Massachusetts Auto

Seen in Insurance Journal:

As Massachusetts gears up for a switch to a more competitive personal auto insurance market, one of its domestic auto insurers, Premier Insurance Co., will adopt the well-known brand of its parent, Travelers Insurance.

Offically, the Premier Insurance Company of Massachusetts, an independent personal auto insurance subsidiary of The Travelers Companies, Inc., announced the company will change its overall brand name to Travelers of Massachusetts.[...]

The Premier Insurance Company of Massachusetts will remain a separate and distinct company from all other Travelers companies as it has been since 1993. This means that the auto insurance products provided by Premier are not underwritten, reinsured or guaranteed by any other Travelers company.

IJ seems to spin the article as a sign of cautious normality approaching for the Mass Auto market. However, I’m not sure about that. In the not-too-distant past, First Floridian rebranded as “Travelers of Florida”. I wouldn’t call recent events in Florida as particularly attractive for the industry…and so I’m inclined to see this as part of a larger rebranding effort. Note, for example, that Premier appears to remain outside the primary Travelers pooling structure.

Seen in a wire service story:

The Massachusetts insurance commissioner on Friday banned the use of drivers’ credit scores in auto insurance coverage decisions under a final set of rules opening the state’s auto insurance market to greater competition.

Commissioner Nonnie Burnes expanded restrictions on insurers’ use of credit histories after consumer advocates, the state’s attorney general and some insurers said at a Sept. 20 public hearing that Burnes’ draft regulations weren’t strong enough.

Burnes’ Aug. 28 draft proposal forbid insurers from using data from credit reports in setting individuals’ rates during a one-year transition to a new market starting next April. But her earlier proposal would not have barred insurers from considering a driver’s credit history in underwriting, or deciding whether to insure someone.

Considering the political climate in Massachusetts, this isn’t too surprising…and I have to admit that permitting scoring for underwriting but not rating is the exact opposite of the compromise struck in most other states, where rating based on credit is OK, but refusing to write due to credit is not.

From my perspective as a “credit lover”… I still don’t think this is a bad thing. To the extent that insurers are being permitted to determine their own rates, not having access to credit is fine given that access is being blocked to all competitors. Also, given that one of the concerns in Massachusetts is of massive rate swings as deregulation is phased in…perhaps having one less variable at work is not a bad thing.

It seems that some folks at the Globe are thinking about how auto insurance pricing could change as Massachusetts moves towards a little less regulation in pricing. From Friday’s paper:

Should drivers pay less for auto insurance simply because they maintain a checking account at a particular bank, graduated from law school, or work as surgeons?

Thousands of Massachusetts drivers receive these types of price breaks today, but it’s unclear whether the discounts will continue next year when companies for the first time in 30 years will be allowed to set their own rates subject to state approval.

Insurance Commissioner Nonnie S. Burnes, concerned about higher prices for drivers who are less affluent or less educated, has proposed rules for auto insurance competition that would bar companies from using such socioeconomic factors as income, education, occupation, and homeownership in deciding how much drivers should pay for coverage or whether to insure them. She has also proposed a one-year ban on the use of a driver’s credit history in setting rates, but not in deciding whom to insure.

It’s probably worth noting that group discounts do exist in the rest of the country, usually masked as a discount in an affinity program, but they are far less significant given the competitive marketplace reducing the effective value of those discounts. (”I could get an X% discount for being a member of group Y, but I already pay less than that because I get my coverage through insurer Z.”)

It’s funny that the pro-consumer entities that have been making a fuss to block credit-scoring and occupation-rating in deregulated auto insurance in Massachusetts haven’t been making a fuss over the group discounts now.

I suppose this could be explained by the mentality described in the following quote from the article:

With the current group discounts, members of the group pay less for auto insurance but nonmembers do not pay more[....]

Programs that provide only discounts seem to play better than programs where differences are expressed as both discounts and surcharges…even though the actual rates derived may be identical under both systems.

The lack of basic math understanding here is simply amazing.

