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State to Let Drivers Shop for Best Rates

Jul 16, 2007

By Bruce Mohl, The Boston Globe

Jul. 17--Insurance Commissioner Nonnie S. Burnes yesterday said she plans to give the 4 million drivers in Massachusetts a taste of auto insurance competition next year, letting them shop around for the best deal for the first time in 30 years.

Instead of approving one set of rates that every company must charge, which has been past practice, Burnes said she plans to let companies set their own rates for 2008, under close supervision from the Division of Insurance.

The new rate-setting process will start April 1.

Burnes called the new system "managed competition," but offered few details about how it would work. She said details would emerge when she issues regulations covering the competitive rate-setting process.

She promised at least one public hearing on the regulations.

In a telephone interview, Burnes said companies would file their rates with supporting analysis, and they would take effect unless her office rejected them.

She said companies could base their premiums on such factors as driving record, the number and severity of at-fault accidents, and traffic violations.

She said she would view "with extreme skepticism" any rate proposal based on socioeconomic considerations, such as education, occupation, home ownership, or an individual's credit score.

In materials accompanying her decision, she said her managed competition would fall short of "unfettered competition." She said it would ensure that good drivers, irrespective of where they live, would receive lower rates. She said it would also give insur ers more flexibility to introduce "competitive products."

Separately, Burnes said she plans to change the method of assigning drivers whom no insurer wants to cover voluntarily . Currently, those higher-risk drivers can select any insurer, and the insurer then decides whether to assign the driver to an industry pool, where profits and losses are split among the companies doing business in the state.

Under Burnes's proposal, such drivers would be randomly assigned, with the number of assignments to any one carrier based on that company's market share. Drivers who are assigned will lose the ability to select their own insurer.

The decision was issued after 6 last night. A spokeswoman for Attorney General Martha Coakley , who had urged Burnes not to introduce competition and warned that she might face an industry lawsuit if she did, declined to comment. The spokeswoman said Coakley had not had time to review the decision.

James Ermilio, a senior vice president at Commerce Insurance of Webster, the state's largest automobile insurer, with more than a third of the market, said a system allowing the company to set its own rates would be beneficial. But Ermilio, who has opposed earlier attempts to introduce competition, said much would depend on the details and how agents and young and urban drivers would be affected.

"If the details protect those interests, then it's going to be a good system for us," he said.

The last time a state insurance commissioner permitted competition among auto insurers was in 1977. Rates at that time rose 14.5 percent statewide, but rates in some urban areas skyrocketed. The seven-month experiment was quickly canceled, and insurance commissioners ever since have set all auto insurance rates.

"We can no longer be held hostage to the failed 1977 experience," Burnes wrote in her 25-page decision.

Massachusetts is the only state in the nation where regulators set all auto insurance rates. Since 1990, 35 companies have abandoned the state because of its insurance system, according to the division. Many major national insurers, including Progressive Corp., Geico, and Allstate Corp., currently shun the state because of its heavily regulated system.

Several other states, including most recently New Jersey, have opened their markets to greater competition in the past decade. The moves have attracted more insurers to those states and often have resulted in lower rates for good drivers. But in some cases, rates for young and urban drivers have risen. Young drivers tend to have higher accident rates because of their lack of experience, while rates in urban areas are higher because of greater congestion, theft, and fraud.

Burnes vowed to protect young and urban drivers as Massachusetts moves toward auto insurance competition.

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.

Burnes said she believes there is too much emphasis in the current rates on where a car is garaged, which she says penalizes good drivers. She said she intends to review the number of territories in use in 2009.

Across the country, auto insurance rates have been falling as safer cars and other factors have resulted in a drop in the number of claims. Massachusetts auto insurance rates fell 8.7 percent in 2006 and 11.7 percent this year. Industry officials say they expect rates to continue falling in 2009, and Burnes said rates should fall further under the new competitive rate-setting system.

"Structurally, they should," Burnes said.

Burnes, a former Superior Court judge who was appointed by Governor Deval Patrick in late February, said she decided to move to competition because the governing statute demanded it. Under the law, she said, the commissioner sets the rates only if competitive rates would be excessive, or lead to the insolvency of insurers. She said testimony she heard indicated neither of those conditions existed.

Burnes said she briefed Patrick on her plans last week, but noted that "he had no input" on the decision. Patrick's office issued a statement last night saying he supported her.

"I am confident that she will keep a steady hand on this process as it moves forward to ensure that all Massachusetts consumers realize the benefits inherent to this transition," Patrick said.

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