Mass. Cuts High Risk Exemption for New Auto Insurers to 2 Years

By | May 8, 2008

New carriers in the Massachusetts auto insurance market will be exempt from high risk assignments for their first two years under an amended rule approved by Massachusetts Insurance Commissioner Nonnie Burnes.

The original rule had permitted a delay period of up to three years for new entries and was criticized by some existing carriers as unfair to them.

Rule 30 of the Massachusetts Assigned Insurance Plan (MAIP) establishes a timeframe for determining when a new carrier qualifies to become an assigned risk carrier (ARC) and must begin accepting assigned risk business. The original rule required a carrier reporting more than $100,000 in premiums or $50,000 in paid losses to file its statistics no later than the December of the second year after it reaches one of these thresholds, a delay that could be up to three years.

After hearing complaints from existing carriers in the state, Burnes issued a decision on May 6 that this potential three-year delay is too generous and reduced it to a maximum of two years during which a new entrant will not receive an ARC assignment from MAIP.

She said this policy aligns the state with 40 other residual markets throughout the country that permit a two-year lag between entry into the market and assignment of residual market risks.

She dismissed calls for eliminating the delay altogether.

Critics, including established carriers in the state Arbella Mutual, Plymouth Rock and Encompass, said the rule would give new carriers a “free ride” at their expense. The newcomers would be able to price their policies without factoring in the cost of high risk drivers, a cost that one estimate pegs at as much as $100 per policy, they argued.

But Burnes said the critics’ analyses were not balanced, “less than candid” and “na├»ve” about the realities of the market.

“The substantial start-up costs, including marketing and infrastructure expenses, that are involved in establishing a business, particularly in a newly competitive and somewhat idiosyncratic market, make it highly unlikely that any new entrant will not have a long-term commitment to our market,” Burnes said in her May 6 order.

“Indeed, a prudent insurer’s rate structure will anticipate the imminent burden of assignments; if it fails to, the company will be faced with the unsavory prospect of requiring rate increases after only two years in the market,” she continued.

She added that her departmentI would be checking all rates to make sure they are adequate.

Burnes also said that the companies that oppose any delay in eligibility for MAIP assignments “conveniently fail to acknowledge” that the state has long had a reprieve period for new entries.

Under the approved rule, once a company is eligible to receive MAIP assignments, its share will be calculated on the same recent twelve-month basis, updated monthly, as other carriers’ share. Thus the MAIP ‘brings a new entrant up to par with existing companies immediately,” she maintained.

In the May 6 order, Burnes addressed several other assigned risk rules that some carriers and producers had questioned.

Rule 21 establishes the timetable for identifying the type of risks that may be placed in the MAIP during the first year ending March 31, 2009. Some critics had suggested it failed to guarantee access to insurance for some drivers. But Burnes found otherwise. “Every driver who cannot obtain insurance on a voluntary basis during the transition year is guaranteed insurance either through an exclusive representative producer or through the MAIP,” she wrote.

Through March 31, 2009, a carrier considering a MAIP-ineligible risk from a producer who is not an ERP may either write it voluntarily, elect to write the risk and cede it to the reinsurance facility (CAR), or decline to write it. So no MAIP-ineligible risk will be unable to buy insurance, the commissioner noted.

Rule 29 clarifies that risks insured through group marketing plans may not be placed in the MAIP. The carrier must provide the risk with a voluntary policy. The rule was amended, however, so that carriers will receive voluntary credits for these group policies.

Producers had complained about Rule30C, which requires a carrier that decides to write a MAIP risk voluntarily to pay the producer of record for that risk a commission. The commission obligation ends in 2011. Producers argued the commission should be paid until the policyholder leaves the producer’s agency. But Burnes declined to change the rule.

She also rejected a request from direct writers that they be allowed to assign selected producers to handle assigned risk business rather than being required to have all of their producers in the state trained to handle assigned risk business.

Finally, she upheld a rule that allows MAIP member carriers with Limited Assignment Distribution Agreements with other carriers to service all of their assigned risk business to charge the LAD’s rates rather than the voluntary rate of the member carrier itself.

The law on high risk premiums, known as the Lane Bolling amendment, guarantees a high risk will be charged a premium that is no greater than the premium charged by a servicing carrier. But, Burnes concluded, it does not guarantee assignment to a particular servicing carrier or its rates.

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