Massachusetts Personal Auto
The Road to a Free Market
Reform Objectives



Attract new companies and new capital
to the market
Provide greater consumer choice of
product and price options
Create employment opportunities
Reform Process



Special examination of CAR by Tillinghast on
behalf of DOI completed in 2004.
Changes achieved through regulation
beginning in 2003.
Bi-partisan legislative task force for auto
insurance reform created in 2004.
Key Barriers to Entry



Rate adequacy
Structure and management of residual
market
Barriers to exit
Ratemaking in Massachusetts

By finding the market non-competitive, the
Commissioner establishes the personal auto
rate. This rate is:

The maximum rate

Contains a minimum mandatory commission

Incorporates significant rate subsidies by territory
and driver class
Necessary Conditions for
Competitive Pricing


Fix-and-establish rate should reasonably align
with company programs to minimize price
disruptions to consumers during the transition
to competitive pricing.
Consumers need to understand their role and
rights in the purchasing decision.
Improving Rate Adequacy Through
Current Regulatory Practice

Eliminate arbitrary reductions to fixed
expense loads.

Introduce a total rate of return profit model.

Increase rates for drivers with bad records;
reduce rates for good drivers.

Significantly reduce rate subsidies for
inexperienced operators (< 6 yrs.).
There are Good Drivers in MA


62% of all
experienced drivers
have been clean for
6 or more years
83% of all
experienced drivers
have one accident or
violation or less in
the past five years.
Proposed Changes to the 2006
Safe Driver Insurance Plan


All at-fault accidents and traffic
violations are surcharged for five years.
Points assigned for each incident:




2
3
4
5
points
points
points
points
–
–
–
–
minor violation
minor accident (>$500)
major accident (>$2,000)
major violation
Proposed Changes to the 2006
Safe Driver Insurance Plan


Each point valued at 13.5% for experienced
operators; 7.5% for inexperienced operators.
If a driver has 3 or fewer accidents or
violations in the past five years, and all of
them are more than three years old, the
surcharge point of each is reduced by 1.
Proposed Changes to the 2006
Safe Driver Insurance Plan


Drivers clean for the past five years get
an Excellent Driver Discount of 6%.
Drivers clean for the past six or more
years get an Excellent Driver Plus
Discount of 17%.
Estimated Rate Effects of Proposed
Safe Driver Insurance Plan
25.0%
20.0%
Average Rate Change
15.0%
10.0%
5.0%
0.0%
0
-5.0%
in
6
0
in
t
5
ts
n
de
1
i
i
nc
ts
n
de
ci
2
in
ci
3
in
ts
n
de
-10.0%
Driving Record
ci
4
in
ts
ts
n
de
5
en
d
i
c
in
6+
en
d
i
c
in
How Proposal Improves
Alignment with Competition


Proposed rates based on driving record align
in a more meaningful, consistent, and
transparent way with company use of rating
tiers.
Rate for best drivers is still too high relative
to costs facilitating positive rate effects under
a competitive pricing environment.
Reduce Rate Subsidies for
Inexperienced Drivers (2005)


Manual rates are established independently
for each territory and driver class combination
based on loss experience.
Prior to 2005, pure premium relativities for
each combination were capped at 3.25 times
the statewide average of 1.0.
Changes in Pure Premium
Relativity Caps Beginning in 2005

Principal Operators
Coverage
BI/PIP
PD
Collision
0-3 Yrs. 4-6 Yrs.
21.2%
16.8%
22.5%
4.1%
-0.2%
2.1%

No changes made
for experienced and
occasional
inexperienced
operators
Increases for
principal
inexperienced
operators introduced
Reducing Rate Subsidies for
Inexperienced Operators


Rate effect of changes to relativity tempering
to be phased in over the next 3 years using
rate change caps.
When finally implemented, inexperienced
principal operators with less than three years
of experience will still receive a “subsidy” for
mandatory injury coverages of about 15%.
Anticipated Change in Average
Premium Assuming 0 Change in Base
$3,000
Average Compulsory Premium
$2,500
$2,000
$1,500
$1,000
$500
$0
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27
Rating Territory
2005 0-3 Yrs. Exp.
2009 0-3 Yrs. Exp.
Experienced
How Action Improves
Alignment with Competition



