1. Massachusetts Personal Auto Insurance Limited Competition In A Fixed & Established State Robert C. MacNicholl Acting Director, State Rating Bureau MA Division of Insurance Session REG-41 Regulatory Update CAS Seminar on Ratemaking March 9-10, 2000

2. MA Personal Auto Rate Law n MA--only fixed & established state for personal auto in U.S. n fixed & established state--insurance commissioner determines one set of rates and classifications to be used by all insurers operating in MA

3. MA Personal Auto History n 1925--first state in U.S. to enact compulsory auto liability insurance n 1928--enacted fixed & established rate law for compulsory auto liability insurance n 1976--enacted law that ended state set rates as of 1/1/77 n 1977 (January)--open competition begins n 1977 (July)--open competition ends with rebate legislation that capped all increases over 1976 at 25%

4. Alternative Auto Rate Options Available under MA Law n 1968--113B classification deviations (downward) n 1973--group marketing deviations (downward)

5. MA Personal Auto Market Experiences Low Point in 1980’s n Rate Adequacy

6. MA Residual Market Mechanism in 1980’s n Reinsurance Facility (C.A.R.) n Assessments Tied to Base Year 1982 n Cession Rate Increases to 68% in 1989

7. Insurers Exit Market n Combination of C.A.R. Assessment Rules & Rate Adequacy n Exit Rules Make Withdrawal Difficult

8. MA Auto Insurance Reform Act of 1988 n Consensus Flows from Crisis n Major Reforms u Monetary Tort Threshold Increased from $500 to $2000 u Increased PIP Limit from $2000 to $8000 with Health Insurance Primary in $2001-$8000 Layer u Allowed Insurers to Establish Direct Payment Plans with Referral Body Shops u Directed Residual Market Mechanism to Come Up with Depopulation Plan

9. MA Personal Auto Market in Early 1990’s n Improved Rate Adequacy

10. Reform in Residual Market Assessment Methodology n Assessment Based upon Voluntary Market Share and Utilization n Phase-In from Base Year Methodology to Utilization (1990-93) n Cession Rates Decrease to 10% Range

11. Competitive Turning Point in 1995 n Open Groups First Approved in Late 1994 (Greylock Credit Union) n AAA Group Deviation Applications Filed by Commerce Ins Co & Approved in Mid 1995 n 1,000,000+ AAA Members Approved Eligible for 10% Rate Deviations n Brief Panic Occurs Among Insurers n Timing of Approval Gives Competitors Time to Develop Reaction

12. Competitive Responses in MA Auto Market n 113B Classification Deviations u Liberty Mutual SDIP Step Deviation n Group Marketing Plans u Open & Closed Groups n Mutual Insurer Dividends n Auto Payment Plans u No Finance Charges or Installment Fees

13. Subsidies in MA Auto Rates n Relativity Tempering n Flat Loading of Residual Market Deficit Pure Premium n Rate Cell Capping (5% & 13%) n Class Constraints

14. Groups

15. Other New Issues in MA Personal Auto n OEM Parts Endorsement n Vehicle Replacement Cost Endorsement n Managed Care Endorsement