Committee Members
Chair Michael J. Barrett
Vice Chair Benjamin B. Downing
Ryan C. Fattman
Jason M. Lewis
Michael O. Moore
Bruce E. Tarr
James T. Welch
Co-Authors of the Report
Rosalie Fazio-Eynullayeva, Counsel to the Committee
Candace Williams, Legislative Aide to Sen. Barrett
Rosie Hunter, Chief of Staff to Sen. Barrett
Sen. Michael J. Barrett
Table of Contents
INTRODUCTION
SUMMARY OF COMMITTEE FINDINGS
1.DOI has discretion to provide public notice and allow public input, but doesn’t use it
2.Once it bars other parties from the process, DOI does not do enough on its own to evaluate rate requests
3.Once rates are set, DOI lags other regulators in arming consumers with information
4. Beset by weak DOI regulation and poor consumer information, local homeowners face rising premiums
RECOMMENDATIONS
1.DOI should use its existing authority to open up the process
2.The General Court should require transparency at DOI
3.The General Court should authorize the AG to order a limited number of homeowners hearings on her own initiative
4.DOI should issue regulations to govern both rate requests and hearing requests
5.DOI should push harder on weather models, reinsurance cost estimates, and policy cancellations and nonrenewals
6.Either DOI or the General Court should compel insurers to notify people about new rates
7.DOI should create an online premium comparison tool for homeowners insurance
REGULATION OF HOME INSURANCE RATES IN MASSACHUSETTS
Overview
How insurers prepare rate change requests
Process of filing a rate change request
Lack of public hearings on homeowners insurance
Contrast: the FAIR Plan
2015 Rate increases
DISCUSSION OF FINDINGS
1.DOI has discretion to provide public notice and allow public input, but doesn’t use it
2.Once it bars other parties from the process, DOI does not do enough on its own to evaluate rate requests
3.Once rates are set, DOI lags other regulators in arming consumers with information
4.Beset by weak DOI regulation and poor consumer information, local homeowners face rising premiums
RECOMMENDATIONS
Appendices
Appendix I: Bibliography of Additional Sources Consulted
Appendix II: Experts and Advocates Interviewed by Committee Staff
Appendix III: Testifiers at Sept. 22, 2015 Committee Hearing
Appendix IV: Written Testimony Received at Sept. 22, 2015 Committee Hearing
Massachusetts Division of Insurance
Paula Aschettino
Joint Statement of Trade Associations
Sherman “Whip” Saltmarsh
Appendix V: Nov. 30, 2015 Letter from the Attorney General’s Office to the Committee
INTRODUCTION
In 2015 the Massachusetts Division of Insurance (“Division” or “DOI”) considered, and granted, requests by several of the state’s biggest insurers to raise their rates on homeowners coverage by as much as 9%.[1] These were substantial adjustments, affecting a considerable number of residents. Yet neither the public, nor state legislators, nor insurance experts in the state Attorney General’s office, were informed of the requests. Later, when staff to the Attorney General were able to analyze industry documents filed in secret with the Division, they deemed two of the largest increases unlawfully excessive.[2] Regardless, the Division had the last word. As of the date of this report, both rates remain in effect.
Concerned about the lack of advance notice, the absence of outside participation, and the size of the increases, the Senate Post Audit and Oversight Committee undertook this inquiry into Massachusetts’ process for overseeing homeowners insurance. On September 22, 2015, the Committee held a public hearing in which it heard from, among others, the Commissioner of Insurance and other DOI officials, executives of three of the state’s largest insurers, a representative of the Attorney General, and several citizen experts.[3] Before and after the hearing, the Committee chair and staff interviewed witnesses, conducted research, reviewed academic studies, attended public informational sessions run by the agency, and corresponded with a number of interested parties.
Members of the Committee know that provision of homeowners insurance is a business, subject to costs and risks and deserving of a decent rate of return. But we also believe that rate requests are substantial enough on occasion to warrant regulatory hearings informed by the views not only of industry but also of consumers. This hardly seems like too much to ask.
With respect to the lack of timely information that attends even the largest homeowners increases, there is responsibility to go around. The statutory language on DOI rate filings is contradictory and inconclusive. One provision favors delay: “A filing and supporting information shall be open to public inspection after the filing becomes effective.”[4] But another permits timely information-sharing: “The commissioner may also call a hearing at any time prior to the proposed effective date of any filing.”[5] In the case of these significant rate hikes, had the Commissioner called a hearing prior to the effective dates of the increases, and chosen to make the hearing public, he would have provided the notice and opportunity to be heard that was lacking.
The Division can find further encouragement for timely information-sharing in the state’s public records law, reflective of the General Court’s overarching preference for making information available in useful fashion to citizens.[6] Chapter 66 of the General Laws states, “Every person having custody of any public record, as defined in clause Twenty-sixth of section seven of chapter four, shall, at reasonable times and without unreasonable delay, permit it, or any segregable portion of a record which is an independent public record, to be inspected and examined by any person.”[7] The statute creates a “presumption that the record sought is public.”[8] A DOI official, pressed by the Committee to defend the agency’s undisturbed stretch of secret regulation, mentioned the law’s “deliberative process” exemption. But the plain language of this exemption indicates it does not apply to industry filings, as it refers only to work produced by agency staff themselves.[9]
The Division’s own statutory charge is complex, requiring it to safeguard the fiscal health of insurance carriers even as it serves the community’s interest in high quality but affordable coverage. This cannot be easy. Nonetheless, in a time of profound public mistrust of both governmental and financial elites, the Committee finds no justification for a regulatory process marked by a no-exceptions rejection of public notice, informational access, and consumer input. The DOI, drawing on the flexibility afforded by its rate-setting statute and the public records law, can, if it chooses, provide online notice of rate requests as they are submitted, create online access to the pertinent filings, invite citizen comment and, when the stakes are high enough, permit citizen participation in formal proceedings.
Notwithstanding this flexibility, at last year’s September hearing Division professionals conceded to Senators that the agency has not held a public hearing on an increase in ordinary home insurance rates in living memory, if ever.[10]
We have listened respectfully to insurance industry executives. They voice concerns about the possible disclosure of material useful to competitors. We find there is no meaningful reason to keep rate requests secret across the board. The current statute mandates that everything becomes public anyway, but only when new rates take effect -- essentially, a fait accompli. Industry has cited no information to the Committee that such a peculiar timing arrangement is needed to protect a legitimate competitive advantage of the filer, when the public interest argues for earlier information sharing.