Rates align more accurately with true loss
potential.
Reduced subsidies for inexperienced
operators increases the likelihood that
individual companies will write them
voluntarily.
Facilitates a reduction in the proportion of
these drivers insured through residual
market.
Ratemaking Areas that Would
Require Legislative Attention



Current law prohibits the use of age, gender,
or marital status in rating.
Current law requires that all drivers over the
age of 65 receive a senior discount of 25%.
Current law requires that the safe driver
insurance plan be revenue neutral.
The Residual Market in
Massachusetts

Reinsurance facility

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2004 deficit estimated to be $306 million
Insures approximately 7% of the market
Company deficit share based on utilization
adjusted market share.
Law requires that all agents be appointed to a
servicing carrier for residual market business,
regardless of whether they have voluntary
relationships with companies.
Problems with Residual Market



The formula for deficit sharing is unfair.
A disproportionate number of urban and
inexperienced operators are insured through
the residual market.
The process of assigning agents without
voluntary markets to companies does not
result in a fair distribution of the losses
associated with these agencies.
Problems with Residual Market


Reinsurance facilities reduce incentives for
companies to fully fight fraud.
Criteria for a company to become a servicing
carrier to the residual market is 5,000 insured
cars. Companies writing less than 5,000 cars
may underwrite in the traditional sense and
do not have to accept involuntary agency
assignments.
Process of Residual Market
Reform

Commissioner orders CAR to rewrite their rules of operation
(4/30/04)

CAR submits proposed rules (6/30/04)

Commissioner remands CAR proposal for further work (8/27/04)

CAR submits revised rules (9/24/04)

Commissioner issues changes to 11/23/04 submission.

Commissioner finalizes new rules to be effective 1/1/05 on
12/31/04.

Superior Court stays the Commissioner’s decision on 2/1/05.
Commissioner’s Auto
Reform Decision

Three-year transition to a traditional assigned
risk plan beginning in 2006 with full
implementation by 2008.

Individual risk assignments based on voluntary
market share are more fair.

Assigned risk structure provides stronger
incentives for companies to fight fraud.

Ultimately eliminates barrier to exit.
Reasons for A Three-Year
Transition



Time needed to retool CAR to process
individual assignments electronically in real
time.
Time needed to strengthen overall rates and
rates for inexperienced operators to control
the size of the plan.
Time needed for involuntary agencies to
restructure their portfolios and obtain
voluntary contracts to survive in an assigned
risk world.
Commissioner’s Auto
Reform Decision - Transition


Revises deficit sharing formula and driver
class and territory credits so that they are
fairer for each company, and provide
incentives to companies to voluntarily appoint
agencies in all areas of the state.
Introduces a subsidy clearinghouse so that all
companies receive the correct average rate
for every risk, thus focusing their attention on
real risk.
Commissioner’s Auto
Reform Decision - Transition


Stops the current practices of assigning
involuntary agents to companies. With
introduction of an assigned risk plan, all
agents are eligible to become agents of the
assigned risk plan.
Requires the reassignment of involuntary
agencies with loss ratios higher than 125% so
that the financial burden of those agencies
are fairly distributed among the companies.
Commissioner’s Auto
Reform Decision - Transition


Requires all servicing carriers to jointly
prepare agency management plans with all
involuntarily assigned agencies. Plans for
such agencies with loss ratios higher than
125% must be filed with the Commissioner.
Permits CAR to develop additional financial
incentive plans for companies that
aggressively fight fraud.
Commissioner’s Auto
Reform Decision - Transition

Changes the requirements for companies to
become servicing carriers of the residual
market from 5,000 cars to writing more than
2% of the market based on vehicles. This
allows 7 of the 19 companies to underwrite in
the traditional sense and to avoid involuntary
agent assignments. These companies share
in the deficit based upon voluntary writings.
Activity in 2005


The DOI has requested the case be
transferred from Superior Court to the
Supreme Judicial Court for expedited hearing.
The legislative task force for auto insurance
reform is working to propose
recommendations to change the system in
2005.