State has a list of don'ts for insurers

State Insurance Commissioner Nonnie S. Burnes yesterday proposed rules for the introduction of competition into the state auto insurance market that would discourage or ban insurers from considering factors unrelated to a customer's driving history when setting rates.

The new rules, if approved by the Division of Insurance, would take effect in April and could entice a host of new insurance companies to offer coverage in Massachusetts, where the state, not insurers, has set rates for three decades.

In New Jersey, which overhauled its auto insurance system to encourage competition in 2003, premiums have fallen and several companies, including national giant Geico Corp., entered the market. The average statewide premium has fallen at roughly the same rate the last three years in New Jersey and Massachusetts, as claims have fallen nationwide. But advocates for competition say good drivers in New Jersey are able to save more money by shopping around.

Under the proposed regulations, insurance companies won't be able to consider gender, marital status, education, occupation, or home ownership status when deciding whether to cover drivers. The rules also would bar the use of those socioeconomic factors to determine how much drivers pay for insurance. In addition, there will be a one-year ban on the use of credit scores as a factor in setting rates.

"The objective here is to really push and encourage the insurers to use things that relate to one's driving. How long you've been a driver, what kind of vehicle you have, if you drive it a lot, that sort of thing," Burnes said. The moratorium on the use of credit scores will allow regulators to study the issue further, she said.

Massachusetts is the only state in the country in which auto insurance rates are set by the government. Since 1990, 35 companies have abandoned the state because of its insurance system, according to the state insurance division. Many major national insurers, including Progressive Corp., Geico, and Allstate Corp., shun the state because of its heavily regulated system.

Most of the state's 4 million drivers can choose their insurance provider, but all insurers charge the same rates, which are set yearly by state regulators.

Insurers in many other states use socioeconomic factors along with other indicators such as a driver's age, record, and garage location to help determine a driver's likelihood of filing a claim. The insurance industry says these disparate factors, as well as credit histories, are accurate statistical indicators of the likelihood that a driver will file a claim.

Opponents say the use of socioeconomic factors can penalize good drivers because of their educational status, income, or neighborhood.

New Jersey Citizen Action released a report in February that said the average quote from Geico's website for a person without a bachelor's degree was 19 percent higher than the average quote for someone with a degree. Geico officials said the report overstated the effect of occupation and education on rates.

One critic of the Massachusetts insurance deregulation proposal said Burnes's plan doesn't go far enough in limiting what insurers can consider when deciding whether to offer policies and rating their clients.

"Every insurer will figure out within 10 minutes how to get around this regulation, so it needs to be changed to identify the only factors that may be used, not to prohibit a short list of factors that the commissioner has identified," said Stephen D'Amato, a consultant for the Center for Insurance Research.

Burnes said in July that she planned to allow insurers to set their own rates to encourage competition. The last time the state permitted insurers to set their own prices was in 1977, but regulators quickly ended that when rates shot up for many urban drivers.

"We are pleased that after nearly five years of review from two very distinct administrations with varying public agendas, the decision to move to managed competition is going forward," James Harrington, executive director of the Massachusetts Insurance Federation, which has lobbied for competition, said in a statement. He called the plan "a responsible and measured approach" to implementing a new system.

Under the new guidelines, insurers must annually file their proposed rates with Burnes, who would have the discretion to reject them if they were considered excessive, discriminatory, or so low that an insurer might risk insolvency.

The guidelines would take effect on April 1 and expire on the last day of March 2009, essentially setting up a one-year trial for insurance competition. A public hearing on the rules is slated for Sept. 20; final rules will be issued in October.

Keith Reed can be reached at reed@globe.com.