In their evaluation of multiple filings, Committee staff found no information that (1) included important elements of previously undisclosed product features or company strategy, (2) appeared to be so time-sensitive that earlier release would have transferred inappropriate advantage to competitors, and (3) in light of the two preceding considerations, rose to a level of seriousness substantial enough to justify DOI’s overriding the public interest in timely access. In rare cases, DOI may find that it is critical for the health of the market that a filing be temporarily withheld from public view, necessitating delay. But neither the Division nor any insurer has, to date, presented the Committee with so much as a single example of such a filing.
Past Legislatures bear some responsibility for the current state of affairs. The original rate-filing statute was borrowed largely from model legislation promulgated nationwide by insurance regulators in the 1940s. While the agency has the discretion under current law to go in a new direction, one supportive of public participation, for the sake of clarity the General Court should legislate further and mandate DOI’s commitment in this regard.
DOI, by choice, goes it alone, serving as sole guarantor of Massachusetts’ interest in fair homeowners rates. This has not proven to be a good arrangement for citizens. The Committee finds that, in three areas critical to the conduct of thorough rate reviews, DOI does not question industry assertions hard enough.
Weather models. In a filing for a rate increase, much depends on a firm’s dollar payouts to insured parties, projected for the next year. Estimates of these rely heavily on meteorological predictions, with special emphasis on the likelihood of hurricanes, extreme winter conditions, and other extraordinary events. In support of its case, the firm offers up reports by outside vendors in possession of computerized weather models.
The Committee finds that DOI, in its consideration of rates for the regular homeowner, does not press insurers hard enough on the assumptions, inputs and calculations that lay behind weather predictions. An independent understanding of weather models is a prerequisite for effective evaluation of rate requests. Yet the agency often accepts, without serious inquiry, weather predictions for large swatches of territory, such as the entire East Coast, that do not include specifics on New England. Even more broadly, the agency appears to accept, at face value, protestations by insurers that they do not know very much -- or cannot discuss very much -- because information about each model must be guarded from competitors. Testimony and comment received from outside experts suggest that DOI’s unquestioning acceptance of unexamined weather models comes too easily, too often, and at too high a cost.[11]
Reinsurance. Sellers of homeowners insurance are themselves buyers of reinsurance, a means of spreading out the risk of financial loss. In their filings, insurers often cite the cost of reinsurance as a significant portion of their overall expenses. Needless to say, there is nothing wrong in general with reinsurance. The problem for regulators comes when they try to evaluate the reasonableness of reinsurance charges that insurers enter into their expense calculations. Reinsurers tend to situate their financial operations offshore, beyond the reach of curious federal and state regulators. Further complicating the picture, several major insurers buy reinsurance from corporate sibling companies. In communications with DOI, staff to the Attorney General emphasize what they regard as agency under-scrutiny of reinsurance cost estimates used to support insurer rate requests.[12] The Committee shares the Attorney General’s concern.
Policy cancellations and nonrenewals. Insurers manage their risk pools, and by extension their losses, by declining to renew policies on properties they find too risky. Property owners often question the reasonableness and consistency of cancellations and nonrenewals, and state law tasks DOI with monitoring industry activity in this respect. But DOI collects data only for certain urban and coastal zip codes. This saps the agency’s ability to spot certain patterns of discrimination, including discrimination by other geographic distinctions or by level of risk.
Massachusetts buyers of homeowners insurance are in some ways set up for success. They have an adequate number of carriers (68, according to the most recent information available from DOI) from which to choose. Aggregate market share of the 10 largest companies does not appear large enough to squelch competition from the remaining firms.
It is all the more telling, then, that consumers find it difficult to compare offerings on cost, quality and convenience.[13] Homeowners confront an advanced case of information asymmetry, the condition of sellers knowing a great deal -- and buyers knowing little -- about a complicated product. Independent brokers may step in to help narrow the imbalance, but they don’t do business with 68 homeowners carriers; most deal with a dozen, and often fewer.
In the 21st century world of information and the Internet, Massachusetts consumers deserve tools that let them do sophisticated shopping. Regulatory and consumer protection agencies in states like Texas,[14] California[15] and Delaware[16] provide online comparison engines that do a good job on rates and coverage. Massachusetts, in contrast, makes little use of government websites for this purpose,[17] and there are no alternative sources of effective information.
In 2007-2013, average Massachusetts premiums for regular homeowners insurance rose 21.6%,[18] far outpacing inflation (12.9%).[19] A 21.6% increase is astounding, considering that, during the same dismal stretch, average Massachusetts home values fell 11% [20] and median household income fell 4.7%.[21] In contrast to home insurance, over the same period costs of auto insurance crept up a modest 2.8%.[22] Compared to those who pay ordinary -- the term of art in the industry is “voluntary” -- home insurance rates, owners of the state’s smaller pool of high-risk properties made out much better; premiums for homes covered by the FAIR Plan, so called,[23] rose 6.7%.[24]
Meanwhile, the results for sellers of homeowners insurance are as bright as the results for buyers are grim. Insurers here are much more profitable, by every measure, than most of their counterparts across the country. For the 10-year period 2004-2013, the most recent year for which data are available, average underwriting profit was 16.9% in Massachusetts versus 1.3% nationally.[25] Average return on net worth was 17.6% versus 6.6% nationally. The average loss ratio for Massachusetts property insurers came in below the national average in nine out of the 10 years.[26]
As a further comment on these trends, we now have a recent communication to the Committee from staff to state Attorney General Maura Healey. The AG’s insurance experts inform us that the high 2015 rate increases granted by DOI to MAPFRE and Safety Insurance, two of the four largest property insurers in Massachusetts, “are of serious concern to the Attorney General’s Office.”[27] These staff specialists, afforded access to materials only after rates took effect, determined that profit estimates in the documents are “arbitrary and not supported by sufficient data.”[28] They determined as well that estimated catastrophe losses -- those related to a specific weather event that generates a large number of claims totaling a large dollar amount -- were calculated using a “biased” approach designed to “increase their revenues.”[29] The bottom line: the rates approved by DOI are unlawfully “excessive.”[30]
Having found that DOI has discretion -- thanks to its own rate filing statute and the Commonwealth’s public records law -- to put an end to exclusionary practices and open up the process, the Committee urges the agency to do so. The Division should, as a matter of course, provide online notice of rate requests as soon as they’re filed, create timely online access to pertinent filings, and invite public comment. In select cases, to ensure comprehensive review of the financial and economic issues involved, it should go further and order public hearings.
