Real insurance reform
(One in a series of editorials about America's car culture.)
THE AUTO INSURANCE titans have paused in their internecine battle over the airwaves, and each side has testified before a legislative committee. It's a good time to step back and consider whether Massachusetts consumers would be best served by tuning up the current auto insurance system or demolishing it.
Proponents of scrapping the system, including Governor Mitt Romney and Liberty Mutual Insurance Co., decry the state's fourth-highest-in-the-nation premiums, rampant fraud, and anticompetitive environment that they say drive away large national carriers. Defenders of the tightly-regulated system, including Commerce Insurance and many consumer groups, point to the state's modest premium increases in recent years -- including a reduction this year, affordability compared to median incomes, and low rates of uninsured drivers. Where an insurance company lines up on this debate often depends on how well it is prospering under the current system.
There's more than a grain of truth to the arguments on both sides. But underlying everything is one basic question: Is it fair and reasonable for about 80 percent of the state's drivers to pay about $100 more each year for insurance so that the remaining drivers, mostly urban and young, can pay roughly $400 less? No state flattens rates to the extent Massachusetts does to ensure that drivers can afford coverage in congested, low-income areas where accidents and vandalism occur at higher rates. Romney and other critics look at the system and see an unfair social policy. We look at it and see a sensible public policy in need of some improvements.
The state's 4 million drivers pay $1,100 on average each year for auto insurance, 27 percent higher than the national average. Rates are based on driving record, residence, experience, and desired coverage. The cost is steep, but so are the rates in New Jersey, New York, and other densely populated states with challenging weather and road conditions and high labor costs. No level of reform -- or entrance into the market of national insurance carriers like GEICO -- can make Massachusetts look like Idaho or North Dakota, where traffic-related stresses are low and auto insurance costs about $700 annually. But rate-setters can still provide relief under the current system, as evidenced by Romney's recent announcement of an 8.7 percent decrease in the statewide average premium.
The most controversial change recommended by the governor is the creation of an assigned risk plan to replace the complex structure known by the acronym CAR, which now serves roughly 7 percent of the drivers in the state who are deemed high risks by their companies. National insurance carriers detest CAR and shun the state because of it. There is reason to criticize a system that pays claims from a single pool established by the companies, thereby weakening the incentive for individual companies to fight fraud. Some companies cherry-pick low-risk drivers and contribute less than their fair share to CAR by manipulating the system of special agents whose job it is to ensure access to people in underserved areas.
But CAR has its virtues, notably the requirements that insurance carriers take all comers, service their contracts, and charge them base rates that are the same whether they are ceded to CAR or not. The governor's bill, if passed, would give insurance companies the freedom to reject applicants as they see fit. The undesirables would be placed in a pool and assigned randomly to individual companies. The pool would charge a so-called ''dirty rate" for these customers, whose only fault in many cases is living in an urban neighborhood. Thousands of drivers would be forced to pay higher rates to companies they never chose in the first place. Making matters worse, Romney's bill would allow insurance companies to set their rates based on credit scores, marital status, and other predictors that can't be applied now and that don't relate to driving experience.
Annual insurance bills upwards of $5,000 for young, urban drivers are not unknown in states that lack the price controls in place here. Hal Belodoff, president of Plymouth Rock Insurance Co., estimates that 70,000 policyholders, mostly in urban areas, would see increases from $1,000 to $7,500 under the fully competitive plan envisioned by the governor. There is danger when premiums reach that high: Desperate drivers go without insurance, placing both themselves and others at risk. Whatever savings might accrue to the majority could easily be eaten up by the increased cost of protecting oneself from accidents with the uninsured.
This is far from saying the status quo is perfect. Massachusetts drivers file claims for both bodily injury and property damage at about double the national average. Fraud is rampant, especially in larger cities. Anyone who favors flattening the rates for good urban drivers must also support a redoubling of efforts by insurance investigators and police to crack down on fraud in the cities.
The governor's bill offers many ways to help. Those worthy of support include linking medical payouts to the rates set for worker's compensation insurance; limiting the number of visits to chiropractors and acupuncturists to address patterns of bogus bodily injury claims; and requiring a $100 deductible for glass breakage to limit the extraordinary incidence of windshield replacements statewide. And no legislation would be required for the insurance commissioner to crack down on companies that manipulate CAR unfairly. It is also worth considering changes to the state's no-fault insurance policy, so that drivers could lower their insurance costs by waiving their rights to sue.
Massachusetts requires all drivers to carry auto insurance. That means that everyone is in this together, and that no one with a decent driving record should be crushed by insurance costs. While many substantial improvements can and should be made, the basic structure of auto insurance in Massachusetts is sound.
Next: The case for seatbelts.