Seen in Insurance Journal:

Massachusetts insurance agents aren’t happy about the decision to introduce competitive rating into the state’s price-regulated private passenger auto insurance system. They enjoy the best market share (86 percent) in the country under the current system and don’t want to see that jeopardized. Their commissions are also protected under the current fix-and-establish system.[...]

[Frank Mancini, president and CEO of the Massachusetts Association of Insurance Agents] is worried that some smaller agencies, perhaps as many as 20 percent of agencies in the Commonwealth, might have to consider merging or even going out of business as a result of the move to a competitive system.

Well, let’s see….at the move to normalize the auto insurance market is arguably a result of a desire to increase competition and thereby generally reduce the cost of insurance overall to Massachusetts consumers. Part of the reason that there’s suspected to be some room for improvement is presumably the result of inefficiencies tolerated in the market as a result of lack of competition.

Therefore, it is natural to expect that producers who focus on auto insurance might need to look for ways to improve their efficiency if the gradual deregulation is successful in promoting competition.

It’s unfortunate for the agents…but it’s not the 1960’s anymore. Times change and businesses need to adapt.

Having said that, before fearing too much the threat of direct and internet specialists from entering the Massachusetts market….I don’t think that those changes will happen overnight. It will take time for the Mass Auto market to liberalize enough to begin to resemble the rest of the country, and to be welcoming to direct players. Thus, there’s time to adapt.

Also, don’t forget that even though direct writers don’t have to pay agents commissions, they do incur some pretty incredible staffing and marketing expenses that puts them at significantly less advantage to agency companies.

One of the problems with having to get up early for a work-related daytrip is that the accompanying need to turn in early cramps online reading time.

That’s the excuse I’m going to make for having missed this Insurance Journal article Monday:

Gov. Patrick’s insurance commissioner, Nonnie Burnes, a former judge, has announced a plan to move to competitive pricing, despite a lack of clamor for change from a motoring public that has enjoyed years of rate cuts, despite signals from several powerful domestic insurers that they like the system just the way it is, and despite warnings from some politicians that she is playing with fire.

“We can no longer be held hostage to the failed 1977 experience,” Burns declared in her landmark ruling. “[N]o time is better than now to utilize the file-and-use system so that consumers, and the industry, can reap the multitude of benefits of a less regulated system.”[...]

Burnes provided few details of how the system will be moved from rigid price controls to “managed competition” but promised at least one public hearing to address concerns and move the process along.

It remains to be seen exactly what will constitute “managed competition”, but it sounds like a promising first step towards an introduction of sanity into the Massachusetts auto insurance market. Hopefully it will be gradual enough so as not to inflame public opinion further.

My hopes are supported by a Boston Globe article that provides a few additional quotes:

Currently, suburban and experienced drivers pay slightly higher premiums, so the rates of urban and inexperienced drivers can be kept relatively low. Burnes promised to continue the existing system of subsidies.

“We’re going to continue to protect them through the regulatory process,” she said.

And in other news, I’ve heard that the minions in Hades have broken out the winter-weather gear, just-in-case.

A reader pointed me to an article at Squaring the Globe, rebutting an article in the Boston Globe, which I commented on a few days ago.

Harry at Squaring the Globe writes:

From an economic perspective there are 2 fundamental facts concerning the present sorry condition of Massachusetts auto insurance:

1. Insurance rates are set by state government, and the rate structure in place effectively subsidizes auto insurance for urban car owners. Suburban and rural car owners pay these subsidies through above-market insurance rates. The Globe?s own editorial board estimated the value of these subsidies at $400 per year per urban car.
2. The high degree of regulation in the Massachusetts insurance market has led major national insurance firms (Allstate, State Farm, GEICO, Progressive, Liberty Mutual) to leave the state. Auto insurance is provided by smaller state-based firms whose business (and political influence) is concentrated here in Massachusetts, and who will therefore fight to their last lobbying dollar to preserve the present regulatory climate that keeps national competitors out of “their” market.

