Updated Information on the Massachusetts Automobile Insurance Plan (MAIP)

NEW INFORMATION ON THE

Auto Reform Update:
CAR Amends MAIP Proposal; DOI Sets New Hearing Date...October 29, 2004

from The Massachusetts Agent - October 21, 2004

On September 24, 2004, the CAR Governing Committee, in compliance with Insurance Commissioner Julie Bowler's August 27, 2004 remand order regarding a new private passenger residual market system, submitted to the Commissioner the revised rules she directed CAR to submit. A hearing was scheduled on the revisited rules for October 20, 2004. On October 8, 2004, CAR filed with the Division of Insurance (DOI) a revision to the rules sent to the DOI on September 24, 2004. Later that same day DOI Hearing Officer Jean F. Farrington, rescheduled the October 20, 2004 hearing date to October 29, 2004. In her order Farrington stated that she rescheduled the hearing, "to ensure adequate time for interested persons to review and analyze the new proposal". The changes sent by CAR to the DOI on October 8, 2004 focus on company assessments and participation during the period of transition (2005-2007) to an assigned risk plan.

As the year-long effort to restructure an arcane private passenger auto insurance residual market moves toward conclusion, we believe it is appropriate to once again state for our members why MAIA has supported the efforts to transition our residual market to an assigned risk plan-the Massachusetts Automobile Insurance Plan (MAIP). Appearing below is an article that first appeared in The Massachusetts Agent on March 25, 2004. The article is somewhat edited to reflect matters that have changed or have been clarified since the article first appeared.

How Healthy is the MA Private Passenger Auto Insurance Marketplace?

While thinking about this question, consider the following facts: only 19 companies write private passenger auto insurance in the state; capital commitment to private passenger auto insurance is thin, with little hope of significant new capital to be invested in the line; the burden of the residual market is inequitably distributed among companies; there exists a two-tier agency system, which does not provide equal access for all agencies to the residual market; the structure of the residual market encourages the growth of involuntary agencies, limits the appointment of voluntary agencies and fosters manipulation of agencies between companies and other agencies.

In making the decision to support a proposal, the Massachusetts Automobile Insurance Plan (MAIP), to reform the state's private passenger automobile insurance residual market, MAIA considered each of these facts and came to the conclusion that this marketplace is not healthy. And with independent insurance agents writing 80% of the private passenger auto insurance in the state, an unhealthy system, if not addressed, could prove problematic for our member agencies.

The MAIP is designed to be an assigned risk plan (rather than an assigned producer plan as we have now) that will involve the random assignment of residual market risks to insurers. The MAIP will be introduced in two stages. The first stage will become operative on January 1, 2006 and run through December 31, 2007.

This two-year transition is designed to limit market disruption and allow for the conversion of many involuntary agents (Exclusive Representative Producers) to voluntary agencies. The second stage will begin operations on January 1, 2008 for all residual market business.

In 1989 there were 61 companies writing private passenger automobile insurance in the state. Two-thirds of those companies have left the state over the last 15 years, leaving only 19 companies today. Fireman's Fund Insurance Company has recently announced its intention to exit the Massachusetts marketplace. This will reduce the number of auto insurance writers to 18, only 11 of which are independent insurance agency companies.

There is a high concentration of business in a limited number of companies with the top three writing 50% of the market and the top ten writing 90% of the market. While there are many reasons the Massachusetts marketplace is not attractive to insurers (state-set rates, take-all-comers, mandatory offer, to name a few) the structure of the residual market is cited as the most significant roadblock to market entry and the most common reason for market exit.

With the limited number of companies in the marketplace comes a limited amount of capital committed to private passenger auto insurance. Each time a company makes the decision to abandon this auto market, it puts pressure on the remaining capital in the marketplace. If a significant writer of auto insurance decided to exit Massachusetts tomorrow, would there be sufficient capital to keep the system stable? A number of companies writing auto insurance in Massachusetts write business in many other states and have numerous options for where to invest their capital. Massachusetts is not likely to be high on their lists.

