Years After Reforms, Mass. Steers Toward Auto-Market Stability

New Jersey and Massachusetts both suffered from automobile insurance markets in turmoil and both enacted reforms to their systems to stem the bleeding of carriers from their markets. But following the reforms, their roads diverged.

In Massachusetts, the goal has been to hold the line since the state's 30-year-old system of centralized rate-making came to an end in April 2008 with the introduction of "managed competition." Companies could now set their own rates, instead of the state, but there were "some who never had faith in the managed competition system," according to Paul Tetrault, Northeast state affairs manager for the National Association of Mutual Insurance Companies.

So despite issues like a ban on the use of credit-based insurance scoring and frequent rate challenges from the state Attorney General, "The best thing is to have stability, to not have any changes, to not have retrenching and go back to what was before," Tetrault said. "The dynamic exists for potential retrenchment. It's an active issue."

Numbering among the opponents of reform: one of the largest auto insurers in the commonwealth.

"We were absolutely on the other side," said John Donohue, chief executive officer of Arbella Mutual Insurance Co.Arbella ranked as the third-largest writer of private passenger auto in Massachusetts the year the reforms went into effect, according to BestLink. In 2010, the company had dropped to No. 4.

"We thought that the old system was not necessarily broken," he explained. The only difference between the old rate-setting system and the new managed competition system is under the old system, profit margins were smaller. A mutual like Arbella can run on a smaller margin of profit because they "don't have to answer to Wall Street," he noted.

"This is really about how much profit an insurance company can make," Donohue said, noting more companies have entered the market since the reforms, but there was nothing stopping them from entering it under the old system. "They chose not to because they did not like the regulatory system."

While Arbella has made peace with the new system — with Donohue saying "the changes are at about the right level" — Arbella is opposed to any lifting of the ban on credit scoring. He said allowing such a factor "creates too many pricing swings" and is not best for the consumer.

He notes while rates dropped with the entry of new insurers, "since '09, more companies have been taking rate increases than rate decreases." Some have been taking them twice a year, Donohue said. "That would not have been allowed under the old system."

Tetrault said Massachusetts was a very constrained market, driving the amount of companies actively writing auto insurance to around 19. But by 2010, there were 32 writers in Massachusetts, according to BestLink. "Politics and business don't mix that well," he noted, saying rate-setting prior to reform was heavily informed with political motives. "It's better to remove the politics and let the market function."

Donohue said "time will tell."

He fears prices may go up faster in the future, harming the consumers who need to know how much money to put aside to pay premiums. He noted that when new companies came to the market, they had very low pricing to gain market share quickly. Afterwards, they filed for significant rate increases.

These new entrants in a new system were one of the biggest challenges faced by insurers already in the market, said Rich Attanasio, vice president of property/casualty ratings at A.M. Best. These old companies were used to the prior system, knew how it worked and now had to adapt to a different environment. "In general, most companies adapted well," Attanasio said. "That's not to say there weren't some bumps in the road."

Arbella's combined ratio was profitable before the reforms, but then rose above 100 in 2009 and 2010. "What we believe was driving that increase was two things: the weather patterns were worse and competition forced us to cut prices," Donohue said. Despite the new competitive environment, Arbella has mostly maintained its market share and retention rates have gone up.

"We feel pretty good about how we handled this major change to our largest market," Donohue said. The company has introduced some new products and pricing since the reforms. "There's definitely been an increase in advertising...We think that's helped us in the marketplace."

Tertault called the boom in advertising in both New Jersey and Massachusetts a "harbinger of success."

Donohue said "more choice is always better," but also noted the market was starting to see some stability in fewer new entrants and less new products. "There hasn't been any wide swings like in New Jersey," he said, alluding to the disruption of market share in that state. In 2003, the year New Jersey's reforms went into place, Allstate and State Farm were at the top of the pack. In 2010, Berkshire Hathaway wrote the most auto premium in New Jersey, Allstate had fallen to second place and State Farm to fifth.

"New Jersey was an example for Massachusetts," Tetrault said. New Jersey has more participants, "but their system was not broken for as long. New Jersey got back on its feet quicker, but the change in Massachusetts from a political perspective was so remarkable."

(Editor's Note: The New Jersey auto market since 2003 reforms will be examined in a future article.)

(By Rick Cornejo, managing editor, BestWeek: [email protected])