2 - Significant Events of 2008
2.1 Automobile Insurance Reform
For more than three decades, the Division of Insurance set all rates for personal auto insurance in Massachusetts. Under this government imposed rate-setting system, every auto insurance company offered the same price for the same coverage. No competitive pricing was allowed. Consumers could not shop around for lower rates. Insurers complained that the system was complex and unfair. Scores of consumers wrote the Governor's office, the Legislature and the Division of Insurance complaining about the lack of choice.
This absence of choice became progressively worse over the years. From 1990 to 2007, 35 insurance companies stopped offering coverage in Massachusetts and not a single new company entered the marketplace. This left only 19 active auto insurers in the state. At the same time, many other states had well over one hundred insurers. Massachusetts was consistently among the ten most expensive states in which to insure a vehicle.
In 2007, Governor Patrick convened the Automobile Insurance Study Group to make recommendations for reforming the system to increase competition and reduce costs, while ensuring that consumers were treated fairly. The group recommended changes to the system that would introduce competition while keeping prices affordable, minimizing disruptions to the market and maintaining consumer protections. The Commissioner of Insurance issued a decision on July 16, 2007, calling for the gradual introduction of competition in the Massachusetts auto insurance market by April 1, 2008.
Following this decision, a group of Division employees from various departments worked on the logistical tasks of auto reform. During the year, the team successfully:
- Designed and implemented a regulatory framework for managed competition in Massachusetts that provides affordable premiums for good drivers, a competitive rating system, and a business environment that attracts new insurers to the state.
- Designed and launched a consumer website that allows users to find sample premium rates and contact information for insurance companies and agents.
- Launched a media campaign to educate consumers on managed competition and the premium reducing options available to them.
April 1, 2008, was the first time in more than 30 years that Massachusetts consumers had the option of shopping for auto insurance. Consumers who came from other states were eager for this change; but for some drivers who had never purchased coverage outside of Massachusetts, these new choices were confusing. The Division was committed to offering drivers an array of resources to help them navigate this new marketplace.
To assist consumers through this market transition, the Division unveiled a sample premium website that showed consumers the variety of prices and products available to drivers. The Insurance Rate Comparison website, located at www.mass.gov/autorates, launched in February, 2008. Accompanying the launch of the website was the development and launch of the "Better Rates for Better Drivers" marketing campaign. This campaign blanketed various media outlets across the state during the spring of 2008. Consumers using the website discover that there are huge variations in prices and discounts offered by different companies. Hopefully, this motivates them to get serious about calling their agent and start comparison shopping.
The Division supplemented these new web-based shopping tools with additional consumer materials on the InsureMass consumer portal of the Division's website. New materials included a consumer bill of rights, a list of companies selling auto insurance and a guide specific to the residual market.
Company Assistance and Rule Changes
With the introduction of managed competition, companies were now permitted to submit their own policy forms and rating plans instead of being required to use standard policy forms and rates. Special one-year transition rules were developed that would facilitate the change and allow Massachusetts residents a wider array of choices already available in most other states. On the first day of managed competition, 20 company groups offered rates and forms in the newly competitive market. During the remainder of the year, four additional companies received approval to offer products in the market.
In addition to introducing competitive rating, the Commissioner also changed the residual market for private passenger automobile insurance to an assigned-risk system. In order to minimize disruption in the market, the Commissioner implemented the residual market change in two stages. In the first year, companies could only decline coverage for new drivers and very high risk drivers. Such drivers could then be assigned coverage through the Massachusetts Assigned Insurance Plan (MAIP).
Impact of Auto Reform
Near the end of 2008, the Division engaged a consultant to conduct a research study to understand how the new auto insurance market was affecting consumers and the economy. The study was designed to include the perspectives of drivers in every region of the state, with a particular focus on the experiences of minority drivers and drivers from urban or low-income communities. The perspectives of insurance agents and insurance company executives were also included.
The study began in early 2009, and next year's annual report will include the study's detailed findings. Nonetheless, we do know that the first 8 months of managed competition brought about dramatic changes across all facets of the auto insurance marketplace. The bottom line is that consumers are saving money and increasing their coverage; new companies are entering the marketplace and adding jobs; and the residual market is shrinking as drivers are able to find coverage in the competitive market.
Manuel Carballo Award for Excellence in Public Service
The Division's Private Passenger Automobile Managed Competition Team was selected to receive the Manuel Carballo Governor's Award for Excellence in Public Service as part of the 2008 Performance Recognition Award Program. The award is given annually to no more than ten employees or groups of employees who exemplify the highest standards of public service. A Selection Committee which includes the Speaker of the House, the President of the Senate, and gubernatorial appointees from business, labor, community groups, academia and the media who are knowledgeable about Massachusetts state government reviewed the nominations and recommended to the Governor the names of finalists who are most worthy of receiving the award.
