CAR to recalculate the loss ratios of all ERPs before reassigning the business to carriers. She ordered CAR to complete the redistribution within 60 days.
The new rule also provides faster relief to insurers that find themselves with more than their fair share of ERP business. Under the old rule, a company could seek relief only after it had shouldered 25 percent above its fair share for a year. The new rule permits an insurer to seek adjustments if it has carried 10 percent more than its quota for only three months.
The CAR governing board will discuss Bowler’s order at a meeting on Oct. 5 in Boston.
The fairness of the distribution of CAR’s business and its $260 million annual deficit was highlighted in a report by Tillinghast Towers Perrin last April and has been the subject of various reform proposals by Bowler, Attorney General Tom Reilly, the industry and others. The most ambitious of these was a plan pushed by Bowler to convert CAR to an assigned risk plan similar to those in other states. But opponents of that plan, including several leading domestic auto insures, succeeded in blocking it in Suffolk Superior Court after effectively arguing that Bowler exceeded her regulatory authority in imposing the change.
The redistribution could mean more than 100 ERPs will have to switch from one servicing carrier to another, bringing their policies with them. Critics of the revision warned that this could mean market disruption for thousands of motorists.
But it might also mean that some of these ERPs with better loss ratios wind up being offered voluntary contracts from insurers. “Our hope is that companies would want to keep them and not lose them if they are good ERPs,” commented Frank Mancini, president and chief executive officer, Massachusetts Association of Insurance Agents.
Mancini said that the new Rule 13 is a positive move overall. “It will accomplish one of our goals which is to equalize the residual market burden for insurers,” Mancini said, noting that the Rule 13 change stops short of converting CAR to an assigned risk plan, a step Bowler had attempted but which would have hurt some ERPs.
While Bowler’s Rule 13 ruling moves CAR in the direction she has sought, the Romney Administration is not satisfied. Romney continues to advocate legislation to change CAR to an assigned risk plan and deregulate rate setting.
“This ruling on Rule 13 in no way negates the need for residual market reform,” said Chris Goettcheus, spokesman for Bowler.
The revised Rule 13 also bans side agreements by insurers looking to fulfill their ERP quota by taking on better performing ERPs, a controversial practice permitted but criticized in the past.
Last month, Bowler rejected another CAR reform proposal that would have altered the credits and penalties insurers receive for voluntarily writing risks in certain classes and territories. In its proposed changes to Rules 12 and 13, CAR hoped to reduce the penalty insurers pay for ceding high loss ratio ERP business to CAR. But Bowler reasoned that lowering the penalty would lead to an increase in the residual market population.
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