Auto insurance change drastic; Insurers would set rates.

Byline: Bob Kievra

The state's automobile insurance industry faces a U-turn after Insurance Commissioner Nonnie S. Burnes yesterday unveiled a sweeping plan

that, for the first time in 30 years, allows insurers to establish their own rates.

Massachusetts stands alone among the 50 states in having the insurance commissioner establish annually a rate that all automobile insurers have to charge the state's 4 million drivers, a system Ms. Burnes rejected in favor of what she termed "managed competition."

The last time Massachusetts allowed insurers free reign over automobile insurance rates was in 1977, a seven-month tenure in which rates jumped 14.5 percent, producing an outcry that prompted legislative intervention.

But conditions have changed in the ensuing years producing an "overregulated market" that currently has only 19 insurers writing policies, she said.

"We can no longer be held hostage to the failed 1977 experience," Ms. Burnes said in her 25-page decision, released last night.

Under her plan, consumers will be able to take advantage of competitive rates for policies renewing on or after April 1, 2008, a major victory for a coalition of large insurers that lobbied former Gov. Mitt Romney and his insurance commissioner, Julianne M. Bowler, who led the charge until she was dismissed by Gov. Deval L. Patrick, who took office in January.

Some consumer advocates, including Attorney General Martha Coakley, had fought the move to competition. However, Ms. Burnes said in an interview that disruption should be minimal, noting that she will retain subsidies for young and urban drivers and that drivers 65 and older will not lose a 25 percent discount enacted under a separate state law.

Ms. Burnes said she will unveil a regulatory framework that enables insurers to weigh factors such as driving record, the number and severity of at-fault accidents and traffic violations in pricing an insurance policy.

But she said she would cast a skeptical eye on any pricing plan that takes education, occupation, home ownership or a person's credit ratings into account.

"We will be scrutinizing these plans," she said. "I spent a lot of my time looking at my authority and there are a lot of controls."

Ms. Burnes said she hopes the changes entice more insurers into the state, including those who are also willing to write homeowners' policies.

In addition to reshaping the voluntary insurance market, Ms. Burnes also altered how the state's 200,000 high-risk drivers obtain insurance. In a separate ruling, she established an assigned-risk plan that would have high-risk drivers randomly assigned to insurers based on the company's market share. It scraps a system in which high-risk drivers were placed into a residual market pool in which premiums and losses were shared with other carriers based on market share. The old system permitted high-risk drivers to select their own insurer.

Changing the system comes at a time of declining automobile insurance rates in Massachusetts. The state cut auto rates for 2007 by 11.7 percent, producing an average statewide premium of $898.81. Rates were reduced 8.7 percent in 2006, and most experts predict a drop of another 8 percent to 10 percent for 2008.

The state's largest automobile insurer, Commerce Group Inc., had argued against competitive rates. But Webster-based Commerce, which controls about 32 percent of the $3.9 billion market, said its

opposition was on behalf of agents and consumers, and not because it would hurt the company's bottom line.

"Provided it's done carefully, this could be very beneficial for us," said James A. Ermilio, Commerce's executive vice president of Massachusetts insurance operations. "From the beginning we've talked about how this would affect the people selling and buying the product because we live and work here and have to deal with them on a daily basis."

The Hanover Insurance Group Inc. of Worcester has 3.5 percent of the state's automobile insurance market and is ninth in market share among the state's insurers. It pared its business in the state in recent years and has lobbied for a shift in state policies.

Hanover had net written premiums of $205.8 million in Massachusetts last year, or 14.4 percent of its total personal lines net written premiums. That is down from 2005, when the insurer had $245.7 million in net written premiums, or about 18 percent of its total.

"This is a very thoughtful and measured approach, gradually introducing competition in a closely monitored, carefully regulated manner,"

Hanover President and Chief Executive Officer Frederick H. Eppinger said. "The action taken today will enable quality agents to provide their customers with more choices - more product and services - to meet their needs."

In adopting the competitive model, Ms. Burnes signed on to many of the recommendations of a seven-member task force chaired by Daniel C. Crane, director of the state Office of Consumer Affairs and Business Regulation. The task-force report, released in March, expressed concern over the state's declining insurance carriers and high claims frequency, but delegated the form and substance of any proposals to Ms. Burnes, a former superior court judge who left the judiciary in January to take her current job.

The changes: The insurance commissioner unveiled a sweeping proposal that, for the first time in 30 years, allows insurers to establish their own rates.

The history: The last time Massachusetts allowed insurers free reign over automobile insurance rates was in 1977, a seven-month tenure in which rates jumped 14.5 percent, producing an outcry that prompted legislative intervention.

The reality: Conditions have changed in the ensuing years, Ms. Burnes said, producing an "overregulated market" that currently has only 19 insurers writing policies.

ART: PHOTO

CUTLINE: Nonnie S. Burnes, former Massachusetts Superior Court judge, is commissioner of insurance for the Commonwealth.

PHOTOG: IAN HURLEY