Commonwealth Automobile Reinsurers (“CAR”) has focused over the last two years on the rising commercial lines deficit and its causes. CAR’s annual report for 2018 estimated a $75 million deficit in the commercial lines pool.
However, CAR’s Commercial Automobile Committee with the help of CAR Staff has done a remarkable job over the last eighteen months in developing and implementing changes that may over time reverse the deficit trend for the better.
Initiatives to exclude ineligible risks from the residual market pool
The Committee has already successfully implemented important underwriting controls including:
- A business “nerve center” test incorporated into the definition of Eligible Risk in Rule 2 of CAR’s Rules of Operation;
- The creation of standards to determine an applicant’s Principal Place of Business, including a certification form to be used in evaluating and confirming eligibility;
- Requiring servicing carriers to share information relating to risks identified as ineligible for placement in CAR;
- Establishing standards to be employed by servicing carriers and producers to determine whether a non-fleet private passenger type risk is eligible for placement in the commercial automobile residual market;
- Developing a certification form to be signed by applicants attesting to the validity of the business entity to ensure that a commercial operation exists;
- The adoption of an Operator Exclusion Form which must be signed and submitted with the application if the business owner(s) does not hold a valid driver’s license or is not listed on the application as an operator(s).
- The amendment of the Commercial Automobile Manual to restrict coverage for ceded policies to vehicles specifically described in the policy declarations: and
- The elimination of servicing carrier options to employ composite, gross receipts, or mileage-based options for policies written on the Business Auto Coverage Form.
Commercial Automobile Committee continuing with initiatives to control deficit
While the above list of initiatives is impressive, the Committee has not rested on its achievements. At its January 22, 2019 meeting the Committee continued evaluating and voting on further changes to control the commercial auto pool deficit.
At this meeting, the Committee continued to discuss the progress on the Ineligible Risk Database, the development of a market need concept for new producer appointments, driver licensing requirements, and review of modifications to Rules 52 and 72 of the Commercial Automobile Manual relative to radius of operation and rating territory. The Committee also reviewed a draft of servicing carrier and exclusive representative producer standards for determining and validating radius class and geographic classification for trucks, tractors and trailers and public automobiles.
Database up and running to identify ineligible commercial auto risks
On November 18, 2018, CAR announced and implemented the Ineligible Risk Database for the use of servicing carriers. At Committee’s meeting, Ms. Wendy Browne noted CAR’s new is being actively utilized by servicing carriers to share information on ceded risks that are ineligible for coverage in the Massachusetts commercial residual market.
The database is website application set up to assist servicing carriers in evaluating and underwriting ceded risks by allowing the carriers to share information on those ceded risks that have been declined, non-renewed, or canceled because of being ineligible for coverage in the Massachusetts commercial residual market.
Under the rules applicable to the Ineligible Risk Database a servicing carrier that declines, non-renews, or cancels a risk that it determines to be ineligible for coverage in the commercial residual market must report such action to CAR’s Ineligible Risk Database within two business days of the issuance of the notice to the risk. The servicing carrier must also enter into the database specific information to identify the risk.
The database operates prospectively with only risks that are declined, non-renewed, or canceled after the November 18, 2018 implementation date being entered by the servicing carriers.
As of the meeting date, the database had over one hundred entries, primarily for trucks, zone rated trucks, tractors and trailers, and non-fleet private type risks of ineligible risks.
Restricting exclusive representative producer contracts based on market need
The Committee heard from Mr. John Metcalfe on a market need concept proposal for the appointment of new commercial residual market Exclusive Representative Producers (ERPs) endorsed by the Commercial Automobile Residual Market Standards Subcommittee at its meeting held earlier on January 22.
Mr. Metcalfe reviewed the various components of the concept including that the Governing Committee or its designee, on an annual basis, will assess whether a market need exists for new exclusive representative producer appointments for commercial contracts.
- An applicant with a voluntary commercial automobile contract will be appointed to a servicing carrier when the eligibility requirements of Rule 14. A. 4. have been satisfied. This appointment would not have a market need condition.
- If it is determined that a market need exists, the Committee will determine the conditions under which new appointments would be made to applicants without a voluntary commercial automobile contract with an active Massachusetts commercial automobile insurer.
