Proposed Mass. Auto Rules Would Ban Use of Socioeconomic Factors

August 29, 2007

Auto insurers in Massachusetts would not be allowed to use socioeconomic factors in competitively pricing or underwriting policies under a regulation proposed by Insurance Commissioner Nonnie Burnes.

The draft regulation makes years of driving experience, driving record and a vehicle’s model and safety features as the primary rating and underwriting factors in private passenger auto insurance.

The draft regulation bans insurers from using gender, marital status, education, occupation, national origin, religion, homeownership and other socioeconomic factors, some of which Burnes says are prohibited by statute and others which she deemed violate public policy, for either rating or underwriting.

It also forbids insurers from using information from credit reports or scores for rating for at least a year, during which time she said she would study the overall use of credit scores by insurers. It does not prohibit the use of credt scoring for underwriting.

The regulation is designed to implement Burnes’ decision to move the state from a system under which the state fixes auto insurance rates for all insurers to one where insurers are given more freedom to set their own rates for use beginning in April 2008.

Initial reaction from insurers that backed a switch to a more competitive system included disappointment at how much state control will be retained.

Burnes’ plan provides for a one-year transition from April 1, 2008 through March 31, 2009 during which time various restrictions would remain in place and the regulation sets forth a basic framework under which the new system will operate.

The proposed regulation requires insurers to retain some of the existing subsidies that benefit urban drivers including a discount for low mileage and it maintains the existing territorial rating alignments for the year-long transition period.

It also retains the statutorily-mandated discount for senior drivers who are 65 years and older — an exception to the ban against using age as rating factor.

Burnes also wants insurance companies to make public the overall percentage change from the 2007 premium on a vehicle-by-vehicle basis, a provision designed to help drivers shop around.

Also, insurers would be required to notify all producers if their rates include a change in agent commissions. Agents could then request a hearing.

When fully operational, insurers and rating organizations would be allowed to file new rates within 45 days of their proposed effective date and use them if approved by the state. Insurers would have until Nov. 19, 2007 to file rates for use in the voluntary market as of April 1, 2008.

The regulation also requires insurers to file a rate for risks insured through the residual market, the new assigned risk plan.

Insurers will be able to create competing merit rating plans but these will not be able to include an accident or violation that is more than six years old.

The regulation contains provisions for the commissioner to use her regulatory authority to disapprove “excessive and discriminatory rates” and suspend rates already in effect, if necessary.

Burnes has said her goal is a system of “managed competition” under which insurers are given more pricing freedom even while some of the state’s restrictions on pricing and underwriting are preserved.

“This regulation is based on the principles of managed competition: reducing rates for good drivers regardless of where they garage their cars; sustaining a low number of uninsured drivers; maintaining stability in a small residual market and ensuring fairness for all drivers through bans on the use of socioeconomic factors,” said Burnes. “It incorporates significant consumer protections and benefits, safeguards to ensure a smooth transition and prevent market disruption, and measures to retain my supervisory role in the new process.”

Lawmakers, agents and some critics of competitive rating have urged Burnes to block the use of socioeconomic factors as she as done, although she stopped short of a permanent ban against the use of credit scores.

“I have repeatedly expressed my extreme skepticism about socioeconomic factors and my belief that prohibiting their use is good public policy and beneficial for consumers,” said Burnes. “Using credit information for rating and underwriting purposes affects multiple lines of insurance – not just auto – and therefore requires further study. I fully expect that banning credit scores in rating during the first year will give us the time we need to examine and address a number of important and complex issues.”

Burnes will hold a public hearing on the guidelines on Sept. 20, 2007 and will issue a final regulation in October.

While acknowledging concerns raised by some lawmakers and agents about moving to a competitive system — a reform that was attempted in 1997 but failed — Burnes has been upbeat about the opportunity. In a letter accompanying her draft regulation, she maintained that the timing is right for rates to go down and characterized managed competition as a good deal for good drivers.

“Information from the industry reveals continued declining claim costs. Additionally, insurance companies continue to enjoy good financial health,” she wrote “Both of these factors indicate that we can expect that drivers with good driving records should benefit from managed competition, regardless of where they live. These drivers should enjoy lower premiums and have the opportunity to choose from diverse offerings of premiums, products and services from the industry.”

Insurers pushing for a deregulated system reacted positively to the draft regulation, even while expressing disappointment that Burnes has not gone as far as they would like to free insurers from state controls.

“The draft regulations begin to put meat on the bones of the new ‘managed competition’ system for private passenger auto insurance in Massachusetts and are an important first step in the process,” said Frank O’Brien, vice president and regional manager for the Property Casualty Insurers Association of America (PCI).

“Unfortunately, the proposed regulations focus more on the word ‘managed’ than they do on the word ‘competition.’ Nevertheless, the proposal represents progress. Rome wasn’t built in a day and reforming 30 years of over-regulation to bring more choices to Massachusetts consumers in auto insurance will not come overnight.”

O’Brien said PCI member companies are “in this for the long term and will continue to press for beneficial change.”

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