Driven To Distraction

When Cheryl Travis, an account supervisor at Weber Shandwick, a public relations and marketing firm in Cambridge, moved from Winchester to Charlestown two years ago, there was one cost that caught her by surprise: the $1,500 increase in her auto insurance premium. A call to her insurance company revealed that, because of the theft and accident rates in her new neighborhood, she would have to pay $2,700 a year – more than double the $1,200 she paid in Winchester – to insure her 1999 Acura with more than 85,000 miles on it and plenty of dents.

“I could raise or lower my deductible, but the difference is going to be around $50,” she says. “It’s not going to lower my overall costs by anything important.” The only real option she has for saving money is more drastic. “I’ve thought about dumping the car, but I grew up with a car,” she says. “I’ve never not had one. Now that I’m almost 30, I can’t imagine not having a car. I’m married to it at this point.”

That means she’s married to a high auto-insurance bill, and not just because she moved to Charlestown. In fact, were it not for state-imposed subsidies designed to keep insurance affordable for city-dwellers, Travis would have to pay even more.

The cost of auto insurance in the Bay State is among the highest in the nation. The average premium in Massachusetts in 2001, the latest year for which data are available, was $1,013.46 – fifth highest in the nation, up from 11th in 1997, when the average premium here was $802.94, according to the National Association of Insurance Commissioners. The state’s rate of increase between 1997 and 2001 is the highest in the nation.

One would think that high rates would make Massachusetts a good place for insurers, but it isn’t. Insurance companies hate doing business in the state, and they are voting with their feet. In 1990, there were 53 underwriters offering auto insurance to drivers in Massachusetts. Today there are 19, with one more recently threatening to pull out, and many of those that are left are small insurers unable to spread their risk over a large pool of customers.

According to a study published in 2002 by the American Enterprise Institute and the Brookings Center for Regulatory Studies, all 10 of the market leaders in the state’s automobile insurance market in 1982 were national companies that did business in all 50 states. By 1990, this number had fallen to five (with one additional company doing business in 48 states) and in 1998, the number declined to two (with one additional company doing business in 47 states and two others writing policies in two or three). In virtually every departure, the primary motivation for leaving, which required the companies in question to pay substantial penalties, was the widely unpredictable distribution of high-risk drivers. With rates set by the state, companies can’t charge higher-risk drivers more for their insurance, so companies that end up with a disproportionate share of high-risk drivers lose their shirts, while those with a bigger share of low-risk drivers are virtually guaranteed a profit.

“In the mid-1990s, Massachusetts was one of the most profitable states in the nation for the insurance industry as a whole, and yet we were losing companies,” says Steve D’Amato, executive director of the Center for Insurance Research. “How can that be? The answer is we have this Kafkaesque system of assigning bad risk. Everyone knew the system was unfair.”

Last April, the Romney administration embarked on a campaign to overhaul the automobile insurance market in the state, creating a task force charged with investigating ways to introduce free-market competition into the private passenger automobile insurance market. The task force was scheduled to report to the Legislature by the end of the year.

One obstacle to competition is a complex system of subsidies, which drive up the cost of insurance for experienced drivers with clean driving records to keep insurance affordable for inexperienced drivers and those with bad driving histories. Another obstacle – though one the Romney administration insists will remain untouched – is the set of territorial offsets that force car owners in outlying areas with lower rates of collision and theft to pay more to make insurance more affordable for those who live in higher-risk neighborhoods, primarily in Boston and the state’s other cities.

“The governor has stated that people wouldn’t be penalized for where they live,” says Beth Lindstrom, director of consumer affairs for the Romney administration. “Drivers should be paying in relation to the risk they pose to the system.”

Steve D’Amato: “We have this Kafkaesque
system of assigning bad risk.”

Indeed, the administration has trained its guns on the way we assign risk in our high-cost, high- dent state, a method that observers say is driving potential competitors out of the insurance market here. Last year, Insurance Commissioner Julianne Bowler instructed the 13-member governing committee of the Commonwealth Auto Reinsurers (CAR), the state body created to manage the “residual” market (customers no insurance company would take voluntarily), to design a plan that would more fairly distribute high-risk drivers among insurance carriers.