Other states do this. North Carolina changed its laws in 2009 to allow a public comment period for every home insurance rate filing, and recently concluded the state’s first public hearing on voluntary market rates in 20 years.[31] More than half of states post home insurance rate filings online after they’ve been approved.[32] Several states, including Rhode Island, Connecticut, Idaho, Oregon and California, post the filings while they are still under review.[33] Massachusetts, a progressive state and a leader in innovative technology, ought to be at the forefront of providing online access to information that affects consumers, not one that lags behind dozens of other states.
The record shows that the agency’s regulation of regular home insurance rates is remarkably low-energy. Members of the House and Senate should take legislative action, clarifying to the Division that there is no permissible rationale for adherence to the practice of non-transparency.
In February 2016, the Senate approved language requiring DOI to post homeowners rate requests and supporting information online within three business days of receipt. Included in the Senate version of public records reform and dependent, as of the publication date of this report, on acceptance by a Conference Committee of the House and Senate, this breakthrough would bring transparency to a corner of the Massachusetts economy in desperate need of it. Industry filings are already submitted to DOI via an online system that can easily be broadened to afford public access, so the agency could comply with a legislative directive promptly.
Within the professional lifetimes of staff to both the Insurance Commissioner and the Attorney General, DOI has not once exercised its power to hold hearings on regular home insurance rates.[34] Over this period, DOI has not only declined to act on its own initiative; it has denied petitions for hearings by the Attorney General and others.[35]
No question, formal proceedings of this kind are time- and labor-intensive. The option to hold them should be employed carefully. Still, in the Committee’s view, the Division’s embrace of complete abstinence has rendered the hearing option a dead letter, with implications for the agency’s ability to deter industry over-reaching.
Because the status quo risks harm to citizens of the Commonwealth, the Committee recommends passage of new legislation giving the state Attorney General the authority to order a small number of public hearings -- perhaps up to four a year -- on requests for increases in regular home insurance rates. While DOI would continue to conduct all proceedings, the Attorney General would participate as a matter of right, as an advocate for consumers.[36]
The AG’s office employs several insurance experts in its Insurance and Financial Services Bureau. It retains a number of others for its work on the more heavily-regulated FAIR Plan, as discussed later in this report. As the state’s consumer advocate in chief, the AG ought to have the opportunity to get involved in regular home insurance filings in this limited capacity in order to address excessive rate requests.
Though authorized by law to adopt regulations governing regular homeowners rate proceedings,[37] DOI has never done so. The agency evaluates rates -- and approves or rejects them -- in an environment bereft of written rules and standards. Likewise, the agency rules on requests for hearings without any regulatory guidance. The agency should issue draft regulations, solicit comment, and finalize written procedures to govern its review of rate requests and hearing requests.
Weather models. Three times in recent years -- in 2009, 2011 and 2012 -- staff to the Attorney General have written the Division to voice concerns about the prominent reliance in regular home insurance filings on weather model predictions. In the two more recent letters, the staff presented grounds for their belief that the models afford too little insight into conditions specific to Massachusetts.[38] In its eventual response, the Division agreed “to hold a public hearing in 2012 to review catastrophe models in detail and evaluate the features of the models, including the calibrations that are specific to Massachusetts experience.”[39] No such hearing has been held. The issues are important and have not gone away. DOI should make good on this pledge.
As this report discusses, insurers rely heavily on weather models to predict future losses. Weather models are created by a small number of outside vendors that provide this service for all insurers. DOI does not receive specific information about these models, and to date has not pushed insurers to reveal more details. DOI can and should require insurers to provide much more information in order to gauge that the weather models are sufficiently tailored to Massachusetts and that vendors are using actuarially sound methodologies.
Reinsurance. In the 2009 letter, Attorney General staff questioned what they regard as agency under-scrutiny of reinsurance cost estimates presented by insurers.[40] The Committee shares the Attorney General’s concern. DOI should require that insurers provide specific information regarding their reinsurance costs, as well as the underlying weather models used by reinsurers to justify premiums. Like the losses predicted by weather models, reinsurance makes up a substantial portion of the premiums charged to customers. Without probing the underlying components of this cost -- the weather models used by reinsurers, for instance, which were a significant issue in the FAIR Plan proceedings of 2013 -- DOI is simply rubber-stamping this large portion of customers’ rates.
Policy cancellations and nonrenewals. As we’ve indicated, state law requires DOI to collect data on insurance policies cancelled and non-renewed in the “urban and coastal” areas of Massachusetts,[41] but the agency is also free to range beyond this minimum requirement. Periodically, at the very least, DOI should sample for other instances of possible discrimination. Insurers must be free to choose their own pools of risk and to manage them, but consumers should also have access to information about which insurers are declining to renew policies, for what reasons, and in which locations. To permit this to happen, the General Court should amend the statute to require that DOI collect additional data.
DOI should promulgate a regulation requiring insurers to give clear notice to homeowners when they roll out major rate increases. Consumers typically are not informed of rate changes -- they simply receive a bill for a premium based on the new rate and the annually updated assessment of their home.[42] Insurers are not required to inform customers, so they do not. If customers received notice that their premiums were going to increase, they would have time to shop for a different policy prior to renewal of their existing policies. If DOI does not act, the Legislature should enact language mandating notification.
DOI should follow the examples of Texas,[43] California[44] and Delaware,[45] among others, by creating and maintaining an online comparison engine for homeowners insurance. This tool should, at a minimum, let consumers compare carriers on coverage and charges, without having to contact multiple agents or request quotes from multiple insurers. DOI already offers Massachusetts consumers a rudimentary application for auto policies,[46] and has the authority and ability to create such a tool for homeowners.
