Opinion 1: Patience Needed For Managed Competition
By Richard McGrath
Special to the Worcester Business Journal
In a free-market economy, government agencies don't set prices for products - businesses do.The Massachusetts auto insurance industry has not operated in a free market for 30 years. Instead, Massachusetts has been the only state in the country where the insurance commissioner sets auto insurance premiums.
While this system was allegedly set up to help consumers, the cost of auto insurance in Massachusetts last year was 27 percent higher than the national average, according to the Boston Globe.
Fortunately, Massachusetts restored competition to the auto insurance industry beginning this month. That's good news for consumers, who should benefit from more choice and lower premiums.
Many insurance carriers have announced benefits such as loyalty discounts, full replacement coverage for new cars that are stolen or totaled, and even a waiver of surcharges for moving violations or accidents.
For the first time in years, consumers will have the freedom to choose the policy that best suits their needs at a competitive rate.
Managing Competition
Nonnie Burnes, commissioner of the state Insurance Department, and Gov. Deval Patrick deserve credit for reintroducing competition to the market, in spite of opposition from many urban legislators and powerful political foes. However, the transition from a government-controlled system to a free-market system will not be painless.
Some are already criticizing the proposed average decrease in premiums of 7.8 percent as being too low. They argue that if the commissioner continued to set rates, the reduction might have been higher. Under the old system, premiums dropped 8.7 percent in 2006 and 1.7 percent in 2005.
Indeed, the commissioner could have dropped rates however low she wanted to. Of course, an excessive drop would result in more carriers abandoning Massachusetts, as they have in past years.
Currently, consumers in other states have an average of more than 100 auto insurance carriers to choose from, while Massachusetts consumers have 19, down from 53 in 1990.
When only a few companies control an industry, they can wield a great deal of power, especially when they sell a product everyone is required by law to buy. Without competition, they could pressure the commissioner to raise rates higher than ever.
Another problem is that not everyone's premiums will decrease. That's because insurers will now use valid underwriting standards, rather than government dictate, to set rates. As a result, high-risk drivers will pay higher premiums.
Commissioner Burnes has attempted to balance the concerns of high-risk drivers with changes dictated by a competitive market. Her "managed competition" system restricts some practices used in other states, which should help prevent massive premium increases. She also imposed a temporary cap that prevents rates for any drivers from increasing by more than 10 percent.
Yet if the government plays too strong a role in setting underwriting standards, it will be no different than having the government set rates.
The need to educate consumers about auto insurance presents another challenge.
Consumers are already being conditioned to think that all they have to do is shop on the Internet for the lowest priced policy. When competition is introduced, consumers will find that not all auto insurance is alike.
Some insurers may cut rates to gain market share, but will the low-cost insurers really provide the same level of protection? Will they pay claims promptly? Even more important, will they get to know consumers so they can match them with policies that best meet their needs?
Consumers who follow the advice of Internet-based insurers to spend a few minutes online and then buy the lowest priced policy will likely find that they get what they pay for. In a free market, consumers will need to spend more time comparing policies, or having their agents compare them.
In spite of these roadblocks, the new system should benefit consumers - as long as the free market is truly allowed to operate freely.
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