The inequitable distribution of residual market risks and losses has been cited by companies, regulators and government officials as a key component of this marketplace's unhealthy position. We must move to a system that will equally distribute residual market risks based on voluntary market share. This will allow companies to better manage their books of business and more accurately predict their results.

The current structure of the residual market results in companies either being financial "winners" or "losers". The system does not allow for all companies to be "winners". So, as the financial "losers" withdraw from the state, some of the remaining companies move from the "winner" column to the "losers" column. Once a company finds itself as a financial "loser", it faces the decision of whether to withdraw from Massachusetts. As noted above, this process has resulted in a significant abandonment of this marketplace over the last 15 years.

A reform of the residual market structure would be a modest step in an effort to keep the remaining companies in the marketplace, encourage them to commit additional capital for growth and allow them to better manage their business.

A residual market for any line of insurance should provide for equal access to that market for all agencies. Massachusetts private passenger auto insurance residual market does not provide such equal access. ERPs have open access to the residual market, while voluntary agencies are restricted from writing risks, either in the voluntary or residual market, that are above arbitrary step levels, forcing that business "out the door." The MAIP will provide for equal access for all agencies to the residual market and will encourage the appointment of ERPs to voluntary agency contracts.

Companies spend too much time, energy and money on ERP manipulation (buying, selling ERPs, maneuvering to avoid assignment of high loss ratio ERPs, etc.). Throughout the state ERPs can be found in the lowest rated territories with loss ratios and ceded business at voluntary agency levels. These ERPs are more valuable to companies as ERPs than they would be as voluntary agencies. They are held "captive" as ERPs, unable to secure voluntary contracts because it would adversely impact the carrier's subscription level. The residual market must be restructured to eliminate the ERP manipulation focus and allow companies to do what they should be doing - strengthening their market position through their voluntary agencies, appointing ERPs to voluntary contracts,
settling claims fairly and fighting fraud.

The adoption and implementation of the MAIP will represent an important step in achieving stability in the Massachusetts private passenger auto insurance marketplace. Such stability will forestall the potential of a market "crisis" and the threat to the independent insurance agent's position in the marketplace.

We solicit your questions and comments regarding the MAIP proposal. Please contact Frank Mancini or Dan Foley by phone - 800-972-9312 or 508-628-5452 or email- fmancini@massagent.com or dfoley@massagent.com

CAR Sends Revised Private Passenger Auto Residual Market Rules to Commissioner; Hearing on October 4..........................from The Massachusetts Agent

- September 30, 2004

The CAR Governing Committee, in compliance with Insurance Commissioner Julie Bowler's August 27, 2004 remand order regarding a new private passenger auto insurance residual market system, has submitted to the Commissioner the revised rules she directed CAR to submit no later than September 24, 2004. Commissioner Bowler will conduct a public hearing on the revised rules on Monday, October 4, 2004 at 10 a.m. at the Division of Insurance, Boston.

The most significant differences in the revised rules sent to the Commissioner on September 24 and the original rules sent to her on June 30 are included in the transition plan rather than in the structure and operation of the assigned risk plan (Massachusetts Automobile Insurance Plan - MAIP). The transition period will be 2005-2007. The MAIP will become fully operational on January 1, 2008.

In her remand order Commissioner Bowler indicated that CAR would revise its transition plan with the objective of not increasing the written exposures in CAR by more than 100%. CAR currently writes approximately 7% of the exposures in the state. In order to meet the order of the Commissioner, CAR has revised the transition plan by adjusting the incentives provided companies to appoint ERPs as voluntary agencies. The incentive included in the revised rules will still result in ERPs being appointed as voluntary agencies. However, the appointments are likely to be staggered through the transition period, rather than being made during the first year of the transition (2005).

Another change to the original transition plan is regarding the "Dual Status Producer" category. A "Dual Status Producer" (DSP) under the original rules was an ERP who received a voluntary contract during the transition period. Under the original rules a DSP would have written voluntary business with its new voluntary carrier and phased its ceded business into the MAIP during the transition period. Under the revised rules, there is no DSP category. An ERP obtaining a voluntary contract from his assigned carrier will continue to operate with that carrier. An ERP obtaining a voluntary contract from a company other than his assigned carrier will retain the involuntary assignment for new and renewal business for 30 days from the date the voluntary contract is effective. All ERPs receiving voluntary contracts will be considered voluntary producers for the transition period and thereafter will operate under the same MAIP rules as all other voluntary producers.