The Division of Insurance regulates rates and other terms and conditions for voluntary market homeowners insurance, pursuant to chapters 174A and 175A of the Massachusetts General Laws. Massachusetts has what is known as a “file and use” system; insurers provide DOI with comprehensive information regarding proposed rates and the cost and loss estimates underlying them, but need not await the agency’s formal approval before using the new rates.[47] As a practical matter, agency review takes approximately 60 days, and insurers wait out the process before applying new rates.[48], [49]
Chapters 174A and 175A establish the broad standard by which DOI reviews insurers’ rate requests. DOI must approve proposed rates if it finds they are not “excessive, inadequate or unfairly discriminatory.”[50] The burden lies with the insurer to provide sufficient information to enable DOI to make this determination.[51] The agency may disapprove the rates if it finds the documentation insufficient. DOI may ask the insurer for clarification, may question the assumptions or inputs in the rate-setting formula used, or may reject the rate request.[52]
“Excessive, inadequate or unfairly discriminatory,” the standard used by most insurance regulators nationwide to review rate requests, is not given more elaborate meaning in the Massachusetts General Laws or any DOI regulations. It is, however, a topic covered in various treatises on insurance law, some of which DOI relies upon in its work.[53] The terminology was adopted at the annual conference of the National Association of Insurance Commissioners (NAIC) in 1945, following federal legislation declaring that the insurance industry was to be regulated by the states.[54] Insurers are entitled under the law to charge rates that permit a “reasonable margin for underwriting profit.”[55]
Rate requests can be filed at any time. There is no requirement that insurers must submit a filing every year, but neither are they limited to just one filing a year. Revised rates take effect for each customer on a rolling basis, when he or she next renews coverage after the “effective date” set by the insurer.
Insurance rate setting is a forward-looking exercise, where insurers must set prices based upon predictions of their costs, losses and target profit. Insurers are not permitted, under the laws and actuarial principles, to raise rates in order to recoup past losses, even when losses were much higher than those projected for a given year.[56] Conversely, DOI may not force insurers to return funds received from customers when losses are much lower than projected.[57] The Massachusetts Supreme Judicial Court explained in 1987 that “[i]nsurance rate making is essentially prospective in nature. Massachusetts law no longer makes provisions for a ‘second look’ at the rates and does not provide for a rebate to the insurers or to the policyholders if past rate predictions ultimately turn out to be wrong.”[58]
The public interest in regulating rates has to do with the fact that most consumers do not purchase homeowners insurance voluntarily; they’re required to do so as a condition of obtaining a mortgage. The regulating agency guards against any insurer temptation to exaggerate projected losses or inflate associated business costs.
Before an insurer files for a rate change, it first prepares a set of documents that it will submit to DOI to support the proposed rate. These documents lay out calculations of the company’s expected losses due to claims paid out, anticipated expenses and anticipated earned premiums.
Insurers’ projected losses are calculated based on loss ratios[59] and loss adjustment expenses.[60] Estimation of these loss factors turns on past loss experience and forward-looking projections about weather and other variables that impact customer claims. Insurers hire modeling companies to assist them in the murky business of estimating future losses. An insurer’s loss ratio is an important indicator of its financial standing. Likewise, the industry-wide loss ratio is critical to gauging the sector’s overall health. A low loss ratio means greater profit.
Expenses consist of commissions paid to brokers, taxes, reinsurance charges, general administration, and return on equity. Return on equity is the insurer’s selected income target.[61]
Using the loss and expense estimates as inputs, the insurer applies a formula to calculate the change in its rate from the previous year that will be necessary to cover the losses and expenses while meeting a target profit. This rate change is known as the “indicated rate.”
The rate that is actually requested by the insurer, called the “proposed rate,” is a separate number, generally lower than the indicated rate. Insurers apparently select the proposed rate based on what they believe the market will bear.[62] For instance, in 2015, MAPFRE filed a rate request for an 8.9% increase, while its indicated rate increase was 14.2%.[63] Plymouth Rock filed for a 7.7% increase, while its indicated rate increase was more than three times greater: 23.0%.[64] The Division requires a justification for the difference in indicated and proposed rates. But the justifications in rate request documents reviewed by the Committee have been cursory -- for instance, Plymouth Rock Group stated “market competition” as its explanation.[65]
While the rate request documents directly support the indicated rate, DOI also accepts the data and projections as supportive of the “proposed rate.” DOI representatives have stated that direct support for the “proposed rate” is not necessary because analysts review its appropriateness without regard to the indicated rate.[66] It is not clear why the indicated rate is relevant to the rate request or to DOI’s analysis of the rate request.
A rate filing formally begins when an insurer initiates the process on the System for Electronic Rate and Form Filing (SERFF). SERFF is a web site established by NAIC for regulators and insurers.[67] The insurer uploads its rate request documents and DOI later downloads them.
DOI analysts correspond with the insurer’s rate filing attorney through a forum on the SERFF system, and may request additional information or justification for particular inputs into the calculations. This online forum is the primary means by which the Division asks questions of the insurer or requests revisions or clarifications.[68] Exchanges between the DOI and the insurer conducted through SERFF are documented in the rate filing. The parties may also communicate by phone, which is not thoroughly documented in the SERFF record.[69]
When DOI analysts are satisfied that they have received sufficient information to justify the insurer’s requested rate change, the rate request is “placed on file.” DOI generally does not issue affirmative approvals, since approval is not required by statute or regulation. Placing a request on file is an indication to the insurer that DOI does not plan to reject it. At this point the rate review process is usually complete. However, placing a rate on file is not an irrevocable action; DOI can still raise concerns and the insurer may still make small modifications, such as changing the effective date of the proposed rates. It is only at the effective date that the documents become publicly available. And it is only at this point that an “aggrieved” party may learn of the rates and request a hearing.
To examine rate request documents, a person – even the Attorney General -- must contact DOI and ask if any new requests have been placed on file, then either visit DOI’s Boston office in person or request that a CD-R copy be mailed. DOI has declined to participate in an optional SERFF program that allows easier access to documents.[70]
DOI may, at the Commissioner’s discretion, call a hearing on any rate request it receives.[71] Oddly, the agency is not required to have a hearing on a request except when it intends to reject it.[72] In such a case, an insurer can instead withdraw the request and file a new one, a less burdensome option than defending the original filing at a hearing. Withdrawing and filing anew also has the effect of concealing the insurer’s original request, indefinitely, from the public and from any government official outside the Division.