I doubt that the emergence of market pricing, if it ever happens, will be rapid. Subsidies are highly addictive, and their removal is painful. Deval Patrick has not shown he can stomach the kind of pressure that removal of these subsidies would entail. I?d be delighted to be wrong about this, though.

I’d have to agree on all counts.

However, the article does also bring to mind some thoughts I’ve had in the past.   It can be an interesting mental and economic exercise to debate whether auto insurance ought to be mandatory.  Wrapped up in any such discussion is the unfortunate reality that frequently, the folks who are the most expensive to to insure are the least able to bear the cost of the risk they present.

Such thinking brings us to the question of the appropriateness of subsidization of risk for such individuals, on the basis that auto insurance “should” be mandatory and in much of the country driving most folks “have” to have a car and drive to work, to the store, etc.

Even though I’m neutral on the idea of mandatory auto insurance, and I am very much pro-free-market when it comes to insurance underwriting and pricing, I can see the appeal of such an idea.  And it’s understandable why socialists-in-liberal clothing in Massachusetts might be so against deregulation.

Therefore, I’ll reinject an idea I’ve offered before into the blogoshpere for your consideration:  When it comes to regulating auto insurance, you don’t have to think of the product as a discrete entity.  It would be possible to divide the product into two parts — a primary, mandatory component, and an optional, excess component.

If residents of a state deem that it is in society’s best interests that everyone carry some level of auto insurance, and that it be as affordable as practical, then it would be understandable that tight regulation be placed on this primary level of insurance.  I’d also argue that such a product has now become a social tool rather than insurance, and therefore the risk should be borne by the state…but that’s a monologue for another day.

With that primary level of coverage addressed, it should be much easier for all but the most hardcore socialists to stomach deregulation of the excess, optional coverages, allowing the free market to work its magic.

However, like everybody else, I question whether the political will exists in Massachusetts to actually take any significant steps toward deregulation.  And if such a move is made, political realities will oblige that changes be dragged out over several years, plenty of time for legislators in need of votes or activists wielding initiative petitions to derail the process.

Seen in the Boston Globe:

The battle over the future of the state’s $3.9 billion auto insurance market has trapped Governor Deval Patrick in a political crossfire between his insurance commissioner, who is signaling she wants to overhaul the rate-setting system, and his allies in urban legislative districts, who fear the changes would lead to sky-high premiums for their constituents.[...]

But for urban voters, one of Patrick’s core constituencies, it brings back memories of the 1970s, when a brief effort to introduce competition left some city residents annually paying more for car insurance than their vehicles were worth.

“I think this is potentially the worst, negative economic policy decision that faces this governor during his tenure,” said Senator Dianne Wilkerson, a Democrat of Boston and an early Patrick supporter in last year’s gubernatorial campaign. “This would be a disaster.”

Patrick, the state’s first African - American governor, runs the risk of being accused of turning his back on drivers in minority communities. Wilkerson said the proposed changes are, in effect, “auto insurance redlining” — referring to discriminating marketing practices that target urban neighborhoods, which Patrick battled as chief of the US Justice Department’s civil rights division in the Clinton administration.

“This would be a most egregious form of 21st-century state-sanctioned insurance redlining,” she said. Wilkerson said she is confident that Patrick’s experience would influence the outcome.

Folks who have no contact with the Massachusetts auto insurance market often fail to realize just how politically deadly deregulating the state’s auto insurance market is believed to be.  That it’s been discussed this publicly for this long is an indication of how unhappy the few remaining auto insurers are in the state, and or it’s an indication that a few folks realize that lack of competition and the subsidization taking place in the state’s insurance rates are causing a lot of people to pay more than they would if the market resembled the rest of the country’s.

I’m sadly amused by the observation that some Bostonians were “annually paying more for car insurance than their vehicles were worth”.   That’s a red herring.  Today, many folks in Massachusetts and elsewhere are paying more for car insurance than their vehicles are worth.  That’s because a major portion of almost everyone’s auto insurance premium goes to protect you from damage you might cause to others, a provision that isn’t directly related to the value of your car.

