The automobile insurance market in Massachusetts is severely stressed. The signs of this stress are readily apparent: an ever-decreasing number of insurance companies writing policies; auto-insurance writers that are successful elsewhere refusing to enter the market; a highly concentrated distribution of market share; and the increasing unease with which companies, regulators, and legislators alike view the current arrangements. In short, the continued viability and sustainability of this system is in doubt.

What’s wrong is that the Massachusetts automobile insurance market is the most highly and intrusively regulated in the country. Only by reducing burdensome regulation and boosting competition can we cure our auto insurance woes.

Massachusetts is the only state in the nation that gives the insurance commissioner authority to “fix and establish” automobile insurance rates when the market is deemed “uncompetitive.” It has been almost 30 years since a commissioner deemed the market “competitive,” so, for all practical purposes, the rates are state-made. The way those rates are set, and the way the residual market for high-risk policies is managed, are driving the Massachusetts auto insurance system over the cliff.

A residual market is a tool insurers use to pool losses from higher-risk policies in order to spread the loss over a greater number of insurers. The key to making this work is to spread losses fairly and to charge a premium that reflects this higher risk. This is not the way it works in Massachusetts. Unlike residual markets in any other state, drivers covered through Commonwealth Automobile Reinsurers (CAR) pay rates that are no different than those paid by lower-risk drivers in the voluntary market. In addition, the way CAR distributes residual-market risk results in an unfair distribution of losses among the companies–a position recently taken by Attorney General Thomas Reilly. The solution is to make CAR more reflective of residual markets in other states, spreading the losses more fairly and charging a premium that reflects the higher risk.

Most importantly, though, the “fix and establish” rate setting system must be phased out. Massachusetts has long assumed that little or no competition exists in automobile insurance, even though there actually is some competition and could be much more. But with the strict rate setting system we have, there is no incentive for an insurer to enter this market and make it more competitive. As a result, Massachusetts has the dubious distinction of having fewer automobile insurers writing policies here than in any other state. While there are 60 to 120 insurers on average writing in other states, only about 20 do business here–and the number is steadily falling.

Some feel that competition is not the answer. They point to the Commonwealth’s short-lived 1977 experiment with a competitive rating system as proof that competition won’t work. But the most important lesson from 1977 is that a hastily implemented change is likely to fail. The Alliance of American Insurers supports a methodical, phased-in approach that will, over time, through a consensus-building and confidence-building process, allow the competition and innovation that heretofore have been suppressed by the fix-and-establish system to take hold.

These two reforms–eliminating the fix-and-establish rate system and making CAR more reflective of residual markets in other states–would bring Massachusetts automobile insurance back into the mainstream.

Others want to tinker with the Commonwealth’s unique “no-fault” system for providing personal injury protection. That system is far from ideal, but scrapping it in favor of so-called “choice,” as Paulsen and Hayes propose, would be no panacea. The only states with choice no-fault systems are Kentucky, New Jersey, and Pennsylvania. Of those, the two most urbanized states, and therefore most comparable to Massachusetts, are New Jersey and Pennsylvania. For a variety of reasons, both have experienced urban affordability problems for years.

What’s more significant is that New Jersey took steps this year to streamline and modernize its long-troubled auto insurance rating system, making the state a more attractive market for insurers and promoting increased competition. A major California-based auto insurer has already decided to enter the New Jersey market. This is the example to be emulated in Massachusetts.

Many view any attempt to reform Massachusetts automobile insurance as a Sisyphean task. Indeed, many have tried to roll this rock up the hill, only to have it crash back down. We believe the time has come once again to set ourselves to the task, this time getting that rock to the top for good. The way to do so is with less regulation and more competition.

Frank O’Brien is vice president and New England regional manager for the Alliance of American Insurers, a national trade association representing more than 340 property/casualty insurers.

Drivers lose under “choice” proposal

Under the choice no-fault system proposed by Rep. Anne Paulsen and John Hayes, irresponsible drivers would be immunized from being held accountable for their actions, consumers would pay more for less coverage, and insurance companies would make more money. That’s a wonderful system–for insurance companies.

Unfortunately, the reality is that, regardless of what insurance system is in place, auto insurance premiums will be high in Massachusetts. Automobile insurance is a major expense for consumers in our state and in all states where there is a lot of traffic on congested streets in heavily populated areas. Legislators have been grappling with the issue of high automobile insurance rates for decades.