In addition to allowing the Commissioner to hold hearings, Chapters 174A and 175A of the Massachusetts General Laws establish that any “person or organization aggrieved with respect to any filing which is in effect” may request a hearing before DOI.[73] The agency has complete discretion to grant or deny such a hearing.[74] The Attorney General’s office has requested hearings on regular homeowners rates at least twice in the past six years.[75] Consumer advocates have made at least one request during this time.[76] All requests were denied. None of the current or recent officials at DOI with whom the Committee spoke or from whom it received testimony could recall a time when a hearing was held on request. Based upon the testimony of these officials and a representative from the Attorney General’s office, the Committee understands there has not been a hearing on a rate request in at least 15 years, and possibly much longer.[77]
For Massachusetts residents who live in urban or coastal areas deemed high-risk, there is an alternative insurance option, the residual market or “FAIR Plan.” About 9.9% of Massachusetts properties are covered by the FAIR Plan, accounting for 11.6% of premiums paid.[78] The market was created by Massachusetts (and other states) during the 1960s civil rights era, in response to red-lining, discrimination by insurers in the provision of coverage to urban and minority homeowners.
The FAIR Plan is run by an umbrella group called the Massachusetts Property Insurance Underwriters Association (MPIUA). Sellers of homeowners insurance in Massachusetts are required to belong to MPIUA and must share in its costs relative to their shares of the market.[79] The Division closely regulates the FAIR Plan, its rates and its terms.[80] In sharp contrast to the larger “voluntary” market, MPIUA requests for changes to rates or terms trigger a rigorous process of public hearing and review that includes document discovery, testimony, cross-examination and public comment.[81] The Attorney General’s office is entitled to participate as a matter of right, as an advocate for consumers.[82] Other participants are the MPIUA itself, in support of its rate and terms request, but also the State Rating Bureau (SRB), a once-prominent but now obscure department within DOI that acts as an occasional advocate for consumers.[83] Officers of the Division preside over FAIR Plan rate hearings. The process takes months and results in a written decision by the Commissioner.
The Commissioner of Insurance denied the three most recent FAIR Plan requests for rate increases, in 2007, 2011 and 2013. Most recently, the Commissioner rejected the 2013 request because (1) the model used for hurricane damage projections was insufficiently tailored to Massachusetts and (2) plan administrators failed to demonstrate that reinsurance costs incorporated into the rates were reasonable.[84]
At the Committee’s September 22 oversight hearing, insurers were unable to explain whether or in what way their hurricane models and reinsurance policies differ from those of the FAIR Plan.
At the Senate Post Audit hearing, three insurers that had received recent rate approvals testified: MAPFRE U.S.A, Safety Insurance Group and Plymouth Rock.
- MAPFRE U.S.A., the largest property insurer in the state with 13% of the voluntary market,[85] won an initial increase of 0.3%, effective January 1, 2015, and a second increase of 8.9%, effective eight months later, on August 1, 2015, for a total increase of 9.2% during 2015.
- Safety Insurance Group, 4th largest company in the market with a 7.2% market share,[86] received a rate increase of 3.3%, effective December 1, 2014, and a second increase of 9.1%, effective 11 months later, on November 1, 2015, for a total increase of 12.7% in less than a year.
- Plymouth Rock Group, the state’s 16th largest insurer with a 2% market share, received rate increases of 7.99% in 2013, 9.1% in 2014, and 7.7% in 2015, for a three-year increase of 27.0%.[87]
The impetus for the Committee’s investigation into rate increases for homeowners insurance was the news that very large increases had been approved without any notice to the public, the Legislature or the Attorney General. What the Committee learned was even more surprising -- not only was no notice given, but no one outside the Division has access to any of the information or documents prior to the new rates’ effective date. In fact, no one can learn that a rate request has been filed until the effective date. Even when the rates take effect, no notice is given to the public, to customers of the insurers, to consumer advocates such as the Attorney General or to anyone outside of the Division.
Generally, all documents that DOI receives or creates are considered public records, subject to Massachusetts’ public records statute, Chapter 66 of the General Laws. However, DOI considers rate filing documents to be subject to a public records exemption, and therefore not public prior to their effective date. It claims two bases for this exemption: the “deliberative process” exemption and the statutory exemption.
However the deliberative process exemption, in the clear language of the public records definition statute, is limited to “inter-agency or intra-agency memoranda or letters relating to policy positions being developed by the agency.”[88] It is also limited in time; when deliberations have ended, these memoranda become a part of the public records unless they fall into another of the enumerated exemptions to the public records law.[89]
The statutory exemption, which DOI treats as supplemental to the deliberative process exemption, covers documents that are “specifically or by necessary implication exempted from disclosure by statute.”[90] The exemption language in the relevant law applies narrowly only to documents specifically named or described.[91] The relevant DOI statute states: “A filing and supporting information shall be open to public inspection after the filing becomes effective.”[92] DOI, at its discretion, could opt to make this information available to the public sooner, but to date they have chosen to use this language as the basis for withholding the records while they are under review. For rates that are rejected or withdrawn, DOI chooses not to ever make the documents public.
Several aspects of calculating insurers’ losses and expenses are not fully shared with DOI. They represent significant actuarial judgments on the part of the insurers that are relevant to the excessiveness or adequacy of the proposed rates. DOI could ask for more details but it chooses not to.
Weather models. Estimating the frequency and severity of hurricane storms, including the likely damage they would cause to Massachusetts housing stock is one such aspect. These models have been routinely analyzed in FAIR Plan rate setting proceedings and were taken up by a special legislative commission addressing the home insurance market. The Attorney General’s Office has disputed the use of available hurricane models for not having been proven to “produce accurate and reasonable estimates that are appropriate for use in Massachusetts.”[93] We heard from insurance and weather modeling experts that hurricane models used by insurers in Massachusetts are not particular to our state, to regions within the state or to the state’s climatological history.[94] This means that homeowners living inland face rates based on hurricane predictions estimated for coastal areas, including Florida, Louisiana and the Caribbean. In contrast, Massachusetts has experienced very few hurricanes in recorded history.
