Study Blames Bad Regulatory System, Not Bad Drivers, for Mass. Auto Woes

By | November 9, 2005

A new study suggests that the high cost of auto insurance in Massachusetts should be blamed on bad government, not bad drivers.

The state’s rate setting system encourages drivers to file too many minor accident claims, according to the insurance industry-sponsored report.

The study, “High Rates and Little Choice: The Burden of Automobile Insurance Regulation on Massachusetts Consumers,” was conducted for the Property Casualty Insurers Association of America by Robert Shapiro, an economist with the international consulting firm, Sonecon.

Massachusetts drivers pay 27 percent more on average for auto insurance than drivers in the rest of the country. At $984, the state’s average auto insurance premium ranks fourth in the nation behind New Jersey ($1,113), New York ($1,087) and the District of Columbia ($1,1040), according to 2002 figures from the National Association of Insurance Commissioners.

The Shapiro study acknowledges that Bay State drivers pay a lot because they file a lot more claims than drivers anywhere else. But it pins responsibility for the highest claims frequency in the nation on the regulatory system.

In Massachusetts, people are 2.4 times more likely than people in other states to file bodily-injury claims, even though their claims are nearly 20 percent smaller than those filed in other states. The study further maintains that Massachusetts drivers are 1.85 times more likely to file property damage claims, even though these wind up being 12 percent less expensive than in other states.

But claims-happy Massachusetts drivers are not necessarily bad drivers; they’re just behaving the way the system tells them to behave and submitting all sorts of claims, big or small.

“The principal reason that Massachusetts has the highest costs, per-automobile, for bodily injury and property damage claims is not that Bay State drivers are less skillful or more reckless than drivers elsewhere. In fact, Massachusetts drivers have fewer fatal accidents, both per-car and per-mile traveled, than drivers anywhere else in the country. The main reason that Massachusetts has the highest costs per-automobile, for bodily injury and property damage claims, is that the state’s insurance regulation perversely encourages Bay State drivers and others to file those claims, even to the point of fraud,” Shapiro wrote.

According to this analysis, the big problem is the system, not Bay State drivers. It’s a complicated system that includes a no-fault threshold, a safe driver plan, a high risk reinsurance plan and other features. But Shapiro singles out the state’s “fix-and-establish” rating procedure as the provision most responsible for the off-the-charts claims frequency. This procedure sets rates for all insurers and restricts the variables that can be used to differentiate prices among various groups of drivers.

The rate-setting system is at fault because it does not make people pay based in part on the number of claims they file, the study determined.

“The main way that state regulation promotes the filing of accident claims at rates outpacing every other state is by eliminating virtually any costs from doing so,” it says.

That’s not the way it is in other states, where drivers’ rates can be affected by the number of claims they file, no matter who’s at fault.

“In states where market competition helps determine insurance rates, a driver’s premium usually reflects in some way the frequency with which he or she has not only been involved in accidents but also filed claims for accidents in the recent past. In Massachusetts, drivers pay higher premiums if they’re at fault in an accident, but not for filing claims. Once an accident occurs, therefore, everyone, can try to collect for even the most minor accidents without concern that doing so might affect his or her premium,” Shapiro maintains.

Claims history is just one of the desirable factors missing from the rating formula, according to the study. Massachusetts also prohibits the use of gender or marital status as rating criteria. And where it does permit pricing variations, such as with years of driving experience or garaging territory, the system softens the impact with subsidies for inexperienced and urban drivers.

The study maintains that 87 percent of insureds subsidize the premiums paid by the other 13 percent, who are mainly young, male and urban drivers that represent higher risk to insurers.

If Massachusetts did away with its government-controlled rates and gave insurance companies freedom to price auto policies the way they do in many other states, it is “highly likely” that this 87 percent of the state’s drivers would pay less than they now do, according to Shapiro.

The report was released as part of the ongoing debate in the state over whether and how to change the auto rating system. Gov. Mitt Romney has filed legislation that would relax regulation on insurers that is still being debated on Beacon Hill.

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