Mass. A.G. Reilly Calls for 6.2% Cut in Auto Rates

Following up on his previous assertion that auto insurance in the state is actually too profitable, Massachusetts Attorney General Thomas F. Reilly has now called for a 6.2 percent cut in private passenger auto insurance rates for next year.

Reilly’s proposal, an expected salvo in the annual process under which the insurance commissioner sets rates, opens a wide gap with the insurers and agents, whose recommendations equal a combined a 9.3 percent rate hike.

According to Reilly, the industry’s combined filing would boost the average premium by about $100, while his would reduce it by about $60.

The Automobile Insurers Bureau had originally asked for an average increase of 5.8 percent for insurers but that figure did not reflect the request by agents for a 32 percent jump in average commission from $114 to $151.

Reilly’s recommendation comes about a month after his office told Insurance Commissioner Julianne Bowler that profits in auto insurance have been too generous.

Peter Leight, assistant attorney general in the insurance division, said at last month’s opening hearing that of the $240 million sought by the insurers in their original 5.8 percent filing, half is profit. “The insurers’ added profit is completely unjustified,” he told state officials.

A quarter of the industry’s proposed increase, or about $80 million, is for an “unreasonable” increase in expenses, Leight continued. He said this reflects “excess and profit sharing commissions” which consumers should not be asked to pay.

Finally, Leight said, the industry is asking a similar amount — $80 million— to cover losses despite the fact, he contended, that losses were flat in 2003. “(T)he insurers’ rate request asks policyholders to pay higher premiums to cover as yet unrealized losses,” he commented.

“Excessive insurer rate increases have been the norm in Massachusetts,” Leight argued. He maintained that insurers have over-predicted losses an average of four percent a year over the last decade, which he said translates into “hundreds of millions of dollars of excess profits.”

“The rates have been too high and yet every year the AIB seeks higher and higher rates and more and more profit,” Leight charged.

The attorney general is not the only one taking shots at the industry. The State Rating Bureau (SRB is the consumer arm of the Division of Insurance) has also criticized the AIB request.

The SRB’s Kevin Beagan told Bowler that the combined request of insurers and agents “would be an excessive rate not permitted under Massachusetts law.”

Beagan also criticized the AIB’s filing for improperly calculating the profit and for failing to fully account for lower claims due to successful anti-fraud activities in Lawrence and other cities.

Beagan also took exception to the argument that auto insurance is not profitable in the state, citing a loss ratio in 2003 for insurers of 67.6 percent. “It is generally accepted that this value indicates that writing private passenger automobile insurance is a reasonably profitable undertaking for the companies,” he said.

The job of defending the insurers’ rate hike belongs to Daniel Johnston, president of AIB, who acknowledged that insurers are asking for a higher expected rate of return of 10 percent compared to the 7.7 percent allowed in 2004 rates. Even the 10 percent, he maintained, is below the Value Line’s 14 percent estimate of what the industry as a whole nationwide will earn in 2005 and the 17 percent that has been reported for New Jersey insurers.

“If you want to send a signal to those companies that might consider doing business here in the future, as well as to those companies who continue to provide a marketplace here, today, then adoption of a 10 percent cost of equity in your profit model will be a significant and prudent first step,” Johnston told state officials.

This year’s filing from the AIB also contains changes in rate subsidies and in the way motorcycles are priced.

Agents said they would defend their bid for a commission increase during additional hearings.

“That’s what the numbers show,” noted Frank Mancini, president and chief executive officer of the Massachusetts Association of Insurance Agents, which made the commission recommendation. He was referring to the results of a new agency cost study conducted for the group by Tillinghast that was used in preparing the recommendation.

The hearings will continue with questioning of actuarial and financial experts before the commissioner announces a decision, which usually occurs on the deadline of Dec. 15.