Mass. AG Loses Another as Hanover’s Auto Insurance Filing is Cleared

January 30, 2008

Massachusetts Attorney General Martha Coakley has lost another skirmish in the battle over regulation of 2008 auto insurance rates.

Insurance Commissioner Nonnie Burnes has upheld the rate filing of Hanover Insurance, which proposed an overall rate decrease of 8.1 percent. She rejected Coakley’s complaints that Hanover’s profit and commission provisions are too high and produced excessive rates.

The Hanover ruling follows Burnes’ rulings earlier this week that upheld rates filed by the state’s two largest auto insurers, Commerce Insurance and Safety Insurance over Coakey’s objections. Hanover ranks ninth, with a 3.6 percent market share.

Until this year, auto insurers had their rates fixed and established by the insurance commissioner. But beginning in April, 2008, insurers are being allowed to compete using their own rates under a new managed competition system. Insurers file individual rates which become effective unless the commissioner disapproves them.

The AG has the right to trigger rate hearings on individual insurer rate filings she deems excessive, which Coakley did in the cases of Commerce, Safety and Hanover, but the final decisions rest with the commissioner.

In the Hanover case, Coakley ‘s lawyers had argued that Hanover’s profit provision was excessive in part because it incorporated a 15 percent cost of capital, which the AG said was higher than necessary.

As she has done in other rates cases, Burnes ruled that a competitive market allows insurers leeway and accepted the explanation of actuaries representing the insurer.

“In a competitive market, companies are free to incorporate their own target profit provisions into their proposed rates; price competition is expected to exert pressure on rates and to provide some control on target profit levels,” Burnes wrote. “Differences are to be expected between profit provisions developed for an entire industry in a fixed-and-established system and those developed for individual companies in a competitive market.”

Also, as she has done in previous rulings, Burnes dismissed objections based on a comparison with rates approved under the previous fix-and-establish system.

“That Hanover’s underwriting profit provision would be lower if it were based on industrywide input values from a prior rate decision, or that its methodologies differ from those adopted in prior fix-and-establish decisions does not demonstrate that its rates are excessive. The issue is whether Hanover’s profit provision is developed using
generally accepted actuarial principles and falls within a range of reasonableness. I find that it satisfies both standards.”

The AG had also objected to Hanover’s provision for regular commissions (13.8 percent) for the company’s insurance agents as higher than that paid by other insurers and opposed the inclusion of the cost of contingent commissions in rates.

But on both counts, Burnes sided with the insurer, noting that they are used by insurers to compete.

“Indeed, to allow the continent commission provision in the other 14 company rate filings and not in Hanover’s would be unreasonable and highly prejudicial to Hanover. On this record, Hanover has met its burden to show that its commission expense provision complies with generally accepted actuarial principles and does not produce excessive rates,” Burnes wrote.

Coakley has also challenged the rates fled by Arbella Mutual Insurance Co. and Premier Insurance Co. (Travelers) of Massachusetts.

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