Center for Insurance Research

Report

GROUP AUTO INSURANCE IN MASSACHUSETTS: MARKET ASSESSMENT

I. INTRODUCTION

II. INSURERS' GROUP AUTO INSURANCE OPERATIONS

III. PUBLIC POLICY ISSUES

IV. APPENDIX

TABLES: Group Auto Plans

TABLES: Group Auto Experience

GRAPHS

ADDITIONAL MATERIALS

INTRODUCTION

For the first time ever, virtually all residents of Massachusetts can or will be able to purchase auto insurance at a group discount rate guaranteed to be below market rates. All Massachusetts drivers who work for an employer, or belong to a union or membership organization that sponsors a group auto insurance plan, are eligible for insurance discounts ranging from 3% to 15% depending on the plan. Most discounts are between 5% and 10%, which will result in estimated yearly savings of between $45 to $91, assuming average personal auto insurance expenditures of $909 in 1995.1 A driver with a $2,500 annual premium at a 5% or 10% discount would save between $125 and $250 a year.

The group personal auto insurance market in Massachusetts experienced explosive growth in the last year alone, increasing 400% to 857 plans 2 from just 214 plans in July 1994. The number of plans has grown by 2,850% since 1989, when there were only 30 group auto plans in existence. This report lists and analyzes only 816 of the purported 857 group auto plans in existence, because the group market is expanding so rapidly that the number of new plans constantly outpaced efforts to tabulate and publish them. The number of insurers underwriting group auto plans has also expanded dramatically, doubling from ten to 19 insurers from July, 1993 to July, 1995. 3

This phenomenal market growth, along with a parallel expansion of the types and sizes of such plans, promises universal access to discounted auto insurance in the Commonwealth, which is notorious for having among the highest automobile insurance rates in the country.

The market growth is due largely to the profitability of group plans for insurers. While most group plan discounts range between 5% and 10%, the savings generated by group plans for insurers are much more substantial. The conservatively estimated savings are 24.2%, above and beyond the discounts to consumers over a recent three-year period. 4 The costs and expenses for Metropolitan (the insurer writing 27 of the 32 mature group plans analyzed) were approximately 30% lower than those of the general market over the same period. 5 Metropolitan's expenses were 4.8% below the market, which appears to justify most of Metropolitan's consumer discounts of 5% and 6%. Discounts of 10% were only justifiable on an expense-cost basis for Hanover's two groups. Together the two groups had a three-year expense ratio which was 13.9% below the general market.

The continued profitability of the group business is evident from the market's exponential growth. In July 1995, the group marketplace was profoundly expanded when the insurance commissioner approved group plans sponsored by area American Automobile Association affiliates (3AAA2) which collectively have members in approximately 725,355 households across much of the Commonwealth. 6 AAA, as a grouping of affiliates, is among the state's largest membership associations. The auto club plans are being underwritten by the state's largest personal auto insurer, Commerce Insurance Company, which is providing premium discounts of 10% off market rates to AAA members. Anyone can join AAA.

The entrance of AAA into the marketplace as a group insurance sponsor heralds an unprecedented shift away from the traditional large employer groups previously underwritten principally by Metropolitan, Arbella and Hanover, to more accessible association and membership-based organizations. The existence of approximately 40 associations (i.e., teachers, condos, clubs, professional groups), 38 credit unions, and hundreds of smaller employers in numerous businesses and professions already reflects this transformation. In contrast, as of 1993, there were only 8 non-employer sponsors and a predominance of large businesses, manufacturers, and colleges.

Group auto and homeowners plans have been permitted in Massachusetts since 1973. The enabling statute, Mass. Gen. Laws Chapter 175, Section 193R, permits insurance companies to provide discounts on premium rates to employees or members of plans sponsored by employers, unions and membership associations with the approval of the insurance commissioner. These discounts can be justified where at least 35% of eligible group members are enrolled based on a group's expenses and losses (i.e., profitability), among other requirements. 7

Consumers, insurance companies, and sponsors of group plans apparently all benefit from participation in the group auto insurance market. Arguably, the overall marketplace does as well. As noted above, individual participants in group plans save between 3 and 15 percent off their auto premiums. 8 The insurance companies benefit from the growth of a profitable market, because the discounts passed on to members of group plans are in many instances far less than the total savings generated from the plan. The employer or association sponsors of group plans also benefit because their employees or members receive a valuable benefit, and yet the sponsors bear virtually no administrative costs or burdens. 9 The overall marketplace potentially benefits from increased competition, greater bargaining power on the part of consumers, opportunities for system-wide cost cutting efficiencies, and unique mechanisms for safety promotion.