Heck, if I weren’t seeing a substantial benefit in my premium due to having a good insurance credit score (a factor not considered in Massachusetts auto insurance rating), I would be paying more for my and my wife’s insurance than our 9 year-old vehicle is worth.

The Boston Globe describes the feelers being put out by Insurance Commissioner Burnes about whether it’s time to consider again relaxing Massachusetts’ draconian auto insurance pricing regulation:

At a hearing today on whether the state is ready for auto insurance competition, Burnes didn’t indicate what she plans to do. But her questions of witnesses focused on whether she had the legal authority to introduce competition and what impact that would have.

“She is seriously, seriously considering moving to a competitive system,” said Deirdre Cummings, consumer education director at the Massachusetts Public Interest Research Group, who opposes such a move at this time.[...]

If memory serves, recent commissioners in Massachusetts have been somewhat receptive to permit competitive pricing in auto insurance, but have also been very aware of the political minefield that must be crossed in such a change — that the folks currently being subsidized in the current system, urban risks and youthful operators, are rather politically active in the state.

I wonder if a compromise could be struck. For example, it would be interesting to see restrictions lifted on the pricing of “optional” auto insurance coverage (i.e. coverage beyond minimum limits liability), with an offset by using an alternative mechanism to provide “mandatory” insurance, e.g. pay-at-the-pump.

I’m not necessarily advocating pay-at-the-pump, mind you…but such a compromise would presumably appeal to the activists who have been most aggressively fighting against market freedom in the state.

Seen in the Salem News:

Tucker is on the Legislature’s Financial Services Committee, which is currently considering two pay-as-you-drive bills. Their primary backers are Rep. Carl Sciortino, D-Somerville, and Rep. James Marzilli, D-Arlington.

The bills would allow the state’s insurance commissioner to base insurance rates on a “pay-as-you-drive” or a cost-per-mile basis. The more a motorist drives, the higher the insurance rate. Both bills recommend that a study be conducted on the benefits of the plan.

If approved, the change wouldn’t happen all at once. Sciortino’s bill would phase in the change. For example, by Dec. 31, 2010, he wants the “pay-as-you-drive” policies to represent at least five percent of the policies that they sell.

Ummm. I’m not sure that moving to a system of insurance that hasn’t caught on in other parts of the country is exactly the best idea to resolve the issues with Massachusetts auto insurance.

Pay-as-you-go is a wonderful idea in theory that has issues in implementation. Specifically, verifying mileage is a problem. Insurers have the option of:

1. Asking consumers to self-report odometer readings, hope that they respond, and ignore the fact that the ridiculous level of dishonesty traditionally associated with mileage-based classifications or discounts is somehow diminished.
    
2. Require consumers to report periodically to their agents for odometer readings (not sure how this would work for customers who purchase through direct writers.not that there are many direct writers operating in Massachusetts to begin with).
    
3. Install or access black boxes in every auto, potentially gaining access to not only mileage readings but a host of other data (hard brakings, speed traveled, time of operation). It’s a wonderful idea that would finally allow ratemaking to be based on how a vehicle is driven (as opposed to the false belief that claims history and MVR’s provide much in the way of meaningful data for the majority of the population)..but which suffers from having been patented by one insurer, and which would presumably raise privacy concerns among consumer advocates.

Legalizing pay-as-you-go is a great idea. A fix to the issues in the Massachusetts auto market it is probably not. Mandating a certain level of usage is probably not a great idea.at least not until after existing patents expire.

The Pittsburgh Tribune-Review makes a very interesting observation in an article discussing the ramp-up in competition among personal auto insurance writers:

Competition certainly shows in the number of companies writing premiums. In 2005, 317 insurers wrote nearly $7.1 billion of vehicle-related premiums, according to [Pennsylvania] state Department of Insurance data. Eighty insurers wrote at least $10 million in premiums that year.

Compare Pennsylvania’s numbers to Massachusetts. Since 1990, that state has lost 35 auto insurers, and has 19 companies writing policies for 4 million drivers. New Jersey, prior to legislative reform in 2002-03 lost 20 insurers, including five of the top 10.