It was an approach that represented a consensus among the Romney administration, the Legislature, and Attorney General Thomas Reilly – a rarity in the fractious climate of Beacon Hill. “Fixing the residual market is an important first step toward reforming the state’s auto insurance market,” says assistant attorney general Alice Moore, who serves on the task force appointed by the Romney administration.

Still, in November, when Bowler issued new rules for assigning high-risk drivers, she did so after the CAR review process had stirred up consumer concerns about the effect of competition on urban drivers and on group discounts – and threats from at least one insurance company opposed to the shift, which said it might take the insurance commissioner to court for taking action on her own. A group of 18 state senators also chimed in along the way, challenging Bowler’s authority to make these changes without legislative approval.

At year’s end, however, the controversy seemed to have died down a bit. Is this the calm before the storm? Or is it the sound of a new era in auto-insurance competition getting underway? Rep. Ronald Mariano, a Quincy Democrat who is House chairman of the Legislature’s Insurance Committee, says it had better be the latter.

“If we don’t get it done now, we won’t get anything done for a long, long time,” says Mariano.

Sticker shock

It’s not just insurance that makes cars a drain on our pocketbooks. According to the US Department of Labor, owning a car eats up 19 percent of average household income nationally. At nearly $7,000 a year, the cost of keeping a private automobile on the road is second only to housing in the family budget and more than three times what a typical family spends out-of-pocket on health care.

And we’re keeping more of them on the road than ever. Between 1992 and 2002, the number of licensed drivers in Massachusetts increased just 12 percent, from 4.2 million to just under 4.7 million. But the number of vehicles registered in the Commonwealth leaped by 47.6 percent, from approximately 3.7 million to 5.4 million. Cars now outnumber drivers in this state by some 700,000.

All these cars cost us, in a variety of ways. Jennifer Morrow, e-commerce director of the Consumer Credit Counseling Service of Southern New England, says that roughly half of the 20,000 Massachusetts, Connecticut, and Rhode Island residents currently getting credit assistance from her company got into financial trouble because of their car payments.

The trouble, she says, starts on the dealer’s lot – or the finance office. In the late 1980s, the typical new car cost about $10,000 and was usually paid off in four or five years, says Morrow; these days, with most new cars costing $20,000 or more, six-year loans have become prevalent. Those payments take their toll over time.

“People don’t sit down and do a budget and ask themselves, ‘Can I afford this for 60 or 72 months?’” Morrow says. “A lot of buyers rely on who[ever] is financing the loan to determine whether they can afford the car, thinking, ‘If it’s approved, it must mean it’s within my budget.’”

For many families, it isn’t. With a typical car payment of $400 a month and a monthly insurance bill of $150 ($250 if the family includes a young, inexperienced driver), car costs pile up, especially in a two-car family, Morrow says. Then there are excise taxes, which for a car worth $20,000 to $25,000 can approach $500 a year – enough to push some car owners over the financial edge. “We’ve seen a number of consumers who didn’t figure those ramifications in before the purchase and who come to us when their registration is on the verge of being cancelled,” says Morrow.

For low-income families, even a used car can be a financial burden. “If you make $200 a week and your basic living expenses are $190 a week, owning a car is not an option. You’ll end up with a repossessed vehicle,” Morrow says. “Still, it happens.”

Then there is gasoline, the price of which has been climbing in the past year. But, oddly enough, fuel costs are not as bad as they seem. Adjusting for inflation, the $1.92 a gallon price in late August was still substantially less than the $1.35 a gallon charged in 1981, according to the American Petroleum Institute; gas prices would have to rise to $2.82 to match the 1981 level. In any case, the cost of filling up is a minor factor in auto economics, experts say.

“Your fuel costs are a pittance compared to the overall cost of an automobile,” says Terry Regan, a senior associate at the Planners Collaborative, a Boston-based consulting firm, and a research partner at the Rappaport Institute for Greater Boston, a public policy center at Harvard’s Kennedy School of Government. “The cost to buy a car, finance it, and insure it is huge, and once you’ve done that, there’s really no reason not to drive.”

Road warriors

And drive we do. In 2003, Massachusetts drivers logged a total of 53.8 billion miles at the wheel, up from 50 billion in 1997. The Boston Metropolitan Planning Organization estimates that in 2025, drivers will travel a total of 143 million miles a day in metropolitan Boston, up from 109 million in 1995.