Despite concern that weather models are a factor in the rise of home insurance premiums, DOI has made no effort to analyze the underlying data and assumptions of the models. DOI is too ready to accept the weather model vendors’ claims that the models contain proprietary intellectual property requiring protection from competitors.[95]
The AG’s Office has written three times to the Division of Insurance, in 2009, 2011 and 2012, to address the impact of insurers’ use of these models. In 2009, Glenn Kaplan, Chief of the Insurance and Financial Services Division of the Attorney General’s Office, wrote:
I write to express our Office’s concern with respect to current homeowner insurance premiums in Massachusetts and, in particular, the use of unproven and in some cases discredited hurricane models to justify rates that are vastly higher than necessary to cover Massachusetts losses… One of the principal reasons for the very low loss ratios and corresponding high profitability of homeowners insurance in Massachusetts is the use of modeled hurricane loss provisions in Massachusetts homeowner insurance rates.[96]
Tellingly, in 2007 and 2013, proposed rate increases for the FAIR Plan were rejected based upon the use of hurricane models DOI itself found insufficiently tailored to Massachusetts. The models used to justify regular homeowners rates have not been shown to be materially different.
Reinsurance. Like hurricane loss modeling, this has been a concern of consumer advocates and the Attorney General’s Office in discussions of rate fairness. Reinsurance is purchased to reduce underwriting risk. The insurer files a claim on its reinsurance policy when it has extraordinarily high claims after very severe weather or other covered damage to insured properties.
Insurers purchase reinsurance from dozens of companies, most of which are headquartered outside the United States and are therefore not subject to U.S. or Massachusetts regulation or oversight. Some insurers may even purchase reinsurance from a division of their own company, as is the case with MAPFRE U.S.A.[97] Generally, the cost of reinsurance makes up a significant portion of the insurance premiums charged to consumers. Reducing risk is a crucial part of insurance companies’ business model, and reinsurance is a key part of risk management. However, in states where it is under-regulated, reinsurance has become a budget item where companies can beef up their expenses, and then set customers’ rates based on the expectation that they will earn a certain percentage of those expenses back as profits.[98]
Lack of access to key information makes it difficult for regulators to analyze the appropriateness of the cost of reinsurance. A compounding factor is that the price of reinsurance for insurers is also based on hurricane loss models. Consumer advocates and concerned parties fear that insurers are overcharging consumers on the basis of costs for inflated reinsurance coverage.
Mr. Kaplan, in his 2011 letter, estimated that the use of “untested and discredited hurricane models” and “inflated reinsurance provisions” resulted in consumers being overcharged for homeowners insurance by at least a half billion dollars for the period 2004 to 2010. He requested that the State Rating Bureau initiate administrative rate proceedings to review voluntary market rate requests that were on file at that time, with a specific focus on hurricane models and reinsurance provisions.[99] In response, the Division agreed to hold proceedings related to hurricane and other catastrophe modeling in 2012. [100] The AG’s office responded, offering to lend its expertise to assist DOI in putting together a comprehensive review of hurricane models, and reiterating its concerns.[101] However, to date DOI has not held any such proceedings.
Policy cancellations and nonrenewals. Risk held by a homeowners insurance company can also be mitigated by cancelling policies or failing to renew policies of individuals who have filed several claims within a period of time or whose homes are located in areas with higher incidences of damage. Cancellation of a homeowners policy, when either the insurer or the homeowner breaks the policy before the end of its term, is permissible in certain circumstances.[102] Insurers are always free to non-renew a policy. DOI collects cancellation and nonrenewal data from the companies that make up the top 25 in market share in designated urban and coastal zip codes. This data is reported in the agency’s annual report on home insurance. However, no data is collected for other regions, and DOI does not appear to consider cancellations or nonrenewals in reviewing loss estimates that underlie rate requests.
Consumers in Massachusetts are in some ways set up for success by the insurance market here. Buyers can choose from 68 carriers, as of the most recent information available from DOI. The aggregate market share of the ten largest companies is not big enough to stifle competition from smaller businesses.
Yet consumers find it difficult to compare offerings on cost, quality and convenience.[103] They are up against an advanced case of information asymmetry. Sellers know a lot about a complex product, while buyers know very little. Consumers can work with independent brokers who may make things less complicated. But brokers don’t do business with all 68 homeowners carriers; most only deal with a dozen or fewer.
Homeowners need more -- much more -- information about the different premiums charged by each of the insurers from which they can choose. DOI does not provide consumers with any resources to compare premiums and coverage available from insurers. Insurers are not required to make basic pricing information available in a way that would help differentiate among their options. Even for shoppers who seek competitive quotes -- a time-consuming task that requires providing a great deal of personal information to brokers -- it can be very hard to compare these complex offerings. Effective competition requires that we solve this information asymmetry by arming consumers with tools to understand their choices.
Massachusetts consumers ought to have an online tool to research homeowners insurance offerings. As mentioned, regulatory and consumer protection agencies in states like Colorado,[104] Florida[105] and Delaware[106] have set up comparison engines that show rates and coverage. Massachusetts, in contrast, makes little use of government websites to explain options.[107] There are no other places to get a comprehensive picture.
As of the Committee’s hearing, there were 68 home insurance providers in Massachusetts.[108] The top 10 insurers sell 66% of all home insurance in the state, based on total premiums collected.[109] According to NAIC’s 2014 Homeowners Competition Report, nine firms left the market and 13 entered the market in the previous five years.[110]
Despite these characteristics, which are sometimes indicative of a market competitive on coverage and prices, Massachusetts premiums are rising rapidly. Between 2007 to 2013,[111] the average premium increased 21.6%.[112] This rate of growth outpaced regional inflation by almost 9 percentage points.[113] Over the same time, the median income of the state’s households fell by close to 5%[114] and average home values in the state, a factor used by insurers to set rates, dropped 11%.[115] In comparison, the growth in average premiums paid by homeowners under the FAIR Plan was 6.7%[116] and the average cost of auto insurance rose by 2.8%.[117] Consumers are not doing well, while insurers are doing very well.
