Mass. Upholds Competition; Allows Insurers’ Rates and Commissions

Some of the largest auto insurance writers in Massachusetts whose rates were challenged have been given the green light to use the rates they filed for 2008 in a group of pro-competitive rating rulings by the state’s regulator.

The rulings characterize objections to insurers’ profit, commission and loss provisions as “irrelevant” under the state’s new managed competition marketplace and bring to an end challenges to rates filed by 19 auto insurers.

The rulings also preserve contingent commissions for agents.

Insurance Commissioner Nonnie Burnes ruled in favor of Commerce, Safety, Arbella, Premier and Hanover over the protests of Attorney General Martha Coakley, whose lawyers had tried to persuade Burnes that items contained in the insurers’ rate filings led to rates that were excessive even though they all filed for overall decreases.

The rulings mean the insurers may proceed to market using their filings, which called for an average rate decrease of 8.1 percent by Commerce; an average 6.3 percent cut by Safety; a 7.7 percent decrease by Arbella; a 6.3 percent reduction by Premier and 8.1 percent for Hanover.

In declining to disapprove the rate filings, Burnes also handed independent agents’ a victory by upholding the inclusion of contingent commissions as part of the rate filings. Coakley’s team had argued that they should not have been part of the rates.

Auto insurers have had their rates set by the insurance commissioner for years. But beginning in April, 2008, they are being allowed to compete using their own rates under a new managed competition system. Insurers file individual rates that become effective unless the commissioner disapproves them.

The attorney general has the right to trigger rate hearings on individual insurer rate filings she deems excessive, which Coakley did in the cases of the five insurers, but the final decisions rest with the commissioner.

Coakley objected to provisions for profit, expenses including contingent commissions, and loss trends used by insurers in their rates.

But Burnes dismissed the AG’s entire analysis, ruling in favor of the insurers on each provision. Burnes suggested that while the AG’s approach might have worked under the previous fix-and-establish system, it was irrelevant under the new managed competition system and that the AG “fails to recognize” that the rules have changed.

Burnes said that while the attorney general wants to challenge individual provisions of rates, as was done under the previous system, a competitive system requires a broader view.

“I do not set the rates under c. 175E [the rate statute]. My authority is limited strictly to disapproving a rate or, under very limited circumstances set forth in the statute, approving it. I look at the proposed overall rates generated by the rate filing viewed as a whole in determining whether a company’s proposed rates are excessive for the insurance provided,” Burnes wrote.

She further explained how her approach under managed competition differs from that taken in the past. In her discussion of the Commerce profit provision, Burnes wrote:

“It is not my task to look at aggregate industrywide data for the purpose of developing an underwriting profits provision that reasonably reflects the average financial needs of a mythical ‘Every Company,’ but is specific to none.”

The analyses by the judge-turned-insurance commissioner of the expense and loss trends provisions used similar language.

The attorney general had attacked contingent commissions for agents as “creating serious potential conflicts of interest and leading to anticompetitive effects such as the steering of business away from more cost effective carriers.” Coakley’s lawyers had also argued that because previous decisions did not allow them, contingent commissions should continue to be rejected in a competitive environment.

But Burnes said that such past decisions are immaterial to the current situation and since such commissions are legal, if insurers decide they want to pay them in a competitive market, they can.

“Contingent commissions now are one basis for legitimate competition in the industry. Indeed, that is why the Division’s rate filing instructions explicitly provide for the possibility of such an expense. It is neither my role, nor the role of the Attorney General, to decide what expenses a company should incur in a competitive insurance market provided no such expenses violate the law. Companies that unwisely spend money will enjoy less success in the market, and this experience alone will alter future conduct,” Burnes wrote.

In the Hanover case, Coakley ‘s lawyers had argued that Hanover’s profit provision was excessive in part because it incorporated a 15 percent cost of capital, which the AG said was higher than necessary.

As she has done in other rates cases, Burnes ruled that a competitive market allows insurers leeway and accepted the explanation of actuaries representing the insurer.

“In a competitive market, companies are free to incorporate their own target profit provisions into their proposed rates; price competition is expected to exert pressure on rates and to provide some control on target profit levels,” Burnes wrote. “Differences are to be expected between profit provisions developed for an entire industry in a fixed-and-established system and those developed for individual companies in a competitive market.”

The AG had also objected to Hanover’s provision for regular commissions (13.8 percent) for the company’s insurance agents as too higher and opposed the inclusion of the cost of contingent commissions in rates.

But on both counts, Burnes sided with the insurer, noting that these commissions are used by insurers to compete.

“Indeed, to allow the continent commission provision in the other 14 company rate filings and not in Hanover’s would be unreasonable and highly prejudicial to Hanover. On this record, Hanover has met its burden to show that its commission expense provision complies with generally accepted actuarial principles and does not produce excessive rates,” Burnes wrote.