Massachusetts Personal Auto Insurance Limited Competition In A

Fixed & Established State

Robert C. MacNicholl

Acting Director, State Rating Bureau

MA Division of Insurance

Session REG-41

Regulatory Update

CAS Seminar on Ratemaking

March 9-10, 2000

MA Personal Auto Rate Law

MA--only fixed & established state for personal auto in U.S. fixed & established state--insurance commissioner determines one set of

rates and classifications to be used by all insurers operating in MA

MA Personal Auto History

1925--first state in U.S. to enact compulsory auto liability insurance 1928--enacted fixed & established rate law for compulsory auto liability

insurance 1976--enacted law that ended state set rates as of 1/1/77 1977 (January)--open competition begins 1977 (July)--open competition ends with rebate legislation that capped all

increases over 1976 at 25%

Alternative Auto Rate Options Available under MA Law

1968--113B classification deviations (downward) 1973--group marketing deviations (downward)

MA Personal Auto Market Experiences Low Point in 1980’s

Rate Adequacy

CALENDAR I/E LOSSYEAR RATIO1984 0.711985 0.821986 0.881987 0.821988 0.751989 0.75

SOURCE: NAIC ANNUAL STATEMENT, STATE PAGE DATA

MA Residual Market Mechanism in 1980’s

Reinsurance Facility (C.A.R.) Assessments Tied to Base Year 1982 Cession Rate Increases to 68% in 1989

Insurers Exit Market

Combination of C.A.R. Assessment Rules & Rate Adequacy Exit Rules Make Withdrawal Difficult

WITHDRAWAL SETTLEMENTINSURER NOTICE AMOUNTAETNA 1991 $87.5MALLSTATE 1989 $29.0MCIGNA 1990 $33.6MFIREMEN'S FUND 1987 $4.0MHARTFORD 1991 $7.7MROYAL 1990 $37.8MST. PAUL 1990 $8.8M

MA Auto Insurance Reform Act of 1988

Consensus Flows from Crisis Major Reforms

Monetary Tort Threshold Increased from $500 to $2000 Increased PIP Limit from $2000 to $8000 with Health Insurance

Primary in $2001-$8000 Layer Allowed Insurers to Establish Direct Payment Plans with Referral Body

Shops Directed Residual Market Mechanism to Come Up with Depopulation

Plan

MA Personal Auto Market in Early 1990’s

Improved Rate Adequacy

CALENDAR I/E LOSSYEAR RATIO1990 0.771991 0.701992 0.621993 0.591994 0.601995 0.561996 0.661997 0.671998 0.68

SOURCE: NAIC ANNUAL STATEMENT, STATE PAGE DATA

Reform in Residual Market Assessment Methodology

Assessment Based upon Voluntary Market Share and Utilization Phase-In from Base Year Methodology to Utilization (1990-93) Cession Rates Decrease to 10% Range

Competitive Turning Point in 1995

Open Groups First Approved in Late 1994 (Greylock Credit Union) AAA Group Deviation Applications Filed by Commerce Ins Co & Approved in

Mid 1995 1,000,000+ AAA Members Approved Eligible for 10% Rate Deviations Brief Panic Occurs Among Insurers Timing of Approval Gives Competitors Time to Develop Reaction

Competitive Responses in MA Auto Market

113B Classification Deviations Liberty Mutual SDIP Step Deviation

Group Marketing Plans Open & Closed Groups

Mutual Insurer Dividends Auto Payment Plans

No Finance Charges or Installment Fees

Subsidies in MA Auto Rates

Relativity Tempering Flat Loading of Residual Market Deficit Pure Premium Rate Cell Capping (5% & 13%) Class Constraints

GroupsMASSACHUSETTS GROUP AUTOMOBILE INSURANCE

NUMBER OF APPROVED GROUPS BY YEAR

132

329

1179

2127

22332159

2209

0

500

1000

1500

2000

2500

1993 1994 1995 1996 1997 1998 1999

YEAR

# O

F G

RO

UP

S

Other New Issues in MA Personal Auto

OEM Parts Endorsement Vehicle Replacement Cost Endorsement Managed Care Endorsement