A new study from the Insurance Research Council examined the before and after of three reformed automobile insurance markets, South Carolina (1999), New Jersey (2004) and Massachusetts (2008) to determine whether or not regulatory reforms has resulted in any benefits to consumers and the industry of insurance rate regulation modernization. Sharon Tennyson, associate professor in the Department of Policy Analysis and Management at Cornell University, authored the study commissioned by the IRC, entitled, “The Long-Term Effects of Rate Regulatory Reforms in Automobile Insurance Markets.“
The Study Finds That the Massachusetts Reform Has Yielded Benefits to the Motoring Public
The study shows that in each state, following the adoption of regulatory reforms, the following occurred:
- Insurance premium expenditures declined relative to previous trends or projections;
- Insurance availability increased or was maintained at previous levels as insurers were encouraged to write more business and enter markets for the first time;
- Underlying claims rates decreased or remained at pre-reform levels.
In addition, the study further argues that reform has been beneficial to both consumers and insurers. Consumers seeking to purchase auto policies have seen greater availability and lower premiums. A number of insurers that had left the Massachusetts market under the old “fixed and established” system have since returned to the marketplace.
“The results of this study show that regulatory reforms have led to a number of positive developments without leading to increases in insurance prices or reductions in availability or service quality,” said Elizabeth A. Sprinkel, senior vice president of the IRC. “The favorable performance of the more market-based rate-setting introduced in these states provides strong support for the idea that strict government oversight of automobile insurance rate-setting is unnecessary, and may even be detrimental to markets and consumers.”
Whether the 2008 rate regulatory reform will ultimately be beneficial, and for whom, may change in the coming years. But for now, the recent IRC study would seem to indicate possible long-term positive effects for the Massachusetts automobile insurance market.
The Massachusetts Fixed & Established Automobile Insurance Market prior to 2008
Prior to the introduction of limited competition in 2008, Massachusetts had a unique system where the Commissioner of Insurance “fixed and established” auto insurance rates annually. Unlike other states the system assigned high-risk insurance agencies rather than the high-risk drivers to companies. There was a general perception through the Massachusetts insurance industry that this system fostered gross inequities in companies sharing high-risk losses. Indeed, there were serious claims that some companies paid less by “gaming the system.” Additionally, the agency assignment system created a two-tier agency system, that caused market problems for independent agencies and discouraged new insurers from entering the market in Massachusetts.
Statistics show that in the three years prior to 2008, state-set auto insurance rates declined by almost 25%. And, there were predictions of a further 10% decline before the new “managed competition” system was announced.
During this period, regulatory rigidity and premium caps, under the fixed rate system resulted in Massachusetts seeing approximately 70 percent of auto insurance companies in 1989 leave the market by 2008. When “managed competition” was finally introduced into the market in 2008, only 18 auto insurance carriers were still writing in the Commonwealth. Furthermore, a number of these 18 carriers were Massachusetts-only writers formed specifically to write automobile insurance in the state.
Two local carriers, the Commerce Insurance Company and the Arbella Mutual Insurance Company, represented over 40% of the Massachusetts auto insurance market prior to 2008 and attempted unsuccessfully to block the new system of competition through an appeal to the Supreme Judicial Court of Massachusetts. In denying the Arbella and Commerce appeal, the Court ruled that any decision to revamp the existing Massachusetts auto insurance system was the Commissioner of Insurance’s call alone.
After the Court’s decision, the Commissioner of Insurance decided that the end had come to Massachusetts’ unique “fixed and established” system.
In 2007, the Commissioner of Insurance approved a new plan that effectively ended as of April 1, 2008, the agency assignment system and created a more conventional assigned risk plan and allowed competitive rating under certain initial guidelines and rules.
The IRC study, “The Long-Term Effects of Rate Regulatory Reforms in Automobile Insurance Markets“ can be purchased in its entirety from the IRC for $125.00 as a PDF and for $140 in hard copy at:
