On May 31, 2016, Commissioner of Insurance Dan Judson affirmed the decision of Division of Insurance (“Division”) Hearing Officer Jean F. Farrington, issued the same day, denying Commonwealth Automobile Reinsurers’ (“CAR”) proposed reduction in credit factors stating:
…pursuant to the Commissioner’s authority under Article X of the CAR Plan of Operation, the proposed amendments to Rule 29 E that CAR submitted January 14, 2016 are hereby disapproved.
The Division’s decision followed a hearing requested and filed by The Plymouth Rock Assurance Company (“Plymouth Rock”). In that request, Plymouth Rock asserted the revisions proposed by CAR to the existing credit system for servicing carriers violated the law and were discriminatory. See Agency Checklists’ article of February 9, 2016, “Plymouth Rock Appeals MAIP’s 80% Credit Cut for Brockton, Lowell, and Lynn Drivers.”
The Division’s decision nullifies CAR’s proposed rule amendment that would have eliminated the existing credits rewarding insurance carriers that voluntarily insured motorists rated as class 10 whose vehicles have their principal places of garaging in Lynn, Lowell and Brockton.
CAR must conduct yearly review of credits rewarding carriers writing assigned risk business voluntarily
Under CAR’s enabling act, G.L. c. 175, § 113H, CAR has a mandate to control the number of assigned risks by providing for territorial and classification credits to auto insurance carriers that voluntarily write private passenger automobile insurance in territories or for classifications, that without such credits, would have a disproportionately greater likelihood of having to obtain automobile insurance through CAR’s assigned risk plan, the Massachusetts Automobile Insurance Plan (“MAIP”).
The size of the available credits that CAR’s rules allow directly affects the willingness of auto insurance carriers to write voluntary policies in any credit eligible territories.
Carriers that underwrite and accept such risks voluntarily can use the credits generated to avoid random future assignments of assigned risks or, if they have a surplus of credits, they can defray their losses on such accepted policies by selling their surplus credits to carriers that do not wish to accept MAIP policies.
As a result of this credit rule in the MAIP, Massachusetts motorists whose vehicles are principally garaged in credit eligible territories obtain access to voluntary policies of insurance through carriers seeking credits and, thus, avoid having to obtain their policies through the MAIP.
Decision denying CAR rule change resulted from Plymouth Rock hearing request
The Actuarial Committee at CAR had originally proposed in November 2015 to reduce the credits available to servicing carriers for writing voluntary business. At the Governing Committee meeting in December 2015, Plymouth Rock raised a number of questions and the Attorney General’s Office (“AGO”) sent a letter questioning the proposed reductions.
The CAR Governing Committee remanded the proposal to the Actuarial Committee to review that committee’s recommendations. However, later in December, the Actuarial Committee again reviewed the plan in detail and “after considerable discussion” approved the plan by a vote of eight to one.
On January 13, 2016, the Governing Committee accepted the Actuarial Committee’s renewed recommendation and adopted the proposed rule change, over the objections of Plymouth Rock, by a vote of nine members in favor and three members opposed, including Plymouth Rock.
Rule change proposal reduced credits by 22.6% percent overall but affected Lynn, Lowell, and Brockton
Until the vote of the Governing Committee the existing credit plan allowed territorial credits for up to 429,355 insureds. The Actuarial Committee’s amendments adopted by the CAR Governing Committee proposed to reduce the number of credit eligible insureds by 22.6%, to 332,145.
However, as can be seen on the following chart, the reductions proposed by CAR fell almost exclusively on the 117,059 drivers rated class 10 in the urban areas of Lynn, Lowell, and Brockton.
The impact of the proposed reductions outside of Lynn, Lowell, and Brockton affected only 2,322 risks statewide.
Plymouth Rock voted against CAR’s credit rule decision and requested Commissioner to disapprove the rule change
The next day, January 14, CAR submitted the proposed credit amendments to the Commissioner for his approval. On the same date, Plymouth Rock exercised its right under CAR’s Plan of Operation, to request a hearing on the rule change.
Plymouth Rock alleged in its request for hearing that the Commissioner should not approve the rule change because:
- The proposed rule change fails to comply with the CAR enabling statute”) that requires credits had to: “enhance the prospects that no classification or territory is disproportionately represented in the plan.