This increased mileage means more time behind the wheel, not all of it moving. The Texas Transportation Institute estimates that traffic congestion in the Boston area (which, for its purposes, reaches north to southern New Hampshire and south to Rhode Island) resulted in travel delays totalling 81 million person-hours in 2002 – up from 57 million in 1992 – and costing drivers $1.4 billion, or an average of $475 per commuter, in time and wasted gasoline (130 million gallons).

The average commute in massachusetts jumped 18.1 percent from 1990 to 2000

In a report released last fall, MassINC and the University of Massachusetts’s Donahue Institute found that, for those who drive alone (three-quarters of all commuters), average commuting time by car jumped 18.1 percent from 1990 to 2000; of the 551,738 commuters who spend 90 minutes a day getting to and from work (18 percent of all commuters, up from 11 percent in 1990), 79 percent do so alone in their cars. Those lengthening commutes are in part due to road congestion, as traffic counts on Massachusetts roadways increased by almost 14 percent from 1993 to 2001. But it’s also because commuters are traveling farther to get to work, an estimated 10 percent increase from 1990 to 2000, according to the MassINC report, Mass.Commuting.

These numbers have real consequences for people like Michael Kelliher, a divorced father of two who moved from Allston to Marshfield in 2001 to be near his children. Kelliher, who tests high-speed data circuits for Verizon in Boston, spends between two-and-a-half and three-and-a-half hours a day on the road. That affects his family life as well as his wallet.

“During the summer I get them once a week for a dinner visit, and the commute cuts into that,” says Kelliher. “And I’m supposed to pick them up every other week on Friday at 6 p.m., and I’m usually late because of the commute.”

During the Democratic National Convention last summer, Kelliher moved back in with his father in Allston, commuting into South Boston on bike.

“It was a 30-minute ride,” he says. “It was wonderful being in the morning sun.”

Kelliher is bothered more by the wasted commuting time, but he can’t ignore the financial costs, as much as he’d like to. (“You add them up,” he says. “It’s ridiculous. I don’t even want to know the numbers.”) Driving 500 miles a week costs him about $50 in gas, parking in the mud lot in South Boston $35 a week. Those costs, plus $1,000 for insurance and $450 for new tires (three in the past two years) and four or five oil changes a year at $30 apiece yields annual commuting costs of close to $3,600. This doesn’t include the cost of replacing his 2000 Toyota Camry, which he purchased in 2001 and has since paid off.

Got you covered

As one of the few aspects of car costs that the state has some control over, auto insurance has long been a source of controversy in Massachusetts. And no part of auto insurance has been more controversial than the role of market competition. The AEI-Brookings Joint Center for Regulatory Studies has described Massachusetts as having the “most uniquely interventionist automobile insurance system” in the country. In addition to requiring that insurance companies provide coverage to every driver that approaches them (the “take all comers” rule), the state maps out the territories and driver rating classes the companies use to assign premiums, which are also set by the state.

Rep. Ronald Mariano: Subsidies now
help “the worst drivers in the pool.”

In 1972, the state went to a hybrid version of no-fault insurance, which requires all drivers to obtain liability and uninsured motorist coverage and settles most damage claims without recourse to the courts. Restricting lawsuits to cases of serious bodily injury was supposed to hold down insurance costs, but some critics have recently called for “consumer choice” between a stronger no-fault system, which they claim would provide lower premiums in exchange for giving up all access to the courts, and tort liability, which preserves the right to sue. (See Argument and Counterpoints, CW, Fall ‘03.)

In 1976, then-Insurance Commissioner Jim Stone attempted to further squeeze premiums by introducing rate competition. Stone convinced the Legislature to allow companies to set their own rates, which had been determined by the state since 1927. But the switch to free-market competition quickly came under fire.

“The rates for a number of urban communities and young male drivers skyrocketed,” says Peter Robertson, a Newton attorney who serves as Massachusetts counsel for the Property Casualty Insurance Association of America. “There were massive protests at the State House, so [Stone] began the process of undoing the competitive system.”

