Mass. Caps Hikes in Auto Insurance at 10%; Smaller Insurers Eye 2.5% Cut

October 25, 2007

The first moves toward competitive rating for auto insurance in Massachusetts indicate that rates for drivers insured by insurers with small market share could drop an average 2.5 percent, while rates for drivers in the state’s high risk pool could go up 9.3 percent on average.

In addition, any coverage increases for individual drivers will be capped at 10 percent under a directive from Insurance Commissioner Nonnie Burnes, who is managing a transition from a system of state-set rates to one for next year where insurers have more flexibility to set their own.

The rate recommendation from companies with under one percent of the private passenger auto insurance market in the state — the so-called “under 1% companies” — calls for an average 2.5 percent rate decrease, starting April 1, 2008. The filing was made by the industry rating organization, Auto Insurers Bureau (AIB), on behalf of five “under 1%” insurers:

Norfolk & Dedham Group
Allianz Insurance Group
Electric Insurance Group
State Farm
American National Financial Group

The estimated 14 Insurers with bigger than one percent market share have not yet filed their rate indications. They have until Nov. 19 for rates to be used between April 1 and April 30, 2008 and until February 15, 2008 for rates for after May 1, 2008.

According to AIB, in 2006 the “under 1%” companies wrote approximately $100 million of premium, 2.3 percent of the total market, for roughly 100,000 vehicles. About 95 percent of that business was written on a voluntary basis (i.e. retained as direct business) and 5 percent was ceded to the residual market, Commonwealth Auto Reinsurers (CAR).

AIB said the recommended average rate for these small market insurers represents these insurers’ voluntary experience and the expected expense to write and service that business, as well as their share of the involuntary market. The current 2007 average rates for the five smaller companies were set on a total market basis under the fix-and-establish regulation that is now being discontinued. The “under 1%” insurers, however, have different books of business and different operating structures than insurers with larger share and the proposed rates reflect those differences as well, according to AIB.

Also on file with the state insurance department is a filing for drivers insured through the residual market, or CAR, that recommends an average overall increase of 9.3 percent.

That’s a lot less than what insurers would ideally like to get for these drivers they consider high risks. According to CAR, the actuarially indicated, or cost-based, average manual rate level change for these residual policies is an increase of 51.6 percent from the current rates, which run until March 31, 2008. Current CAR rates did not take into account whether the risk was placed in the residual market or retained by the insurer in its voluntary book of business. Even after mandated subsidies in the rates are figured in, the actuarially indicated rate increase for these risks would be 40.8 percent, CAR reported.

However, Burnes has put all insurers on notice that increases for individual drivers should not be greater than 10 percent above the 2007 coverage rates. Thus CAR has submitted a filing for an overall average manual rate increase of indication of 9.3 percent.

“I will find a CAR transition rate filing to be unfair, unreasonable and violative of public policy if it requests an increase for any of the coverages… to any vehicle premium that is greater than 10 percent of the premium that would have applied to the same vehicle based on the private passenger motor vehicle insurance rates effective for the period April 1, 2007 through March 31, 2008,” Burnes informed CAR prior to its filing.

That directive from Burnes capping any coverage increases at 10 percent applies to all rates, not just residual market rates. In her bulletin explaining the cap, Burnes did not outright prohibit increases higher than 10 percent but makes it clear such increases will trigger a public hearing within 10 days and will presumed to be unreasonable.

Each insurer and rating organization must complete filing forms that display estimates of the distribution of vehicles within the market based on the percentage change from the 2007 vehicle premium produced by its proposed rates.

Where necessary, insurers have been directed to use an “actuarially sound rate capping methodology” to produce a coverage level premium for any vehicle that is not more than 110 percent of what the 2007 premium would have been. However, simply capping total premiums at a policy level after comparing that premium to the policy premium that would have applied under the private passenger motor vehicle insurance rates effective during the period April 1, 2007 and March 31, 2008 is not considered an actuarially sound rate capping methodology and is not permitted.

In judging the increases, the change in vehicle premium shall be calculated assuming that there is no change in the individual operator’s circumstances from the prior policy year such as coverages or coverage options purchased, the operator assigned to the vehicle, the operator’s at-fault accident and traffic violation record, the number of years the operator has been licensed, the number of miles the vehicle is driven annually, any other discount or surcharge potentially applicable to the vehicle, the model year and rate symbol of the vehicle, and the garaging location of the vehicle, according to a state bulletin.

Meanwhile, Burnes has scheduled a public hearing for December 4 to consider amendments to CAR’s operations that include requiring companies that reject applications for insurance to inform applicants of the reasons for the rejection; the cancellation of policies written through the residual market, standards for installment plans and related fees offered to consumers who obtain insurance through the residual market, and the relationship between producers and companies when a consumer who was insured through the residual market obtains voluntary coverage.

Editor’s Note: Commisisoner Burnes discusses her views on auto insurance, coastal property and other issues in a recent video interview with Insurance Journal, part of The Commissioner series.

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