On July 25, 2017, CAR’s newest committees, the Ad Hoc Non-Fleet Private Passenger Type Subcommittee, will meet to propose possible remedies to an emerging problem. Commonwealth Automobile Reinsurers (“CAR”) is experiencing an unexpected repopulation of the commercial lines residual market pool and a corresponding increase in this pool’s annual deficit. For policy year 2016, the CAR actuarial committee recently projected a commercial lines pool deficit of $30 million.
Non-Fleet Private Passenger Type risks part but not all of problem
The commercial lines committee of CAR formed this ad hoc committee, designated the “Ad Hoc Non-Fleet Private Passenger Type Subcommittee” to propose changes to the commercial lines pool’s operations. The designation of the ad hoc committee identifies one of the main drivers of the CAR commercial lines pools growth: private passenger vehicles being insured as commercial vehicles.
According to one of the ad hoc committee’s member companies, the non-fleet private passenger type issue escalated with an agency that in many instances created or assisted in creating corporations so that individuals without valid Massachusetts licenses could get insurance and drive in Massachusetts.[pullquote]the recent growth of the non-fleet segment, it appears to be tied to fraudulent practices at an agency level.”[/pullquote]
By forming a corporate entity, with or without the assistance of an agency, individuals obtained coverage they would not get otherwise. Rates in commercial market are lower for the most part as carriers are not rating drivers.
In the case of one agency, the agency placed 5370 ceded commercial policies totaling $11.9 million in premiums. A review of the agency’s book of business revealed that eighty (80%) percent of the agency’s commercial placements were private passenger–type single operator vehicles in comparison to the usual ratio in the residual market for such vehicles of twelve (12%) percent. (For the full story, see Agency Checklists’ April 4, 2017 article “DOI Moves To Revoke John Rapo’s And Rapo & Jepsen’s Producer Licenses And Impose Fines”).
A member company has, however, noted the “the issue of re-population of the residual market pool in Massachusetts is much bigger than just the PPT-NF [private passenger type-non fleet] types.”
Commercial classes other than private passenger type experiencing double digit growth
Per the cession rate data provided the Commercial Automobile Committee for the January 31st meeting there are multiple classes of vehicles that have experienced double digit increases in cession rates. Some of these increases have come from questionable sources such as:
- New York based bus risks have set up a “Principal Place of Business” in Massachusetts to garner lower rates.
- Truckers or auto haulers with vehicles registered in Florida leased to a Massachusetts corporation using Florida licensed drivers.
Fraudulent practices at an agency level
Part of the charge of the ad hoc committee has been for the commercial servicing carriers: Arbella, MAPFRE, Plymouth Rock, and Safety to propose possible remedies for perceived abuses of CAR’s commercial pool.
Some of the initiatives the Ad Hoc Non-Fleet Private Passenger Type Subcommittee are currently discussing revolve around the assumption that rate evasion is a broad market issue.
MAPFRE, for example, has found that most agents, who have some non-fleet private passenger risks in their book, have a relatively small number of these types of policies. Conversely, there is a small number of agents who write a large quantity of non-fleet private passenger risks. MAPFRE found common characteristics in their books of business:
- Large concentration or percentage of non-fleet PPTs risks within the agency’s book.
- Books that are comprised of Services or Construction classes. Typically contractor classes in which the business cannot be validated with a specialty license (le: painters, janitorial vs. plumbers or electricians).
- Policies do not contain Hired & Non-owned coverage
MAPFRE’s conclusion based upon its review of the issue suggests, “…when we are discussing the key drivers behind the recent growth of the non-fleet segment, it appears to be tied to fraudulent practices at an agency level.”
Based on this conclusion, MAPFRE has recommended that “CAR, under the direction of the four limited servicing carriers , perform an Agent Analysis, to better understand this issue as a whole, and to allow the group to discuss the findings in case the strategies being discussed need to be amended or enhanced given this new information.”
Proposed restrictions on ERP agency purchases and appointments
MAPFRE also has proposed to the ad hoc committee initiatives relating to ERPs, including tighter controls and requirements for the purchasing of an agency where there has been action taken by CAR and/or the Division of Insurance. (For problem being addressed see Agency Checklists’ article of January 17, 2017, “How CAR’s Market Review Committee Voted On Rapo & Jepsen’s Buyer’s Request For Relief Against Arbella”).
MAPFRE’s recommendations include:
- Increase work experience period to 1 year
- Increase the educational requirements
- Prohibit ERPs from performing the business service of establishing business entities and obtaining tax IDs
- ERPs purchasing a book from a producer who was terminated, or whose licensed was revoked, must submit a Business Plan to CAR, and the assigned carrier, that clearly outlines the planned book review, validation procedures and the general overview of how the book will be made compliant with CAR Rules. Prohibit appointments to spouses and/or family members who have purchased the book.
- Require a mixed book of commercial business to be appointed and to continue an appointment, no more than 75% in one segment.
- As a requirement to the appointment, require the Producer to have a seasoned book in force with a minimum of $500,000 in premium
- Extend termination period from 2 years to 5 years [for commercial lines ERP reapplications after cancellation].
Arbella’s proposals for rule changes
Another of the limited servicing carriers, Arbella, addressing remedies for the commercial lines pool’s issues proposed some additional remedies in response to CAR’s request for input relative to concerns regarding the non-fleet PPT issues.
Arbella’s proposals to help “combat the problems the industry is currently experiencing relative to non-fleet PPT vehicles insured in the commercial market” included (abridged direct quotes):
- Alter the Current Rating Approach for Non-Fleet PPT Vehicles
Rather than have a single non-fleet PPT rate class, CAR should file a rating plan for non-fleet PPT vehicles; and should consider a new class plan with factors which include, but are not limited to, driver experience, miles driven, and use of SDIP points.
- Confirm Limits that Must Be Offered Through the Commercial Residual Market
Arbella recommends that CAR analyze what limits must be offered to commercial vehicles in the CAR market. CAR should consider scaling back the limits currently offered to help reduce exposure to catastrophic loss and better match residual market offerings across the country.
- Tighten Requirements Relative to Disclosure of Operators and Licensing Requirements
Although servicing carriers currently may ask for driver information, CAR should clarify that such information must be provided by the applicant/insured upon application, upon renewal and upon any change in operators (addition or deletions) during the policy period.
- Create an Eligibility Rules Working Group or Sub-Committee
Arbella has noted its concerns with enforcement of the proposed amended changes to the CAR eligibility rules. Quantifying the percentage of use appears to be fraught with validation concerns. At a minimum the Rules can more expressly state that in order to be eligible for a commercial policy the insured must be actually engaged in the business identified on the application and the insured must provide reliable evidence of the same.
Further reports on committee action
Agency Checklists will monitor and report on any recommendations by the ad hoc committee for resolving CAR’s commercial lines pool issues.
