Safety Insurance Estimates Positive Impact of Mass. Residual Market Plan Changes on Its Operations

Safety Insurance Group, Inc. in Boston has updated its estimate of the financial impact of the reform approved on Dec. 31, 2004 of the residual market system for personal automobile insurance in Massachusetts. The company estimates the changes will reduce its share of the residual market deficit and help its loss ratio.

For 2005, Safety estimates the changes will save it about $6.9 million total in reduced losses and expenses; while for 2006, it should see about $13.8 million in savings.

The bulk of the estimated savings ($5.4 million in 2005 and $10.3 million in 2006) would result from a reduced share of the residual market deficit.

Safety also estimates it will save about $0.9 million in 2005 and $2.7 million in 2006 from an improvement in its loss ratio as a result of the planned redistribution of exclusive representative producers. That same redistribution of ERPs should reduce loss adjustment expenses by about $0.6 million in 2005 and $0.8 million in 2006, according to the auto insurer.

The new rules are designed to achieve a more fair and equitable distribution of residual market costs and assignment of exclusive representative producers (ERPs) by replacing Commonwealth Auto Reinsurers with an assigned insurance plan, the Massachusetts Assigned Insurance Plan (the MAIP), similar to those employed in 42 other states.

Safety said that while its current share of ERP exposures is appropriate, its share of the residual market burden from these exposures is higher than it should be. According to CAR data the company had a 19.5 percent share of the high loss ratio ERP exposures (ERPs with loss ratios of 125 percent or greater) as compared to an expected 11.6 percent share based on our voluntary market share.

The company has also incurred a proportionally higher share of the CAR deficit primarily as a result of ceding more high loss ratio ERP business to CAR than its competitors. Safety said the reason it has ceded more high loss ratio ERP business to CAR is that the company had proportionally 68 percent more of the high loss ratio ERP business as compared to its average competitor. In addition, its private passenger loss ratio has been hurt by retaining a higher portion of high loss ratio ERP business.

Beginning in 2005, insurers that have market shares of 2.0 percent or more will service ERPs. On January 6, 2005 CAR reassigned 7 of Safety’s high loss ratio ERPs to other servicing carriers, which will reduce its share of high loss ratio ERPs by 18,733 exposures. On January 10, 2005 CAR reassigned 10 ERPs from non-servicing carriers to Safety, which will increase its share of ERPs by 15,371 exposures.

Safety estimates that its private passenger automobile loss ratio would improve because the company would no longer be retaining business from 7 high loss ratio ERPs that have been reassigned to other carriers. The company estimates that its private passenger 2005 accident year loss ratio would decrease 0.4 percent and its incurred losses in 2005 would be reduced by approximately $0.9 million pre-tax. Safety also projects that its private passenger 2006 accident year loss ratio would improve by approximately 0.6 percent and its incurred losses in 2006 would go down by approximately $2.7 million pre-tax. The benefits of this change would also reduce incurred losses in policy years 2007 and beyond.

The reduction in high loss ratio ERP business will also decrease Safety’s loss adjustment expenses in the future, partially earned (about $0.6 million) in 2005 and fully realized (about $0.8 million) in 2006.

The MAIP rules will reduce the company’s share of the CAR deficit to a level that is consistent with its market share, according to its analysis.

Topics Auto Profit Loss Massachusetts