Profitability is an indication of an industry’s health. Regarding insurance, a healthy market means that companies are able to remain solvent and importantly, continue to offer this essential product to consumers. However, according to home insurance experts, high profitability suggests that rates are not actuarially fair to consumers.[118] Key indicators of profitability, as identified by the NAIC, are underwriting profit, return on net worth and loss ratio. By each of these metrics, home insurers in Massachusetts are thriving.
For the 10-year period of 2004-13, the average underwriting profit[119] for Massachusetts home insurers was 13 times greater than the national average -- 16.9% in Massachusetts versus 1.3% nationally.[120]
Over that same period, Massachusetts home insurers earned an average of 17.6% annual return on net worth -- the 11th highest out of the 50 U.S. states and the District of Columbia.[121] Home insurers nationwide had an average annual return on net worth of 6.6%,[122] while the long-term average return on net worth for the property/casualty insurance sector, which includes homeowners insurance, is 9%.[123] Of note, Safety Insurance Group and Plymouth Rock Group each based their rates on a 15% return on net worth, while MAPFRE U.S.A. used a weighted return on net worth of 12.2%.[124]
Another indicator of insurer profitability is loss ratio, the percent of premiums received paid out for claims. A lower loss ratio indicates a higher profit, since the insurer retains a larger amount of premiums. In nine out of the 10 most recent years for which data is available, Massachusetts home insurers had a loss ratio lower than the national average.[125] Massachusetts had the 4th lowest loss ratio -- meaning the 4th highest profit, by this measure -- over these 10 years, of the 50 U.S. states and the District of Columbia.
[126], [127]
Within Massachusetts, homeowners insurance also had lower loss ratios relative to other lines of insurance. Home insurers had a statewide average loss ratio of 34.5% in 2013, while Massachusetts auto insurers had a loss ratio of 62.4%.[128] Health insurers are now required by Massachusetts law to have loss ratios of 88% or more.[129]
On November 30, 2015, the Attorney General wrote the Senate Post Audit and Oversight Committee that the rate increases granted by DOI to MAPFRE and Safety Insurance, two of the four largest property insurers in Massachusetts, “are of serious concern to the Attorney General’s Office.”[130] Insurance specialists for Attorney General Maura Healey, afforded access to documents after rates took effect, found that industry profit estimates were “arbitrary and not supported by sufficient data.”[131] They determined as well that estimated catastrophe losses -- those related to a specific weather event that generates a large number of claims totaling a large dollar amount -- were calculated using a “biased” approach designed to “increase their revenues.”[132] The bottom line: they concluded that the rates are unlawfully “excessive.”[133]
High profits accompanied by significant increases in premiums call into question the capacity of market competition to keep prices reasonably low. Insurance is a regulated industry for precisely this reason. The rate filing review process is designed to provide a layer of protection for consumers.
1. DOI should use its existing authority to open up the process
2. The General Court should require transparency at DOI
3. The General Court should authorize the AG to order a limited number of homeowners hearings on her own initiative
4. DOI should issue regulations to govern both rates requests and hearing requests
5. DOI should push harder on weather models, reinsurance cost estimates, and policy cancellations and nonrenewals
6. Either DOI or the General Court should compel insurers to notify people about new rates
7. DOI should create an online premium comparison tool for homeowners insurance
- Bibliography of Additional Sources Consulted
- Experts and Advocates Interviewed by Committee Staff
- Testifiers at Sept. 22, 2015 Committee Hearing
- Written Testimony Received at Sept. 22, 2015 Hearing
- Nov. 30, 2015 Letter from the Attorney General’s Office to the Committee
Books and Reports
Mark Boozell, Professional Insurance Agents Insurance Foundation, Future of the Business Disciplines, Regulation and Oversight of the U.S. Insurance Marketplace (2009).
Michael J. Alef and Brendan Bridgeland, Center for Insurance Research, A Hole in the Bucket: Massachusetts’ Failure to Police Insurance Company Market Practices Leaves Consumers Vulnerable Nationally (1999).
J. Robert Hunter, Consumer Federation of America, The “Good Hands” Company or a Leader in Anti-Consumer Practices? Excessive Prices and Poor Claims Practices at the Allstate Corporation (2007).
J. Robert Hunter, Consumer Federation of America, Property/Casualty Insurance in 2008: Overpriced Insurance and Underpaid Claims Result in Unjustified Profits, Padded Reserves, and Excessive Capitalization (2008), available at http://consumerfed.org/wp-content/uploads/2010/08/2008Insurance_White_Paper.pdf.
Robert W. Klein, National Association of Insurance Commissioners, A Regulator’s Introduction to the Insurance Industry (2005), available at http://www.naic.org/documents/prod_serv_marketreg_rii_zb.pdf.
National Association of Insurance Commissioners, Product Filing Review Handbook (2012), available at http://www.naic.org/documents/prod_serv_marketreg_pfr_hdb.pdf.
National Association of Insurance Commissioners, 2014 Insurance Department Resources Report (2015).
Baird Webel, Congressional Research Service, Insurance Regulation: Issues, Background, and Legislation in the 113th Congress (2014), available at https://www.fas.org/sgp/crs/misc/R43067.pdf.
Mary A. Weiss, Center for Insurance Policy and Research, Systemic Risk and the U.S. Insurance Sector (2010).
Journal Articles
Jack E. Birkinsha, Investment Income and Underwriting Profit: "And Never the Twain Shall Meet"?, 8
Boston College Law Review 713 (1967), available at http://lawdigitalcommons.bc.edu/bclr/vol8/iss4/2.
Patricia Born and W. Kip Viscusi, The Catastrophic Effects of Natural Disasters on Insurance Markets, Journal of Risk and Uncertainty 33 (2006).
Frederick G. Crane, Insurance Rate Regulation: The Reasons Why, Journal of Risk and Insurance 39 (1972).
Anne Gron, Regulation and Insurer Competition: Did Insurers Use Rate Regulation to Reduce Competition?, Journal of Risk and Uncertainty 11 (1995).
Scott Harrington, The Impact of Rate Regulation on Prices and Underwriting Results in the Property-Liability Insurance Industry: A Survey, Journal of Risk and Insurance 51 (1984).