More than 30 years ago, then-Rep. Michael Dukakis teamed up with the father of no-fault, Jeffrey O’Connell, and convinced our Legislature to enact the first no-fault automobile insurance system in this country. They promised that such a system would result in dramatic long-term rate savings for consumers. That promise was not kept. By the mid-1980s, Prof. O’Connell acknowledged that a no-fault system did not result in savings for consumers. In a 1986 Virginia Law Review article, he stated, “A key purpose of auto insurance is to compensate accident victims, and increased payouts mean greater compensation. . .Because no-fault makes many persons eligible for benefits who are ineligible under traditional insurance, for example, one-car accident victims, the total payout under no-fault insurance is greater than under traditional systems.” O’Connell also observed that “no-fault thresholds arguably encourage victims to inflate their claims to exceed the threshold for bringing a lawsuit” and reported that “the average total amount of BI [Bodily Injury] damages per victim is larger in no-fault states than in a traditional state” (emphasis added).

Logically, it makes sense that a no-fault system of compensation for personal injury would be more expensive. Under such an arrangement, at-fault drivers as well as innocent drivers are reimbursed for their lost wages and their medical expenses, resulting in significantly more claims. During the 1990s, the premiums in no-fault states were 20 percent higher than in those states that never adopted no-fault, according to the National Association of Insurance Commissioners. Not only that, but insurance companies made more money on no-fault policies–56 percent more profit per auto insurance policy in no-fault states. Not surprisingly, insurance companies like no-fault. They collect more in insurance premiums and their payouts are more predictable. Because no-fault did not deliver on its promise to reduce rates, however, very few states adopted this system. Therefore, insurance companies and other no-fault proponents re-packaged and re-marketed no-fault under the name of “choice.”

“Choice” is a misnomer for two reasons. First, the system is so difficult to understand that most consumers select the default option, whatever the Legislature determines it to be. In New Jersey, where the default option was the no-fault system, most consumers ended up in the no-fault system. Conversely, in Pennsylvania, where the default was the traditional tort system, the majority of consumers ended up in that system. In other states that studied various “choice” proposals, panels of experts concluded that such a system was incomprehensible even to them.

Statistics over a 30-year period establish that no-fault systems are more expensive than tort systems. Yet, proponents of the choice no-fault plan say those choosing the no-fault option will lower their rates by one-third. What this really means is that those “choosing” the tort option will pay more. That’s because they have to pay a premium to protect themselves and their families in case they are injured by someone who has chosen the no-fault option, since those choosing no-fault are immunized from being held responsible when they cause a collision. For most people, purchasing auto insurance is an economic hardship; they will not have the option of choosing the tort system for the simple reason that it costs more. Consequently, the proponents of no-fault are making the choice for most people. In the end, the insurance companies win. They have a system in place where they still collect and invest millions of dollars in insurance premiums and the payouts on auto insurance claims will be predictable and lower.

Legislators grapple with difficult auto insurance issues annually; their constituents demand relief. Usually, legislation is enacted when the insurance crisis peaks. Historically, reforms have promised a specific reduction in premiums. Thus the preamble to the auto-insurance reform passed in 1988 promised an 18.7 percent reduction. Before the ink was dry, however, insurance companies said they couldn’t live with such a cut and they threatened to leave the state. As a result, consumers never saw the promised reduction; most got about a 9 percent savings. This was a pretty good deal for insurers, since the coverage consumers got was reduced tremendously, about 50 percent. Within a few years, premiums were back up by 27 percent. The net result for consumers? They were paying more for much less coverage. The net result for insurers? Their profits skyrocketed during the next decade; consequently, insurers were happy to write policies in Massachusetts.

There is no magic solution to the auto insurance problem in Massachusetts. Regardless of what is done by the Legislature, rates will remain high. Over the long term, rates would stabilize if the Legislature would repeal no-fault insurance altogether. In the period between 1988 and 1999, health care costs in the United States rose by 75 percent. No-fault insurance brings health care into the automobile insurance system. Clearly, this is not an efficient way to deal with the myriad of issues related to health care costs. Auto insurers should not be in the business of providing or coordinating health care for their insureds.

Massachusetts should return to the tort system. When New Jersey enacted a choice no-fault system it ended up with the highest auto insurance costs in the nation. Is that the goal of auto-insurance reform in Massachusetts?

Kathleen M. O’Donnell is an attorney in Lowell. She is a former president of the Massachusetts Academy of Trial Attorneys and has lectured and testified across the country on auto insurance issues.