Auto Insurance Gets Competitive in Massachusetts
The last time Massachusetts introduced market competition to auto insurance, the experiment lasted only 12 months. Now, 30 years later, the state has once again shifted away from its fully regulated system into something called ‘managed competition.’ The state insurance commissioner vows to steer clear of past mistakes and promises rate reductions for many drivers. But motorists with not-so-clean records may be surprised to see their costs going up — while insurance agencies help consumers navigate an often-confusing maze of new options.
Is the Bay State’s switch to competitive auto insurance rates cause for celebration or concern? The answer might just depend on your driving record.
“The new, managed-competition system penalizes people with bad driving records, and rates are going to be higher for operators who are considered higher-risk, which includes youthful drivers,” said Diana Paris, personal lines manager for the Insurance Center of New England in West Springfield. “At the same time, good drivers are seeing big savings, and that’s a good thing.”
“Based on what we’re seeing, a lot of people are going to save money — primarily the best drivers,” meaning those with the fewest accidents and citations on their record, noted James Phaneuf, owner of Bell and Hudson Insurance Agency in Belchertown. “Early indications seem to be that less-experienced drivers may pay slightly more for their insurance, so not everyone will save money under this system.”
For much of the past century, all rates for automobile insurance in Massachusetts have been set by the state Division of Insurance — until this month, the only such regulated system among the 50 states. Anyone who requested a premium quote for a certain level of coverage would receive the same price from any number of companies, unless they were eligible for a group discount.
Managed competition, which began on April 1, allows insurance companies to offer their own rates. Although these rates may vary, they must still be approved by the Division of Insurance — hence the term ‘managed.’ For the first time since a disastrous attempt at changing the system 30 years ago, Massachusetts drivers may now compare the different rates, benefits, and services offered by the 19 insurance companies competing for their business in the Commonwealth.
Many are busy doing just that, and — if the agencies interviewed by BusinessWest are any indication — actively seeking professional help to navigate the sudden plethora of options.
“There are some fairly subtle pricing differences between companies — and some significant ones,” said William Grinnell, president of Webber and Grinnell Insurance in Northampton. “The good thing about being an independent agent is that we represent several different insurance companies and are able to shop them to consumers. So we’re getting a lot of calls asking, ‘what’s my premium going to do?’ ‘Can I do better with another company?’”
The verdict is still out on how many motorists will actually wind up paying less, but consumers and agents alike have been generally receptive to the change, which is also bringing new business into the Bay State; Progressive Insurance will begin selling insurance to drivers here in May, bringing the total number of competitors to 20.
In this issue, BusinessWest examines the benefits of managed competition, as well as some the possible pitfalls, as insurance options open up like a six-lane highway.
Under the prior, regulated system, insurance providers were required to apply specific surcharges for certain accidents and traffic violations, a program known as the Safe Driver Insurance Plan (SDIP). Now, insurance companies will be permitted to develop their own rules, subject to state approval, for imposing surcharges for at-fault accidents and traffic violations. They may also use the state-established SDIP in setting their rates.
The last time Massachusetts waded into managed competition was three decades ago, and the result was not exactly what state leaders had intended. Consumers weren’t given much time to prepare for the change in early 1977, and premiums shot up more than 25% for some motorists. Lawmakers quickly passed a law capping increases at 25% over 1976 levels, and in 1978, amid widespread discontent, Massachusetts reverted to a fully regulated system yet again.
In 2005, then-Gov. Mitt Romney once again called for a more-competitive system, and in 2006, Gov. Deval Patrick promised during his campaign to increase competition to lower insurance rates. Last year, state Insurance Commissioner Nonnie Burnes, a Patrick appointee, began doing just that.
To avoid the rate-spike problems of 1977, she capped any increase at 10% for the worst drivers, as well as forbidding insurance companies from using certain socioeconomic factors, including credit scores, in setting rates.
The decision hasn’t been without controversy. Martha Coakley, the state’s attorney general, has called the new system “confusing” and frets that some drivers, even many with clean records, could face rate increases. But competition also opens up a world of price incentives that allow drivers to shop for the plan that best suits their own circumstances. Among them are:
• Accident forgiveness. “One difference is the disappearing deductible,” said Grinnell. “If you’ve been with a company for a certain number of years, if you have an accident with a $500 deductible, certain companies will forgive that deductible. And if you’ve owned a car for 10 months and it’s totaled, they might buy you a brand-new car, rather than one that’s depreciated by 10 months. Those little built-in bells and whistles are nice additions, but they’re not necessarily across the board.”
• Elimination of ‘short-rate values.’ These are fees that insurers typically charge for early cancellation of a policy. But under the new system, some customers will not have to wait for their policies to expire to rework them or change companies altogether. “One way insurers are competing for your business under managed competition is by offering to waive or credit short-rate values. Others are rewarding customers who stay with them,” said Burnes. “You should check with your insurance agent to determine the insurance choices that are in your best interest.”
• Discounts when someone insures both their house and vehicle with the same company. Not all insurers offer this incentive, and even when they do, there’s an important caveat. “Insurance companies can’t use your credit as an underwriting tool on auto insurance, but they can and do use it on home insurance,” said Phaneuf. “So, while it generally makes more sense now to have your home and auto insurance with the same company, it’s not always easy to place them with the same carrier if there’s an issue of bad credit.”
In general, he added, “it’s more complicated now. You need an agency with a trained staff to guide you through the maze.” For that reason, area insurance agencies generally agree that the change to managed competition will be good for their business, because a more complex landscape should funnel more customers to them for help.
“Is it going to be more confusing? Yes,” said Phaneuf. “Every company has different rates, policy features, and benefits. More than ever, people are going to need an independent agent to go to work for them.” At the same time, however, auto insurance has become more complicated for the agencies, too, meaning they’ll have to work to earn the extra business.
“It’s going to make the agent’s job tougher than it was previously,” he continued. “In the past, there was one state-set rate, and we competed in areas other than rate — such as being local, having a professional, trained staff, and being involved in the community. Those are still critical areas, but we realize that price is important to customers.”
Paris noted that motorists won’t always get all the information they need from advertisements and Web sites. “It is confusing, and the hype and advertising on television don’t tell the whole story,” she said. “They tell the good parts, but not the bad parts. Someone who had two accidents roll onto their driving record last year might call us, saying, ‘I can save all kinds of money,’ but the price actually went up.”
Coakley has argued that the average auto insurance rate would have declined this year without managed competition, an assertion with which Phaneuf agreed. “So, whether managed competition is a good thing will take a couple of years to figure out,” he said. “Personally, I think a less-regulated market will be a good thing, particularly for good, responsible drivers.”
Indeed, Burnes said drivers with clean records should see a 10% savings, on average, in the coming year, perhaps more if they shop around. The Division of Insurance is helping consumers do just that with a Web site (www.mass.gov/autorates) on which users can answer a few questions and generate a list of sample premiums being offered by the state’s 19 insurers (Progressive will increase that number to 20 next month).
“When consumers use our site, they are struck by the huge variations in prices and discounts being offered by different companies, and it really motivates them to get serious about calling their agent and starting to comparison-shop,” Burnes said. “The savings for good drivers has the potential to be significant, so it’s worth it for all consumers to do a little legwork.”
BusinessWest has heard reports of confusion with the Web site, with some customers complaining that the rates quoted on the site don’t jibe with those quoted by an agent. Paris said agents expect questions and even some confusion, but they also see the value in giving consumers a choice.
“It’s more complicated, and people who want to save money have to do a little homework,” said Grinnell. “But I think competition is a good thing, not just for consumers but for agents, too, because competition makes all of us better.”