Subject: running red lights Massachusetts drivers pay relatively high insurance rates not primarily because of the way rates are set, but because they have the highest accident rate in the country, almost 70 percent higher than the average state, and the highest rate of injury claims, double the average. Even under a competitive system, insurers would need to have premiums at a high enough level to pay these claims. Competition among insurers will not induce Boston drivers to stop running red lights, increase traffic enforcement measures, or make dangerous intersections safer. The simple fact is that Massachusetts drivers have too many accidents; as long as that is true, premiums, no matter who sets them, will be higher than elsewhere. ============== Boston Globe, The (MA) April 3, 2004 COMPETITION WON'T CUT AUTO RATES Author: PETER HIAM AND DONALD BASHLINE Section: Op-Ed Page: A15 THE CLAMOR FOR CHANGING THE MASSACHUSETTS SYSTEM OF SETTING AUTO INSURANCE RATES (UNDER WHICH THE COMMISSIONER FIXES RATES FOR ALL INSURERS) HAS RARELY BEEN LOUDER. ATTORNEY GENERAL THOMAS REILLY SAYS THE SYSTEM IS ``ESSENTIALLY BROKEN'' AND ASSERTS THAT ``WE NEED TO BRING COMPETITION INTO THE SYSTEM.'' THE ALLIANCE OF AMERICAN INSURERS AGREED, SEEKING TO ``STOP THE HEAVY HAND OF GOVERNMENT CONTROL'' AND CALLING FOR ELIMINATING THE CURRENT SYSTEM. GOVERNOR MITT ROMNEY IS REPORTEDLY WORKING ON A FAR-REACHING REFORM PROPOSAL. While the need for reform is clear, those who advocate overturning the current system ignore the real causes of high insurance rates in Massachusetts and underestimate the amount of regulatory oversight that would be necessary under a competitive regime. Also, policyholders accustomed to the current system must be prepared for the potential dislocations its replacement would bring including, for many, higher rates. Massachusetts drivers pay relatively high insurance rates not primarily because of the way rates are set, but because they have the highest accident rate in the country, almost 70 percent higher than the average state, and the highest rate of injury claims, double the average. Even under a competitive system, insurers would need to have premiums at a high enough level to pay these claims. Competition among insurers will not induce Boston drivers to stop running red lights, increase traffic enforcement measures, or make dangerous intersections safer. The simple fact is that Massachusetts drivers have too many accidents; as long as that is true, premiums, no matter who sets them, will be higher than elsewhere. The subsidies in the present system are not the one-sided give aways their opponents often claim. They are provided to urban drivers by their suburban and rural counterparts to help make insurance more affordable in inner cities and to reduce the number of uninsured motorists. Since automobile insurance in Massachusetts is compulsory, some drivers will be forced to choose: stop driving or risk a conviction for driving uninsured. Massachusetts, with only 7 percent of its drivers uninsured, has the fourth-lowest rate of uninsured motorists in the country, half that of the average state, and less than one-third of California's rate. California's insurers set rates competitively and urban drivers have been virtually priced out of the market. Despite numerous reform efforts there, more than 20 percent of California drivers have no insurance, and rates for uninsured motorist coverage are correspondingly high. During Massachusetts's failed experiment with competitive rating in 1977, insurers raised rates in Boston by up to 60 percent on average, and some drivers, even those with clean records, saw their rates more than double. A repeat of such increases would drive uninsured motorist rates sharply higher for all Massachusetts drivers. While overheated rhetoric might succeed in discarding the present system, it will not provide the Division of Insurance with the resources necessary to analyze dozens of complex, technical rate filings. A recent report shows the division with only three full-time equivalent actuaries and six and a half rate analysts. No state with an equivalent population was as meagerly staffed. Per capita funding for the Division of Insurance is less than half the national average, and equals less than 2 percent of premium taxes collected by insurers from Massachusetts policyholders. According to an insurance industry estimate, competition would draw as many as 120 insurers to write policies here; if each files its own rates, only a substantial increase in staff and appropriations will allow the Division of Insurance to keep pace. Some competition-based reforms could be adopted without disrupting availability of insurance or overwhelming regulatory resources: Allowing insurers to modify an industry-wide advisory rate using their own claims and expense data would allow more efficient insurers to charge less. Encouraging insurers to develop individual surcharge and discount plans based on policyholders' driving records would encourage innovation and reward careful underwriting. These changes would broaden options for consumers and insurers without presenting the difficulties of uncontrolled competition. These reforms can be an important part of a comprehensive plan to reduce rates, but not the only plan. Unless we also take steps to reduce accident rates, adequately fund constructive regulation, and keep insurance affordable for all good drivers, competitive rating's attractions will prove, as they did in 1977, illusory. Memo: PETER HIAM AND DONALD BASHLINE Peter Hiam was Massachusetts commissioner of insurance from 1983 to 1987. Donald Bashline is a consulting actuary and former Massachusetts State Rating Bureau director.