03/14/08

When the month turns from March to April in a couple of weeks, Massachusetts will be flipping their auto insurance system from one that uses credit scoring to one that is based on managed care, as a response to a recent ban on the use of credit scoring to price insurance in that state.

It sounds like a good thing, especially to consumers riding the line between good or poor credit, but Fitch Ratings has released a report, "Massachusetts Private Auto: Drive to Managed Competition," which suggests that while the new system may offer a short term benefit, in the long run it will hurt both consumers and insurance companies.

Specifically the report criticizes the new insurance rate system in Massachusetts, which eliminates state-set uniform rates in favor of insurer-set rates (subject to certain restrictions, of course), on two points:

• Fitch is concerned that local insurers that previously took advantage of the old rules could find themselves struggling to stay afloat under the new residual market rules that are being implemented.
• Fitch is concerned that consumers will be denied the full benefits of a competitive market without the use of credit scoring.

The Fitch report does reiterate that there will be a short-term benefit, stating, "Consumers will benefit the most from a wider choice in carriers, innovations in coverage and lower rates for the average consumer."

Fitch is also quick to point out, however, that policy holders in the state would benefit more if insurance underwriters were allowed to use credit scoring, as well as other, "actuarially significant pricing variables that are believed to adequately reflect risk and have demonstrated value in other markets."

Fitch feels that the new state-imposed limits on tiered pricing will discourage national carriers not already doing business in the Bay State from entering the market, as has already happened in New Jersey, when that state enacted similar legislation.

85% of the auto insurance market in Massachusetts is handled by local independent agents; the big national companies, including State Farm, Progressive, and Geico, do not do business in the state.

Fitch's full report can be found at www.fitchratings.com under financial institutions / insurance / special reports.