- If it is determined that a market need does not exist, no new appointments for applicants without a current voluntary contract will be made.
Under the concept being discussed an applicant rejected for no market need could petition for a review of its application before a CAR Committee to demonstrate that a market need exists, that would be uniquely satisfied by the appointment of the applicant. The Committee’s determination of whether or not a market need exists will be based upon a review of current residual market data to evaluate access to producers servicing all classes of commercial risks throughout the Commonwealth.
Also, Mr. Metcalfe advised the Committee about the situation of the purchase of a book of business of an ERP or former ERP who has been terminated under CAR Rules or has withdrawn from an appointment where grounds for termination were previously issued. In that case, whether the purchaser has a voluntary contract will not matter. The purchaser must petition the Committee for a servicing carrier appointment. The applicant must satisfy the Committee that the conditions for termination are not present in the purchase and must demonstrate that a market need exists that would be uniquely served by the appointment of the applicant.
The Committee agreed that the draft proposal Mr. Metcalfe presented effectively addressed the issues discussed by the Subcommittee, and unanimously voted to approve the market need concept as presented. Presumably, the proposal as approved will appear on the CAR Governing Committee agenda for their February meeting.
Standards for the verification of applicant drivers’ licenses
Ms. Natalie Hubley brought the Committee up to date on several updates have been made to the servicing carrier and Exclusive Representative Producer Standards for the Verification of Applicant Drivers’ Licenses. These updates were based on discussion at the Committee’s last meeting on November 8, 2018.
At that meeting, the Committee had suggested that the Operator Exclusion Endorsement be used in instances where a listed operator does not hold a valid license, rather than rejecting the risk as ineligible.
The Committee’s discussion focused on requirements to validate licenses for renewal business with non-fleet private passenger type exposure as well as for all other classes. Some members were concerned with the significant resources that would be required by servicing carriers if all renewal business was required to be reviewed. However, others commented on the legal requirements regarding licensing that have the potential to affect eligibility for each risk at each renewal.
After considerable discussion, the Committee members agreed that all risks must be reviewed to validate licensing at inception and at renewal, regardless of classification, to ensure consistent servicing carrier procedures,
The Committee, therefore, directed Staff to reinsert the wording “and renewal” in the first paragraph of the Standards and delete the last two paragraphs. The Committee then unanimously voted to approve the Standards as amended, and to approve as presented, modifications to the eligibility definition in Rule 2–Definitions of CAR’s Rules of Operation and modifications to Rule 31–Operator Exclusion Form of the Commercial Automobile Insurance Manual.
Amendment to the Commercial Automobile Manual for radius of operation and rating territory
Ms. Hubley stated that at the Subcommittee’s last meeting Staff presented draft amendments to Rule 72 of the Commercial Automobile Manual relative to the determination of the radius of operation and geographic class.
Ms. Hubley walked the Subcommittee through proposed servicing carrier and ERP Standards for determining and validating radius class and geographic class for trucks, tractors, and trailers (TTTs) and public automobiles. She stated that the Standards are meant to assure consistency among carriers in three key areas:
- determining and validating principal garaging:
- determining and validating principal place of operation; and,
- determining radius and geographic class in the absence of credible documentation.
She pointed out that the Standards define principal garaging as the location at which the automobile is garaged the majority of the time that the automobile is not in regular use. For determining and validating principal garaging and principal operation, the Standards identify those tools that servicing carrier and ERPs may take advantage of in evaluating documentation to validate either garaging or operation.
Mr. Coleman Johnson noted that there are other documentation options available to validate an automobile’s principal geographic area of operation, such as the Federal Motor Carrier Safety Administration’s Safety and Fitness Electronic Records (SAFER) and SafeStat systems, and the Standards should note the availability of those options.
Finally, Ms. Hubley noted that the Standards provide instruction on how to determine the radius and geographic class when the risk is unable or fails to provide credible documentation to validate its garaging or operations.
For the next meeting, Ms. Hubley indicated that Staff would update the Rules for out-of-state operations and rating territory and modify the Standards as discussed by the Subcommittee