Mass Auto Reform — Boston Globe Editorial

Thursday saw an editorial in the Boston
Globe, where Dierdre Cummings of Masspirg and Stephen D’Amato of the
Center for Insurance Research chime in with their thoughts on Governor
Romney’s deregulation plan.

The state’s consumer groups — Masspirg, the Center for
Insurance Research, the Massachusetts Consumers’ Coalition, and the National
Consumer Law Center — oppose the Romney plan because it will result in
significantly higher premiums for many experienced drivers with good driving
records, would allow insurers to use discriminatory pricing practices, and,
most worrisome, would fail to address the key factor responsible for our
high premiums.

While I agree that auto insurance reform needs to be about more than
deregulation, I think they underestimate the power of competition, and they
fail to consider that while some consumers’ rates will increase under
deregulation, many more consumers’ rates will decrease.

On the competition front, there are two thoughts to consider. First is that
in any capitalistic environment, competition will tend to drive prices down.
Companies are obliged to find more efficient ways to provide service, either
by creating economies of scale by bringing in features and tools used in
other states, or by providing services that there are currently no
incentives to provide. (See, for example, Progressive’s feature that
they’ll provide quotes for their competitors, so you can see who has the
lowest rates.)

Second, there is currently little incentives for capital providers (read:
investors) to invest in the state’s auto insurance market. The few national
players that do play in the state generally set up standalone entities with
discrete capital, for example. Many national insurers simply refuse to
play. With limited incentive to invest in the market due to the regulatory
environment, insurers have to use other means to attract capital — namely,
increased profit loads, which in turn leads to increased rates for the
consumers.

Then you have the lack of incentive to innovate, and the side effects of
average rating. True, there are some people who pay less than they would
under the current scheme. But there are also many more people who are
paying more than an actuarially fair rate. Folks in western Massachusetts
and some suburbs of Boston are paying more than they ought to to subsidize
the rates for individuals living inside the city of Boston.

The editorialists make a point of slamming credit scoring. My preaching the
gospel of credit is something best left for another day, but I’ll remind
readers that approximately 2/3rds of homeowners insurers saw rate increases
when Maryland decided to prohibit insurance scoring in that state. Some of
those policyholders saw rate increases in excess of 25% as their discounts
went away.

And consider future innovations that will bypass Massachusetts if no reform
occurs. For example, take Progressive’s Trip Sense product currently in
testing. I’ve written about it here previously — it’s essentially
voluntary GPS rating. When fully deployed, participants in the program will
be charged based on how much/where/how well they drive. That’s something
not currently permitted in Massachusetts, despite the potential for savings
by individuals who don’t drive that much (e.g. riders of the T who have a
car only for out-of-town trips), or who have multiple cars some of which see
only limited use.