The final auto insurance regulations, issued by Insurance
Commissioner Nonnie Burnes on October 5, 2007, include significant loopholes
that will undermine competition and harm consumers, concluded MASSPIRG and the
Center for Insurance Research. The two
consumer groups have long been involved in advocating for consumer protection
in the auto insurance rate setting process.
“While the Commissioner did take one significant step to
protect consumers by banning the use of consumer credit scores in underwriting,
the regulations just have too many loopholes, which in the end will harm
consumers,” said Deirdre Cummings,
MASSPIRG’s Legislative Director. “It’s as if the goal was to give the illusion
of protecting the public,” said Stephen D’Amato of the Center for Insurance
Research, “while simultaneously creating loopholes to allow the insurers to
treat consumers unfairly.”
The Loopholes and How They Work
REJECTING DRIVERS
(UNDERWRITING):
Contrary to appearances, the new regulations will not
prohibit insurers from using unfair or discriminatory factors in deciding
whether to insure a consumer.
Here’s why. The new
regulations list a number of factors that insurers may not use in deciding
whether to issue an insurance policy to a motorist. The regulations prohibit the
use of: sex, race, marital status,
creed, national origin, religion, occupation, income, education, homeownership,
age, and principal place of garaging of the vehicle. (The regulations also prohibit the use of
information obtained from a consumer credit report, although the Commissioner
has indicated she plans to revisit this issue in a year.)
Since the regulations specify only the prohibited factors, as opposed to the allowed factors, creative companies will be able to use an endless
list of proxies for the prohibited factors. Some examples of possible proxies
for factors that are banned include: net worth, having other insurance
(especially an umbrella or homeowners’ policy), prior coverage amounts, value
of the car to be insured, number of cars owned, student loans, number of bank
accounts, ownership of stocks and bonds, boat ownership, frequent flyer miles,
newspaper and magazine subscriptions (e.g., subscribes to The New York Times
and/or The Wall Street Journal), contributions to political candidates (amounts
and which candidates), MFA membership, BSO membership, country club membership,
contributions to charity, and whether consumers pay insurance through an
installment plan.
Using proxies for banned underwriting factors is even more
likely given that: (1) the new
regulations fail to require insurers to file their underwriting factors with
regulators and (2) an initially proposed requirement that insurers
disclose in writing to consumers the reasons for refusing to issue an auto
insurance policy was eliminated by the Commissioner in a previous
decision. Thus, there is no meaningful way for regulators or consumers to
determine whether insurers are using proxies for the banned underwriting
factors.
RATES AND TIERING:
Another loophole that insurers can use to circumvent
prohibitions against the use of unfair or discriminatory factors is an industry
practice called “tiering.” One common form of “tiering” is for an insurer with
multiple subsidiaries to offer a different level or “tier” of rates in each
subsidiary. While the new regulations do not make a final determination on
whether tiering will be allowed, the Commissioner has yet to prohibit the
practice, and there is growing concern that she will permit it.
Here’s how it works. An insurance company sets up a number
of subsidiary companies in the state – each subsidiary with a different base
rate structure. If a driver qualifies for the “preferred” subsidiary, that
driver will get the lowest rates offered by the insurer. If the driver does not qualify, the driver
will get a quote from one of the other subsidiaries and get one of the
insurer’s higher rates. The consumer will not necessarily know that there are
multiple companies or that the best rate was not offered. Most important, since
the new regulations do not set out the criteria insurers can use in deciding to
issue a policy (underwriting) and also do not require insurers to disclose
their practices, insurers are able to use tiering as a back door way of
avoiding rate regulation.
GROUP DISCOUNTS:
Lastly, the Commissioner has not restricted the use of
“group discounts,” which could be used as proxies for prohibited rating
factors. For example, existing discounts for the American College
of Surgeons and for the Massachusetts Society of Certified Public Accountants
are obvious proxies for occupation. Unfortunately, the Division of Insurance
routinely approves these types of discounts today, but at least insurers
currently are not allowed to pay for these discounts by charging higher rates to
drivers not receiving the discounts. Under the Commissioner’s new regulations,
drivers not receiving these discriminatory discounts will pay more and will
essentially be the funding source for the discounts.
With proper rules, oversight and information, our
competitive market can serve the consumer. But, as we have seen all too often,
insurers will seek and exploit all “legal means” to increase profits.
“We all like competition when it works,” said Cummings, “but
we’ve seen enough failures to know that without proper safeguards, businesses
will naturally seek to add to their bottom line at the expense of the public.
These final regulations have loopholes so large, you could drive through them!”