- Under CAR’s proposed change, three urban territories — Lowell, Lynn and Brockton — would lose 87.6%, 88.0%, and 87.6% of their respective credits. Of the 119,381 insureds who would lose credit eligibility under the rule, 117,059 insured, or 98% of the insureds losing credit eligibility, resides in those three territories.
- These three territories were three of eleven major credit-bearing territories, that based on census data, were “low income, largely minority communities, with many disadvantages compared to the rest of the state.”
- Without the credits, the no longer credit eligible insureds in the affected territories will lose access to the voluntary market where they may find lower costs than MAIP policies offer and “additional coverages and programs only available to voluntary customers, such as accident forgiveness, reduced deductibles, roadside assistance, and multiple payment plans.”
February 29th Hearing before Hearing Officer Jean F. Farrington
The Commissioner scheduled Plymouth Rock’s hearing request for February 29, 2016, before Jean F. Farrington, a Division hearing officer.
The witnesses testifying before Hearing Officer Farrington in opposition to CAR’s proposed rule change were:
- Paula Gold, Esq., Chief Regulatory Counsel for Plymouth Rock.
- Glenn Kaplan, Esq., Chief of the Insurance and Financial Services Division at the Attorney General’s Office
- Along with insurance producers from Lynn, one of most affected territories.
Hearing Officer Farrington, in her decision, noted that:
The three producers who spoke at the hearing…uniformly expressed the opinion that credit eligibility encourages insurers to write business voluntarily in their territory and that the availability of credits for business written through their agencies is a significant factor in appointing them as producers for motor vehicle insurers [and]…absent credit eligibility, customers might no longer be written voluntarily.
Only MAPFRE submitted a subsequent statement in support of the proposed change during the period the record of the hearing was left open to accept additional written comments.
MAPFRE argued that reducing the amount of available credit would not adversely affect the size of the MAIP because much of the business written in credit eligible territories for the affected drivers was “good business,” and MAPFRE questioned whether credit incentives were necessary to encourage carriers to write that business voluntarily.
Decision of Division of Insurance: “not persuaded that adjustments are needed”
The Decision rendered by Hearing Officer Farrington and approved by Commissioner Judson noted that since the advent of Managed Competition (in 2008), the market share of the MAIP has declined. Presently, the MAIP provides automobile insurance to “less than 2% of the motoring public,” which the Decision stated: “…led CAR’s Actuarial Committee to suggest that the need for the present level of credit assistance to depopulate the MAIP and to induce voluntary writings in credit eligible territories no longer existed.”
However, the Decision reiterated that the credit eligibility system adopted after the shift from a fixed-and-established to a competitive market for motor vehicle insurance was intended to ensure that in a competitive market, where insurers compete for business on the basis of price and policy enhancements, territories and operator classifications are not “disproportionately represented” in the residual market.
The Decision commended the success of the credits in controlling the overall size of the MAIP that most recently, on a statewide percentage basis, stood at just 1.3 percent of the Massachusetts private passenger automobile insurance market. But, the Decision went on to emphasize that the opponents of the rule change believed that, by removing credit eligibility for a significant number of experienced operators in three urban territories, CAR’s proposed Rule 29 amendments would reduce the incentives for insurers’ to write that business voluntarily and be likely to increase the amount of business assigned through the residual market.
That outcome in the Decision stated: would adversely affect consumers and producers living or operating agencies in those [Lynn, Lowell, and Brockton] territories.
While acknowledging that the extensive material that CAR submitted to support its proposed amendments to Rule 29 documents extensive discussion and analysis of options and alternatives to the current credit system. But, the Hearing Officer concluded, and the Commissioner agreed that they were:
…not persuaded that adjustments are needed at this time to a system that has achieved a remarkable reduction in the size of the residual market to a level significantly below the threshold underlying CAR’s proposal.”
In denying CAR’s rule change, the Decision reemphasized that “the current credit eligibility system has resulted in a remarkable reduction in the size of the residual market with a concurrent increase in the number of consumers who are able to obtain insurance in the voluntary market.”
The Decision further implied that perhaps the credit system may have reached a point where further major adjustments might not be favored unless a “compelling reversal in the size of that residual market would support re-analysis of the role of the credit system.” Finally, the Decision advised that “any reconsideration of credit eligibility should give careful attention to its effect on consumers and small businesses in affected [territories].”