Technically, free-market competition is still the law in the auto insurance market here, but not the reality. Each year since the uproar of the late 1970s, the insurance commissioner has made a pro-forma ruling that conditions are such that the state must intervene to ensure fairness in the market, then presided over the process of setting premium rates by regulatory decree. The “rate case,” as it is called, involves the state attorney general and representatives of the insurance industry in a predictable sequence of events: The industry asks for a substantial increase in rates, the attorney general calls for a rollback, and the insurance commissioner makes a ruling somewhere in the middle. From these state-approved rates, companies can deviate only downward, through discounts – which themselves are subject to approval by the Division of Insurance.

The rate schedule issued by the state includes premiums for drivers in different categories of risk, or experience classes, which are assigned according to a driver’s age, number of years driving, and whether or not the driver has taken a safe-driving class. Overlayed on this matrix of categories is the Safe Driver Insurance Program (SDIP), which imposes higher premiums on drivers with bad driving histories and rewards drivers with good records under a system of “steps” numbered nine to 35. Step 9 drivers – those who have the best driving records – are rewarded with discounts, while Step 35 drivers – those with a history of accidents or violations – are charged higher premiums. This safe-driver score is based on a driver’s last six years of experience (new drivers are automatically assigned a Step 15 designation, which has a neutral impact on premiums). For each year a driver operates without an accident, his or her step decreases by one until reaching Step 9. A further incentive is given to drivers with high SDIP scores. After operating three years without an accident, they automatically skip to Step 14 under the program’s “clean-in-three” regulations.

Drivers in suburbs pay more to offset the expense of covering those in cities

Rates are also affected by geographic area – 27 separate territories in the state – because, in general, car owners who live and, for the most part, drive in rural and suburban locales present less risk to insurers than urbanites.

While these provisions seek to align the cost of auto insurance with risk and behavior, they are offset by subsidies that reduce the price for high-risk drivers and those who live in urban areas, where collisions are more frequent. In general, older, more experienced drivers subsidize the cost of younger, less experienced drivers, while drivers living in suburban and rural areas pay more for insurance to offset the expense of those who live in cities. Currently, 86 percent of the state’s drivers pay more than their risk profile would dictate and 14 percent pay less than they would without subsidies. A recent report commissioned by the Division of Insurance and prepared by the Tillinghast subsidiary of Towers Perrin, an actuarial consulting firm, estimates that “non-urban experienced drivers are slightly overpriced (by less than $100) while certain inexperienced drivers are greatly underpriced (by over $500).”

The rationale for these subsidies is simple enough. Massachusetts requires all cars to be insured, but policy-makers worry that sky-high premiums might force some of the highest-risk drivers to drive uninsured. Whether because of these subsidies or not, the uninsured-driver rate in Massachusetts is among the five lowest rates in the country, an estimated 7 percent, according to the Insurance Research Council, an industry group.

So far, no one’s gunning for these subsidies, but with the insurance system under increased scrutiny, the underwriting of allegedly bad drivers by good is getting attention.

“If you look at the amount of accidents, almost 20 percent of them are caused by people with less than six years of experience, yet they receive the biggest subsidies,” Mariano says. “Does that make sense intellectually? Here we are helping out the worst drivers in the pool. If I’m a 20-year-old kid and I’m banging up my car two or three times a year, I should have to pay more.”

Bumper cars

But the biggest factor in auto insurance costs, observers say, is not the way we distribute costs but the way we drive. According to the Insurance Research Council, the frequency of property damage claims is higher in Massachusetts than anywhere else in the US, with 6.88 claims per 100 insured cars in 2000. Washington, DC, comprised entirely of city streets, has 6.16 accidents per 100 insured cars, while Connecticut, which has demographics similar to Massachusetts and a comparable breakdown between city and suburban driving conditions, has 4.37 property damage claims per 100 insured cars. Massachusetts also ranks highest in the number of bodily injury claims, with 2.22 claims per 100. Washington, DC, has 2.07 claims, Connecticut 1.40. Certain parts of Massachusetts have significantly higher levels of bodily injury claims. Boston, for example, has 6.4 injury claims per 100 insured cars, while Lawrence and Chelsea have an astounding 8.7 claims. A number of these cities are thought to be hotbeds of auto-insurance fraud (see “Cracking Down,” sidebar).

Deidre Cummings, consumer program director for MassPIRG, says that it’s the high number of accidents that causes high premiums. The way to reduce the cost of insurance, she says, is to improve driving habits.

