1. Massachusetts Personal Auto The Road to a Free Market

2. Reform Objectives Attract new companies and new capital to the market Provide greater consumer choice of product and price options Create employment opportunities

3. Reform Process Special examination of CAR by Tillinghast on behalf of DOI completed in 2004. Changes achieved through regulation beginning in 2003. Bi-partisan legislative task force for auto insurance reform created in 2004.

4. Key Barriers to Entry Rate adequacy Structure and management of residual market Barriers to exit

5. Ratemaking in Massachusetts By finding the market non-competitive, the Commissioner establishes the personal auto rate. This rate is: The maximum rate Contains a minimum mandatory commission Incorporates significant rate subsidies by territory and driver class

6. Necessary Conditions for Competitive Pricing Fix-and-establish rate should reasonably align with company programs to minimize price disruptions to consumers during the transition to competitive pricing. Consumers need to understand their role and rights in the purchasing decision.

7. Improving Rate Adequacy Through Current Regulatory Practice Eliminate arbitrary reductions to fixed expense loads. Introduce a total rate of return profit model. Increase rates for drivers with bad records; reduce rates for good drivers. Significantly reduce rate subsidies for inexperienced operators (< 6 yrs.).

8. There are Good Drivers in MA 62% of all experienced drivers have been clean for 6 or more years 83% of all experienced drivers have one accident or violation or less in the past five years.

9. Proposed Changes to the 2006 Safe Driver Insurance Plan All at-fault accidents and traffic violations are surcharged for five years. Points assigned for each incident: 2 points – minor violation 3 points – minor accident (>$500) 4 points – major accident (>$2,000) 5 points – major violation

10. Proposed Changes to the 2006 Safe Driver Insurance Plan Each point valued at 13.5% for experienced operators; 7.5% for inexperienced operators. If a driver has 3 or fewer accidents or violations in the past five years, and all of them are more than three years old, the surcharge point of each is reduced by 1.

11. Proposed Changes to the 2006 Safe Driver Insurance Plan Drivers clean for the past five years get an Excellent Driver Discount of 6%. Drivers clean for the past six or more years get an Excellent Driver Plus Discount of 17%.

12. Estimated Rate Effects of Proposed Safe Driver Insurance Plan

13. How Proposal Improves Alignment with Competition Proposed rates based on driving record align in a more meaningful, consistent, and transparent way with company use of rating tiers. Rate for best drivers is still too high relative to costs facilitating positive rate effects under a competitive pricing environment.

14. Reduce Rate Subsidies for Inexperienced Drivers (2005) Manual rates are established independently for each territory and driver class combination based on loss experience. Prior to 2005, pure premium relativities for each combination were capped at 3.25 times the statewide average of 1.0.

15. Changes in Pure Premium Relativity Caps Beginning in 2005 No changes made for experienced and occasional inexperienced operators Increases for principal inexperienced operators introduced

16. Reducing Rate Subsidies for Inexperienced Operators Rate effect of changes to relativity tempering to be phased in over the next 3 years using rate change caps. When finally implemented, inexperienced principal operators with less than three years of experience will still receive a “subsidy” for mandatory injury coverages of about 15%.

17. Anticipated Change in Average Premium Assuming 0 Change in Base

18. How Action Improves Alignment with Competition Rates align more accurately with true loss potential. Reduced subsidies for inexperienced operators increases the likelihood that individual companies will write them voluntarily. Facilitates a reduction in the proportion of these drivers insured through residual market.

19. Ratemaking Areas that Would Require Legislative Attention Current law prohibits the use of age, gender, or marital status in rating. Current law requires that all drivers over the age of 65 receive a senior discount of 25%. Current law requires that the safe driver insurance plan be revenue neutral.

20. The Residual Market in Massachusetts Reinsurance facility 2004 deficit estimated to be $306 million Insures approximately 7% of the market Company deficit share based on utilization adjusted market share. Law requires that all agents be appointed to a servicing carrier for residual market business, regardless of whether they have voluntary relationships with companies.

21. Problems with Residual Market The formula for deficit sharing is unfair. A disproportionate number of urban and inexperienced operators are insured through the residual market. The process of assigning agents without voluntary markets to companies does not result in a fair distribution of the losses associated with these agencies.

22. Problems with Residual Market Reinsurance facilities reduce incentives for companies to fully fight fraud. Criteria for a company to become a servicing carrier to the residual market is 5,000 insured cars. Companies writing less than 5,000 cars may underwrite in the traditional sense and do not have to accept involuntary agency assignments.

23. Process of Residual Market Reform Commissioner orders CAR to rewrite their rules of operation (4/30/04) CAR submits proposed rules (6/30/04) Commissioner remands CAR proposal for further work (8/27/04) CAR submits revised rules (9/24/04) Commissioner issues changes to 11/23/04 submission. Commissioner finalizes new rules to be effective 1/1/05 on 12/31/04. Superior Court stays the Commissioner’s decision on 2/1/05.

24. Commissioner’s Auto Reform Decision Three-year transition to a traditional assigned risk plan beginning in 2006 with full implementation by 2008. Individual risk assignments based on voluntary market share are more fair. Assigned risk structure provides stronger incentives for companies to fight fraud. Ultimately eliminates barrier to exit.

25. Reasons for A Three-Year Transition Time needed to retool CAR to process individual assignments electronically in real time. Time needed to strengthen overall rates and rates for inexperienced operators to control the size of the plan. Time needed for involuntary agencies to restructure their portfolios and obtain voluntary contracts to survive in an assigned risk world.

26. Commissioner’s Auto Reform Decision - Transition Revises deficit sharing formula and driver class and territory credits so that they are fairer for each company, and provide incentives to companies to voluntarily appoint agencies in all areas of the state. Introduces a subsidy clearinghouse so that all companies receive the correct average rate for every risk, thus focusing their attention on real risk.

27. Commissioner’s Auto Reform Decision - Transition Stops the current practices of assigning involuntary agents to companies. With introduction of an assigned risk plan, all agents are eligible to become agents of the assigned risk plan. Requires the reassignment of involuntary agencies with loss ratios higher than 125% so that the financial burden of those agencies are fairly distributed among the companies.

28. Commissioner’s Auto Reform Decision - Transition Requires all servicing carriers to jointly prepare agency management plans with all involuntarily assigned agencies. Plans for such agencies with loss ratios higher than 125% must be filed with the Commissioner. Permits CAR to develop additional financial incentive plans for companies that aggressively fight fraud.

29. Commissioner’s Auto Reform Decision - Transition Changes the requirements for companies to become servicing carriers of the residual market from 5,000 cars to writing more than 2% of the market based on vehicles. This allows 7 of the 19 companies to underwrite in the traditional sense and to avoid involuntary agent assignments. These companies share in the deficit based upon voluntary writings.

30. Activity in 2005 The DOI has requested the case be transferred from Superior Court to the Supreme Judicial Court for expedited hearing. The legislative task force for auto insurance reform is working to propose recommendations to change the system in 2005.