Mass. Agents, Arbella Challenge Managed Competition Rules

Massachusetts insurance agents and one of the state’s biggest auto insurers are going to court seeking to overturn rules that they say give new carriers an unfair advantage under the state’s new managed competition system.

They are also challenging a rule they claim denies independent agents’ their rights to ownership and commissions on some high risk policies.

The Arbella Insurance Group and the Massachusetts Association of Insurance Agents (MAIA) filed a complaint in Suffolk County Superior Court alleging that Insurance Commissioner Nonnie Burnes has wrongly allowed new out-of-state companies to do business in Massachusetts under different rules than those domestic insurers must follow. They allege that action by the Burnes gives foreign insurance companies an unfair advantage when competing for business in the state.

“We take this action reluctantly, but it is important to protect our agents and consumers from the imbalance being created by the commissioner’s decisions,” said John Donohue, chairman and chief executive of Arbella, the state’s third-largest auto insurer. “Arbella can compete with anyone in this market on price and service and reliability. But the playing field has to be level. There is no justification for letting new foreign companies that produce few jobs escape the rules by which domestic insurers must live.”

The court appeal, which asks for declaratory judgment, targets several rules approved in a May 6 decision by Burnes that had been questioned by agents and some domestic carriers.

That May 6 ruling approved a two-year period during which new carriers are free from having to assume their share of losses and costs of the state’s assigned risk plan, the Massachusetts Assigned Insurance Plan (MAIP), where the industry shares policies insurers do not write voluntarily. The controversial rule (Rule 30) violates state law that requires all auto insurance companies to equitably participate in the plan to write insurance for high risk drivers, according to Arbella and the agents.

When she approved the two-year rule — which she reduced from an original proposal of three years — Burnes noted that other states allow a similar grace period for new entries. She said the two-year rule would align the state with 40 other residual markets throughout the country. She dismissed calls for eliminating the delay altogether.

Critics at that time, including established carriers Arbella, Plymouth Rock and Encompass, complained that 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 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.

However, the plaintiffs point out that while other states permit a 24-month lag before risks are assigned to new entrants, those states also allow insurers to price their high risk policies depending on the level of risk. In Massachusetts, there is a 10 percent increase cap on high-risk policies. Therefore, existing companies are required to subsidize the cost of these high-risk policies while new entrants have no such restriction, they argue.

The complaint further alleges that based under the commissioner’s application of the “take all comers” rules, some insurers can reject business that other insurers must write. Thus, existing insurers will be required to incur the expenses and penalties associated with accepting all applicants and renewing certain classes of applicants, while new companies may simply reject applicants they choose not to write.

The plaintiffs contend that this interpretation could pose barriers for some seeking access to auto insurance, as well as open a loophole in which some applicants for insurance in the assigned risk market will end up paying more for their insurance in violation of the state’s uniform pricing requirements.

Burnes has dismissed those complaints, too.

“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 on May 6.

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 concluded.

Another part of the complaint alleges that the May 6 decision violates state law requiring insurance companies to recognize and to pay a fair and reasonable commission to brokers or agents who are the producers of record on auto policies. Producers had complained about this Rule30C, which requires a carrier that decides to write an assigned risk policy voluntarily to pay the producer of record for that risk a commission but only until 2011. Producers have argued the commission should be paid until the policyholder leaves the producer’s agency but Burnes declined to change the rule in her May 6 order.

Agents contend that this rule deprives them of their ownership of expirations, including their exclusive right to use certain information contained in insurance policies and be paid a fair and reasonable commission on business they produced.

The agents had previously said they would ask the state Legislature to overturn this rule but have now decided to also go to court over it.

“Our agents are learning to live in this new age of ‘managed competition,’ and we support the overall objectives of reform,” said MAIA president and chief executive officer Frank Mancini. “But it’s unfair to allow companies to simply ignore agent ownership rights and deprive them of commissions.”