This study is based on information filed by insurers with the Massachusetts Division of Insurance which has jurisdiction over and approves the group auto insurance plans. The information regarding the number and identities of group plans, the insurers writing group auto plans, and the level of premium discounts offered by each is current as of July, 1995. The actuarial information relied on for this study was also filed by insurers with the Division, but is only current as of July 1994, the date for which it was collected and analyzed for this report.

1 According to the Massachusetts Division of Insurance (Division), the most recent figure for average auto premium expenditure is $909 for 1993. The most recent combined average expenditure (liability+collision+comprehensive coverage) is $1,010 for 1993. Telephone conversation with Robert MacNicholl, Ass't Dir. of the Division's State Rating Bureau (July 27, 1995). Auto rates rose in the Commonwealth in 1994 and were lowered in 1995 by relatively comparable amounts. For the purposes of this report, it is assumed that 1993 average expenditures are reasonably reflective of 1995 average expenditures.

2 Milne, Auto Insurance discounts backed, Boston Globe, August, 4, 1995, at 22 [hereinafter Boston Globe, August 4, 1995].

3 See Jason Adkins, Center for Insurance Research, Group Automobile Insurance in Massachusetts, Table II (July 1993) [hereinafter Center's 1993 Group Auto Report] (see below for further discussion of this report).

4 This estimate is based on a weighted average over three years (1990-1992) for all group auto plans for which actuarial data was publicly available when collected for this report in July, 1994. Also see discussion on savings in Footnote 15 below.

5 As discussed below, other insurers' costs and expenses were approximately 21%, 17% and 10% below those of the general market.

6 The group filings for AAA have been aggregated for this report, but actually consists of three affiliated AAA "clubs" as follows: AAA Massachusetts and New Hampshire (527,300 households in MA); Automobile Club of Merrimack Valley (73,055 household in MA); AAA South Central New England ("approximately" 125,000 households in MA). The plans have been approved effective September 1, 1995. Other AAA affiliate groups covering the remainder of the Commonwealth are expected to be established with similar discounts shortly.

7 The statute, ch. 175, § 193R , authorizes group personal lines (auto and homeowners) insurance in Massachusetts for members and employees of associations, organizations and trade unions. Under 193R, policyholders are still individually underwritten, but may receive premium discounts if justified by "direct reductions in expenses resulting from the group marketing technique" (i.e. marketing and administrative savings), and after three years, savings on both the group's losses and expenses. All group discounts must be approved by the insurance commissioner. Group plans must also meet a number of other conditions, including: participation must be voluntary; all members of a group must be guaranteed coverage under the plan if they have an insurable interest and want insurance; no one group member can be canceled (except for nonpayment of premium, fraud or unless the entire group plan is terminated); groups must have a minimum of twenty-five members, at least fifteen of whom are residents of Massachusetts; at least 35 percent of a group's members must become insured under the plan within a year and remain so thereafter; groups must have been formed "in good faith for purposes other than that of obtaining insurance" and "unions, associations and organizations must also have a constitution and by-laws;" and payroll deductions are explicitly allowed.

8 In Massachusetts, all insurers are required by the Massachusetts Division of Insurance to charge the same rate for the same coverage and category of risk. Therefore, the discounts participants in group plans receive guarantee savings off standard market rates. See also Fn. 12.

9 See Valerie Yates and Jason Adkins, Center for Insurance Research, Group Auto and Homeowners Insurance Plans in Massachusetts: Employer-Sponsor Perspective, (July 1994) [hereinafter "Center Survey of Group Sponsor Perspectives"]. This report outlined the findings of a survey of employers and associations offering group auto and homeowners insurance benefits to their employees. Over 25% of the group auto and homeowners insurance sponsors solicited responded to the survey, representing a wide range of experience with group plans, number of employees and years of operation. The survey provides answers to the following areas of inquiry: why are group plans are not more prevalent; what are the barriers to the establishment and maintenance of group plans; what is required of employer and association sponsors in establishing and administering group plans; what are existing sponsors' levels of satisfaction and what is their perception of the satisfaction levels of their employees, among other issues.

The full report is available for $75.00. Send your check to CIR at 1130 Massachusetts Avenue, Cambridge, MA 02138.


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