The following Division employees were honored with 2008 Carballo Award: Kevin Beagan, Deputy Commissioner for the State Rating Bureau; Cara Blank, Casualty Actuary; Elizabeth Brodeur, Deputy General Counsel; Mary Carroll, Deputy Commissioner for Administration; Elisabeth Ditomassi, General Counsel; Jean Farrington, Counsel & Hearing Officer; Andrea Guen, Policy Form Review Analyst; Kevin Kroner, Director of External Relations; Tom Smith, former Director of Information Technology; Stephen Sumner, Counsel & Hearing Officer; Mary Ellen Thompson, Counsel; and Kim Haberlin, Director of Communications.
2.2 Global Financial Crisis
On September 14, 2008, Lehman Brothers filed for bankruptcy. The following week was marked by extreme instability in global stock markets, with dramatic drops in market values on Monday, September 15, and Wednesday, September 17. On September 16, financial services conglomerate American International Group (AIG) suffered a liquidity crisis following the downgrade of its credit rating. The Federal Reserve subsequently created a credit facility for up to $85 billion in exchange for a large equity interest. As these news stories broke, calls began to flood the Division of Insurance's consumer hotline from consumers with AIG annuities and life insurance products asking what would happen to their policies if AIG becomes insolvent.
Calm in an Otherwise Turbulent Time
AIG is typically described as the world's largest insurance company. In fact, it is a global financial services corporation that does business in 130 countries. AIG owns 176 other companies, in addition to 71 U.S. insurance subsidiaries. AIG's subsidiary insurance companies remained strong throughout the crisis. This was largely the result of state regulation that protected insurance companies from the high-risk activities of AIG Financial Products. State regulators were actively involved in the AIG liquidity crisis to help ensure that consumers remain protected. Regardless of the failings at AIG's holding-company level, its insurance subsidiaries continued to fulfill their obligations to policyholders.
This series of events focused attention on the role of state insurance regulation on the national economy. Insurance companies are integral capital market participants and are not immune from this unprecedented global economic turmoil. Nonetheless, the business of insurance has not posed a systemic risk to the nation's economy. To the contrary, the insurance portion of the financial service industry has provided a source of relative calm in an otherwise turbulent time. State insurance solvency oversight has kept insurance companies stable and protected policyholders from the worst of the financial meltdown. Throughout this process state regulators continue to provide a local response to consumer issues. Moreover, this protection is entirely funded by the industry itself with no net cost to the taxpayer.
State Insurance Regulator's Toolbox
The stability of the insurance sector was no accident. A state insurance regulator's "toolbox" helps the regulator protect companies from large losses in other parts of the financial sector. Regulatory tools include performing ongoing financial analysis of insurers, and on-site examinations.
Commissioners of Insurance across the nation subject insurers to far higher standards than regulators of other portions of the financial services industry. State insurance regulators have numerous actions they can take to prevent an insurer from failing. Insurers must operate under conservative accounting rules and are subject to mandatory annual CPA audits. In addition, state regulators routinely impose strict investment regulations and minimum capital/surplus requirements.
In the rare instance when these regulatory controls fail to safeguard an insurer's financial solvency, additional protections for consumers exist that are unique to the insurance sector. The Commissioner of Insurance can exercise varying degrees of oversight leading up to receivership in order to rehabilitate a troubled company. Claims from individual policyholders are given the utmost priority over other creditors. In the unlikely event that assets are not enough to cover these claims, there is yet another safety net in place to protect consumers: the state guaranty funds. These funds are in place in all states. If an insurance company becomes unable to pay claims, the guaranty fund will provide coverage, subject to certain limits, similar to the FDIC's coverage for bank accounts. This entire solvency framework and safety net for policyholders is uniform in every state and evaluated by the NAIC's Financial Regulation and Accreditation Program.
Action in Massachusetts
In various places in this annual report, you will find references to activities by various departments of the Division of Insurance with respect to the financial crisis. Every year, staff from the Division's Financial Surveillance Unit review quarterly financial filings to monitor the financial health of companies under Massachusetts' jurisdiction. The Financial Examinations Section provide an in-depth analysis of virtually all aspects of a company's financial records and statements in order to assure compliance with state laws and regulations. Examiners in the Consumer Services Section handled more than 150 calls on AIG solvency in just the first week of the crisis. Throughout the remainder of 2008, these examiners helped consumers understand the nature of the risk and protections that are in place to safeguard their policies.
While the financial industry continues to face serious difficulties, the untold story of 2008 - and continuing in 2009 - is the success of state based insurance regulation.