“Until we get the accident rate down, insurance rates are always going to be high,” says Cummings. “It’s not just about the insurance companies and how we regulate them. Talk to any driver that comes into the state and they know we drive differently. We drive on each others’ tails.”

Driving can be improved, she says, not by raising rates for inexperienced or unsafe drivers, but through a combination of stepped-up enforcement, improvements in road design, and drunk-driving initiatives. She even thinks it would make sense to raise the speed limit in some areas, if it were then strictly enforced. Better that, she says, than setting the speed limit unrealistically low, in the name of safety, but largely ignoring violators.

“People break the traffic laws a number of times a day and know they’ll never get caught,” says Cummings.

Christopher Kenneally, director of author and creator relations for the Copyright Clearance Center, wonders about the lack of enforcement every time he commutes from his home in West Roxbury to his office in Danvers. People seem to do anything they can to pass the car in front of them, regardless of the risks, he observes.

“It’s being aggressive for the sake of being aggressive – to be in front just to be in front,” says Kenneally. “It’s not as if you’re going to have miles of clear driving once you pass the car in front of you.”

Such recklessness is a function of the number of cars on the road, says transportation analyst Regan. “It affects our behavior because it creates more frustration,” he says. “Because of congestion, travel speeds are much lower. If you’re going slower, you’re going to tend to be more aggressive. Getting through the light means a lot more here than it does in Nevada.”

Proponents of reform maintain that raising premiums for risky drivers would have an impact on driving habits and, ultimately, reduce premiums overall. But not everyone is convinced. D’Amato, of the Center for Insurance Research, says the current system has significant penalties for traffic violations and serious accidents – those “step” increases that take years to work off – that, so far, have not made a dent in driving habits.

Risk avoidance

But the big push behind auto-insurance reform is not about cross-subsidies or changing driving habits. It’s more basic than that. It’s about maintaining – if not creating – a viable market for insurance in Massachusetts. Not only does a shrinking pool of carriers undermine any real hope for competition in auto insurance pricing, it has a spillover effect in other forms of coverage, especially homeowners’ insurance.

“Most of the national writers who come in here will want to write everything, top to bottom,” Mariano says. “When you walk in to get automotive insurance at Allstate, they want to sell you homeowners’. And when they get your homeowners’ insurance, they are going to write that policy nationally.”

In other words, they will offset the risk of covering a home in Massachusetts, where coastal areas are prone to storm damage, against premiums from other states, where weather is less hazardous, Mariano explains. With national companies scared away from Massachusetts because of its auto insurance anomalies, homeowners have also become increasingly dependent on regional insurers. These underwriters operate with a diminished pool of premiums and capital to cover their risks, making them vulnerable to downgrades from rating companies like A.M. Best and Moody’s, which would harm their ability to win commercial clients.

To avoid this fate, some local insurers are ceasing to write homeowners’ policies in high-risk areas. Last year, two insurance companies that are part of the Massachusetts-based Andover Companies – Cambridge Mutual and Merrimack Mutual – announced they would no longer provide insurance to 14,000 homes on Cape Cod, forcing their owners to obtain coverage from the state-managed FAIR plan, created in 1968 to serve homeowners unable to get insurance in the voluntary market. As more loss-prone properties get shifted to the FAIR plan, some observers fear that a single severe storm could render the state fund insolvent.

That, says Mariano, means auto insurance reform is about more than how much drivers pay in premiums. “You’re talking about the health and the strength of the insurance industry,” Mariano says. “It affects everybody in one way, shape, or form.”

But why is it that some auto insurers have gotten stuck with more than their share of high-risk drivers, while others get by carrying less than their fair share? Industry critic D’Amato says it’s a function of the insurance business’s propensity to avoid risk.

“Insurance is a product that has some strange aspects to it,” D’Amato says. “It’s a product where you don’t have any interest in lowering the cost of the product,” increasing profits by capturing more market share. “That’s too inefficient. You want to limit your costs by picking your customers.”

That’s been especially true in Massachusetts. With premiums capped by state regulation, insurers with high numbers of bad drivers can’t possibly make a profit, while those with few accident-prone customers make out handsomely. So, if there’s any way for an insurer to steer clear of high-risk drivers, it would be well advised to do so. And under the system Insurance Commissioner Bowler is now taking apart, shrewd insurance companies found ways to limit their share of the burden.

