From Consumer Viewpoint, New Mass. Auto Rules Need Work

September 21, 2007

A Massachusetts consumer group and Attorney General Martha Coakley urged Insurance Commissioner Nonnie Burnes to incorporate more consumer protections and ban the use of credit scores in her proposed auto insurance deregulation plan at a public hearing.

“We all like competition when it works,” said Deirdre Cummings, legislative director for the consumer watchdog MassPIRG, “but we’ve seen enough failures to know that without proper safeguards, businesses will seek to add to their bottom line at the expense of the public and the consumer.”

“Managed competition regulations should implement competition in a manner that benefits consumers,” said Assistant Attorney General Glenn Kaplan on behalf of Coakley. “These proposed regulations need modification to preserve important consumer protections, such as the opportunity for examination, review, and if necessary, a hearing, to ensure that rates are competitive and comply with Massachusetts law.”

Burnes has proposed regulations to move from a “fix and establish” insurance regulation system, where the commissioner sets the insurance premium after a hearing process, to a “managed competition” system, which would establish guidelines for insurance companies to set their own rates.

The public hearing was part of the process Burnes hopes will result in a final regulation by next month and the beginning of more insurer competition by next April.

MassPIRG’s Cummings told Burnes that any new auto insurance system should be measured against what consumers have today.

“Consumers should have a plan that preserves next year’s 10 percent rate decrease, protects our right to choose any insurer, and allows companies to compete for our business based only on our driving record,” she said.

As have several legislators, Cummings urged Burnes to expressly list all the rating and underwriting factors that may be used by insurers. A motorist’s driving record and experience should be the only factors an insurer can use to deny coverage altogether, the group added.

Burnes’ regulation takes the opposite approach—indicating only the factors that insurers are prohibited from using.

Cummings argued that credit scores and all other socioeconomic factors must not be allowed for use in underwriting or rating. Burnes’ proposed regulation bans most socioeconomic facors including occupation and income but nixes the use of credit scoring for the first year only. It is silent on the use of credit in underwriting.

Cummings also called for rates and products to be standardized, uniformly disclosed, and made accessible on the Division of Insurance’s website. Each insurer’s underwriting methodology should also be available on the website, she testified.

“This will allow consumers to make informed choices and allow regulators to catch new unfair or discriminatory rating and underwriting factors,” Cummings said.

Finally, Cummings called for the commissioner to “mandate a comprehensive plan to reduce our highest in-the-nation accident rate, which is the single largest factor driving our premiums. Without such a plan, consumers will fail to see any meaningful rate reductions in the long term.”

The attorney general’s office focused its criticisms on the “failure to ban the use of credit scoring by insurance companies after the first year, the lack of protection for good drivers in urban areas, and the risk of collusion by insurance companies.”

Kaplan said the regulations suggest that good drivers with bad credit scores could be placed in the residual market. “Specifically, these drivers will be required to buy a policy from one carrier, preventing them from getting a policy from their choice insurer, or from shopping around to obtain discounts,” he maintained.

Kaplan also expressed concern that the regulations would interfere with the attorney general’s mandate to represent consumers in the review of insurance rate filings. “Not only do the regulations fail to require the industry to provide the attorney general with their filings, they establish an unrealistic timetable for her review,” he said.

Kaplan also maintained that the regulations allow insurers “to rely too heavily on last year’s rate decision, which did not accurately reflect losses, in setting the current rate, potentially resulting in grossly inflated rates.”

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