Report: Reining in Wall Street

'How You Drive' Takes a Backseat to 'Who You Are'

(Mis)Managed Competition in the New Massachusetts Automobile Insurance Market

Under the new “managed competition” rating system, “who you are” has become more important than “how you drive.”  Starting in April, factors relating to “who you are” – income, marital status, homeownership, education, age, race, and other factors supposedly prohibited for use by the Division of Insurance – will take center stage in the Massacusetts auto insurance market.  Driving record is no longer the primary rating factor and is now a diluted factor.  As a result, consumers with perfect driving records who have the least resources in our society will pay more to fund discounts to wealthy motorists, including those with terrible records.  [pp. 1-32]
The vast majority of new discounts and rating factors proposed by insurers and approved by the Division of Insurance are substitutes (or “proxies”) for factors specifically prohibited by Massachusetts law and are not based on the consumer’s driving record.  These include discounts for having a homeowners’ insurance policy, Good Student discounts, Multi?Car discounts, Years Licensed discounts, Hybrid Vehicle discounts, and Loyalty discounts.  [pp. 13-21]

The 7.8% overall average rate reduction announced by the Division should be revised to 7.1% because the largest writer of auto insurance in Massachusetts changed its proposed rate decrease from 8.1% to 6.1%.  It is important to note that even the 7.1% figure may be inflated since it is based on each insurer’s estimate of its own proposed rate change.  The Attorney General was denied access to the information necessary to confirm the insurers’ estimates, and consequently, the true overall average rate decrease could well be smaller than 7.1%.  Overall average rates would likely have been reduced by at least 11% under a fair competitive system, as well as under our previous rating system.  The 4% difference in overall rates amounts to a transfer of about $150 million from consumers to insurers.  [pp. 9-10]

If you’re not receiving a particular discount, you’re paying for it.  Unlike the previous rating system, the new system allows insurers to fund a discriminatory discount by charging more to those drivers not receiving the discount.  [pp. 23-24]

While the Division of Insurance has banned the use of credit scoring as a rating factor, the Division allowed insurers a backdoor way to use credit scoring in rating.  Since the Division currently permits insurers to use credit scoring in deciding to whom they offer homeowners’ insurance policies, the insurers can use credit scoring to deny a motorist access to a homeowners’ insurance policy, thereby denying access to an auto insurance discount for having a companion homeowners’ policy.  This is an apparently permissible way to get around the prohibition on the use of credit scoring in auto insurance rating.  [p. 15]

Massachusetts consumers were promised that the new rating system would reward drivers with good records, penalize drivers with bad records, and prohibit insurers from using socio-economic and other discriminatory factors.  Had this all been true, Massachusetts would have a rating system that would be the envy of the nation.  Unfortunately, none of this was true.  [pp. 1-32]

In all parts of Massachusetts, drivers with bad driving records who score well on the “who you are” scale – homeowners, college students, married couples – can receive huge rate decreases that are funded by drivers with perfect records who score poorly on that scale.  [pp. 11, 25-29]

In all rating territories, many drivers with clean records will fail to receive the rate reductions promised by the Commissioner to “drivers with good driving records no matter where such drivers garage their vehicles.”  [pp. 11, 25-29]
The defects in the new rating system cannot be cured simply by urging consumers to “shop around.”  The range of options available to many good drivers is much worse than the range available to many bad drivers.  No amount of shopping around can change that.  [pp. 30-31]

The ideal competitive rating system would have merged the best aspects of the previous system with the best aspects of a competitive market.  It would have required insurers to compete based on driving record and would have produced an overall average rate reduction of at least 11%.  All drivers with good records would have seen large rate decreases.  By shopping around, decreases well in excess of 11% would likely have been available to these good drivers, regardless of socio-economic and other prohibited factors.  [pp. 30-31]

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