Playing the market

The Commonwealth Auto Reinsurers, the state body responsible for making sure drivers whom companies wouldn’t insure voluntarily are still able to get coverage, operates an “assigned agent” system. A special class of insurance agents called Exclusive Representative Producers, or ERPs, serves as the primary source of coverage for high-risk drivers in the state. If all 800 ERPs had the same sorts of high-risk drivers, the system would spread the risk among insurance companies evenly. But they don’t. The loss ratio for some ERPs, especially those located in urban markets, exceeds 125 percent and even 150 percent, meaning that for every $1 collected in premiums the company pays out $1.25 or $1.50 in claims. Meanwhile, other ERPs, those in suburban and rural markets, enjoy loss ratios as low as 70 percent.

CAR assigns ERPs to insurance companies in proportion to the share of the voluntary market they enjoy in the state. Beyond this initial allocation, however, the system is vulnerable to manipulation. If, for instance, an ERP has to be reassigned, as when the company the agent sells insurance for exits the market, he will be assigned to the insurer with the highest discrepancy between its share of voluntary and involuntary business. Once any company realizes it is next in line to get a new, potentially undesirable ERP, it will engage in defensive maneuvers. For example, companies can encourage their agents to purchase the business of ERPs with low loss ratios, protecting them from getting additional ERPs assigned by CAR. Another way to fend off the assignment of a high-cost ERP is for a company to terminate its relationship with a non-ERP agent, reducing the company’s share of the voluntary market.

Companies that have low-cost clients move heaven and earth to keep them

Conversely, companies that have ERPs with low-cost client bases move heaven and earth to keep them. One method of doing so amounts to kickbacks: direct, off-the-book payments to preferred agents. The industry condemns this practice, and even questions whether it takes place at all. But in June 2002, Attorney General Reilly wrote to Insurance Commissioner Bowler charging that payments to ERP agencies have added considerable costs to the insurance system in the state – costs that are passed on to consumers.

Deidre Cummings says the way to cut
costs is to improve driving habits.

Not surprisingly, the most sought-after ERPs are located in low-risk rural and suburban territories. Although created by CAR in 1983 to provide consumers in underserved, high-risk urban markets with a guaranteed source of coverage, ERPs can be found all over the state. Indeed, the Tillinghast report states that 626 of the Commonwealth’s 799 ERPs are located in low-risk territories.

“Many ERPs were created in communities where there shouldn’t be ERPs,” says Frank Mancini, president and CEO of the Massachusetts Association of Insurance Agents, a group pushing for change. “Companies realized they could fulfill their ERP requirements by having an ERP in Wellesley just as well as having one in Mattapan.”

The incentive to game the system this way is huge. According to the Tillinghast report, ERP-related loss ratios “range from 71 percent to a high of 195 percent.” Once a company is stuck with a bad book of business and realizes it can’t make a profit, it’s only a matter of time before it leaves the state, as Fireman’s Fund threatened to do last year, even though withdrawal would have cost the company $5.5 million in penalties.

Changing the rules

On November 23, Commissioner Bowler approved a new method for assigning bad risks. Under the plan, which is similar to mechanisms used in 42 other states, drivers who cannot obtain automobile insurance on a voluntary basis would be allocated individually – not in groups, as they are through ERPs – and at random to insurance companies in proportion to their share of the market. Those companies would each be responsible for paying their customers’ claims, giving the insurers more incentive to fight fraud.

This would not happen all at once. The switchover would be phased in over three years, becoming final in 2008, in hopes of avoiding the chaos caused by introduction of market competition in 1977. During the transition, ERPs would only be assigned to insurance companies with more than 2 percent of the voluntary market, which currently number 12. It is hoped that allowing companies with less than 2 percent market share to skirt the high-risk customers will encourage companies to come back into the state.

Bowler says the changes will not have any impact on premiums paid by consumers or affect the coverage options available to them. “It reintroduces healthy market dynamics in order to attract new insurers to our state and ultimately provide agents and their customers a wider array of choices,” Bowler said in a press release announcing the new system.