The Commissioner in her remand order also directed CAR to include in it revised rules a "clean in three" provision. However, the Commissioner gave CAR latitude in structuring the rule. Below we have reproduced the "clean in three" rule sent to the Commissioner. The last paragraph of the rule allows a consumer eligible for the voluntary market to choose to be written in the MAIP in order to maintain the consumer's producer relationship.

C. Those risks seeking coverage in MAIP and those risks with existing coverage in MAIP will be ineligible for placement in MAIP if the named insured and any other person who usually operates the motor vehicle(s) meet all of the following requirements:

has been licensed more than six years;
has been insured continuously for a period of three years, without any period of lapsed coverage;
has a confirmed driving history for a period of three years, consistent with current Safe Driver Insurance Plan guidelines;
has not had more than one comprehensive claim, excluding glass, in three years;
has not had any PIP claims resulting from an at-fault accident in three years;
has not had more than one hit-and-run incident in three years;
in years four or five of the driving history, does not have any significant activity defined as:
a. DUI conviction;
b. conviction of a vehicular felony;
c. no more than two partial or full thefts;
d. more than one minor at-fault accident and one minor violation (e.g. major at-fault accident and one minor violation; two minor at-fault accidents and one minor violation; one minor at-fault accident and two minor violations; one minor at fault accident and one major violation).

However, to preserve consumer choice of producer, any applicant or existing MAIP risk shall have the option of having coverage placed or retained in MAIP in order to maintain that producer/client relationship.

The revised CAR rules also allow for members of the same household to be assigned to the same MAIP carrier in order to preserve multi-vehicle discounts.

According to the revised rules, business placement during the transition period will be as follows:

Effective January 1, 2006, new business from voluntary producers (including
former ERPs receiving a voluntary contract) may be placed in the MAIP.
As of January 1, 2007, new and renewal business from voluntary producers (including former ERPs receiving a voluntary contract), new business from ERPs that do not obtain a voluntary contract and new and renewal business from voluntary producers cancelled on or after January 1, 2007, may be placed in MAIP.

The provision for High Loss Ratio ERPs did not change under the revised rules (see The Massachusetts Agent, Special Edition, July 8, 2004).

Once the Commissioner finalizes new CAR rules, MAIA will provide you with a detailed explanation of the new residual market structure (MAIP) and how the transition will operate.

In the interim, you may contact either Frank Mancini or Dan Foley at the MAIA offices by phone at
800-972-9312 or 508-628-5452 or by email at fmancini@massagent.com or dfoley@massagent.com

HLRERPs will be assigned to a limited number of Designated Servicing Carriers (DSC). Companies with a 2003 calendar year total expose based market share of 7% or more will be required to become DSCs. Those carriers are Commerce, Arbella, Safety, Metropolitan, Liberty Mutual and Premier. Other carriers may volunteer to be DSCs and must be approved by the Commissioner.

HLRERPs will be required to jointly develop with its DSC a rehabilitation plan to be filed with the Commissioner of Insurance. CAR’s Manual of Administrative Procedures will include requirements that must be included in all rehabilitation plans.

Once the DOI hearing is complete and final rules are approved by Commissioner Bowler, MAIA will provide our members with a comprehensive review of the new private passenger residual market structure.

Should you have any questions in the interim, please contact Frank Mancini or Dan Foley at the MAIA offices by phone at 800-972-9312 or 508-628-5452 or by email at fmancini @massagent.com or dfoley@massagent.com

Citing a Division of Insurance-commissioned study conducted by the consulting firm, Tillinghast/ Towers Perrin, Governor Mitt Romney and Insurance Commissioner Julie Bowler last week took the first steps in what could be the most significant and dramatic change in the Massachusetts private passenger auto insurance system since the 1970's. Governor Romney stated, "The Division of Insurance's report on the state's residual market system clearly illustrates that the auto insurance system in Massachusetts is broken and in need of repair."