For the most part, the insurance industry is enthusiastic about the new assigned-risk approach, which state officials hope will also draw national insurers like Allstate and Geico into the Massachusetts market. Some 16 Bay State insurers expressed their support all along. But there have been exceptions, notably three of the largest auto-insurance companies in the state: Commerce Insurance of Webster, Arbella Mutual of Quincy, and Plymouth Rock Assurance of Boston.

Commerce, in particular, raised a variety of objections to earlier versions, though some of them were satisfied in the final plan. Long thought to be a principal beneficiary of the state’s elaborate regulatory system, Commerce tried to dispel that impression in October by touting an in-house analysis that showed that Commerce would benefit financially from the changes then under consideration. “While the impact of these rules would be favorable for Commerce, they would be terrible for the industry and terrible for consumers,” Commerce senior vice president and general counsel James Ermilio told The Boston Globe.

The company also threatened to file suit if Bowler imposed a new method of risk assignment without approval from the Legislature, where Commerce is thought to have considerable influence. Indeed, 18 state senators, all Democrats, signed a letter to Bowler asking her to seek a formal legal opinion as to whether legislative action is required for the change.

When Bowler issued her decree on November 23, reaction was oddly muted. Nearly a month later, Commerce had yet to make a statement about the plan it had long opposed. And the Attorney General’s office, which has been supportive of the push toward random assignment, had yet to give Bowler’s plan its endorsement. Possibly at issue are the “clean in three” provisions Reilly favors. Bowler included a provision preventing drivers from being trapped in the high-risk pool once three years have elapsed from their most recent accident or moving violation, but dropped the automatic reduction in safe-driver insurance program “steps” for remaining accident- and violation-free for three years.

But in the wake of Bowler’s ruling, a new issue arose: group discounts, including the one Commerce gives to members of the American Automobile Association. Under the new rules, insurance companies would have to carry the costs of high-risk drivers who happen to qualify for such member discounts; previously, insurers could cede these drivers to the high-risk pool, where their losses were shared with other companies. In a December 17 hearing, Arbella chairman John Donohue testified that having to bear these risks could cause companies to reduce their group discounts or discontinue them altogether, according to the Globe.

D’Amato is still concerned that, during the switchover, some drivers could be dumped into the involuntary market, despite good driving histories, because of where they live. In addition, he says, getting rid of ERPs won’t rid the auto insurance industry of gaming but rather make for new games. “In other states,” says D’Amato, insurers “game [the system] by not writing [policies] in certain areas.”

Meanwhile, Sen. Joan Menard, the Somerset Democrat who drafted the lawmakers’ letter, filed a bill that would prohibit implementation of Bowler’s plan until it is approved by the Legislature.

Choosing to compete

If the random-assignment plan goes through, in some form, it will be just the beginning of a move toward rate competition in the auto-insurance market. But already, the prospects for reform seem to be improving the insurance climate here. Frank Mancini, president of the insurance agent association, says some ERP agencies that used to be treated as pariahs are getting phone calls from insurance companies that want to do business with them. Even better, he says, some companies not doing business in Massachusetts are now considering coming into the state.

Beth Lindstrom says good driving
is a “personal responsibility.”

And then there’s Fireman’s Fund, which pulled back from its plan to leave the state next year after meeting with state regulators just weeks before the November deadline for withdrawal. “We came away impressed with the depth and sincerity of the state’s commitment to the reform process,” Robert Courtemanche, president of the company’s personal insurance division, told The Boston Globe.

And a process it will be, with relief for premium payers coming, at best, bit by bit. “It won’t be a dramatic drop in rates, because that’s not how the system operates,” says Mariano. “It doesn’t react immediately to changes, but I do think over time, as we get national writers in here competing for business, rates will either flatten or go down.”

What would really drive down rates, all observers agree, is fewer accidents. Whether insurance reform will do anything about that remains to be seen. But the Romney administration thinks it’s a place to start, and a growing number of other state and industry officials agree. After all, state consumer affairs director Beth Lindstrom observes, Massachusetts may be a bad place to drive, but not everyone drives badly.

Meet the Author
“Three quarters of our drivers have good driving records,” she says. “They navigate the same cow paths as everyone else. If the vast majority of drivers have good driving records using the same roads, then it’s personal responsibility.”

Dexter Van Zile is a freelance writer in Boston.