Robert W. Klein, Insurance Regulation in Transition, Journal of Risk and Insurance 62 (1995).
Joseph C. Samprone, Jr., Rate Regulation and Nonprice Competition in the Property and Liability Insurance Industry, Journal of Risk and Insurance 46 (1979).
Harry Shuford, Understanding Cycles and Shocks in the Property and Casualty insurance Industry: Lessons Learned from Experience, Business Economics 39 (2004).
C. Arthur Williams, Jr., Open Competition Rating Laws and Price Competition, Journal of Risk and Insurance 40 (1973).
Newspaper Articles
Mark Alan Lovewell, A.G. faults hurricane models for inflating homeowner insurance rates, Vineyard Gazette (Dec. 1, 2011), available at https://vineyardgazette.com/news/2011/12/01/ag-faults-hurricane-models-inflating-homeowner-insurance-rates.
Dan Ring, Problems with home insurance among top 5 complaints of Massachusetts consumers last year, MassLive (Mar. 13, 2012), available at http://www.masslive.com/news/index.ssf/2012/03/problems_with_home_insurance_a.html.
Legislative Materials
Hearing before the Select Committee on Property Insurance Accountability of the Florida Senate (2008) (statement of J. Robert Hunter, Consumer Federation of America).
Correspondence
Letter from J. Robert Hunter, Director of Insurance, Consumer Federation of America, and Birny Birnbaum, Executive Director, Center for Economic Justice, to Alessandro Iuppa, President, National Association of Insurance Commissioners (Mar. 27, 2006).
Insurer Rate Filings
MAPFRE U.S.A., Rate Filing CMRC-127613858, Mass. Division of Insurance, Sept. 16, 2011.
Arbella Mutual Insurance Co., Rate Filing ARMU-128563119, Mass. Division of Insurance, Jul. 20, 2012.
Safety Insurance Co., Rate Filing SFTY-129170957, Mass. Division of Insurance, Sept. 10, 2013.
Bunker Hill Insurance Co., Rate Filing PRAC-129338643, Mass. Division of Insurance, Dec. 30, 2013.
Amica Mutual Insurance Co., Rate Filing AMMA-130190563, Mass. Division of Insurance, Sept. 1, 2015.
The Andover Companies, Rate Filing ANDV-129649858, Mass. Division of Insurance, Jul. 31, 2014.
MAPFRE U.S.A., Rate Filing CMRC-129634124, Mass. Division of Insurance, Aug. 14, 2014.
United Services Automobile Association, Rate Filing USAA-129979632, Mass. Division of Insurance, Mar. 16, 2015.
Safety Insurance Co., Rate Filing SFTY-129989109, Mass. Division of Insurance, Mar. 23, 2015.
The Andover Companies, Rate Filing MLLN-130179245, Mass. Division of Insurance, Aug. 11, 2015.
Bunker Hill Insurance Co., Rate Filing PRAC-130020577, Mass. Division of Insurance, Apr. 18, 2015.
MAPFRE U.S.A., Rate Filing CMRC-129987068, Mass. Division of Insurance, Apr. 20, 2015.
Liberty Mutual Insurance Co., Rate Filing LBPM-130168746, Mass. Division of Insurance, Jul. 16, 2015.
Arbella Mutual Insurance Co., Rate Filing ARMU-130231115, Mass. Division of Insurance, Sept. 8, 2015.
Liberty Mutual Insurance Co., Rate Filing LBPM-130378529, Mass. Division of Insurance, Dec. 23, 2015.
Paula Aschettino, President and Founder, Citizens for Homeowners Insurance Reform
Birny Birnbaum, Executive Director, Center for Economic Justice
Monica Brookman, Assistant Attorney General, Mass. Attorney General’s Office
Nonnie Burns, Former Commissioner of Insurance, Mass. Division of Insurance
John Aloysius Cogan, Jr., Associate Professor of Insurance Law, University of Connecticut Law School
Jack Connolly, President and Owner, Wedgwood-Crane & Connolly Insurance Agency
Stephen D’Amato, Former Chief of State Rating Bureau, Mass. Division of Insurance, Former Executive Director of Center for Insurance Research
William A. Delaney, Delaney Legislative Services
Kerry Emanuel, Professor of Atmospheric Science, Mass. Institute of Technology
Burt Feinberg, Mathematician, Mass. Attorney General’s Office
Daniel J. Foley, Jr., Vice President of Government Affairs and General Counsel, Mass. Association of Insurance Agents
Glenn Kaplan, Chief, Insurance and Financial Services Division, Mass. Attorney General’s Office
Peter Leight, Assistant Attorney General, Mass. Attorney General’s Office
Francis A. Mancini, President and CEO, Mass. Association of Insurance Agents
Patricia A. McCoy, Professor of Insurance Law, Boston College Law School
John P. Murphy, Executive Director, Massachusetts Insurance Federation
Peter Robertson, General Counsel, Massachusetts Insurance Federation
Herb Wilkins, Chief Justice Emeritus, Mass. Supreme Judicial Court
Alex Winslow, Executive Director, Texas Watch
Invited Testifiers:
Massachusetts Division of Insurance
Daniel Judson, Commissioner
Gary Anderson, First Deputy Commissioner
Kevin Beagan, Deputy Commissioner
Cara Blank, Property Casualty Actuary, State Rating Bureau
Massachusetts Attorney General’s Office
Glenn Kaplan, Insurance and Financial Services Division Chief
Peter Leight, Assistant Attorney General
Mapfre U.S.A.
Matthew Wilcox, Senior Vice President and Chief Technical Officer
Safety Insurance Co.
James Berry, Vice President of Underwriting
Elizabeth Brodeur, Director of Legal and Regulatory Compliance
Bunker Hill Insurance
Curt Troutman, Vice President
Stephen D’Amato, Former Director, State Rating Bureau, Massachusetts Division of Insurance and Former Executive Director, Center for Insurance Research
Paula Aschettino, President and Founder of Citizens for Homeowners Insurance Reform
Massachusetts Insurance Federation
John Murphy, Executive Director
Senator Daniel J. Wolf, Cape and Islands District
Representative James M. Cantwell, 4th Plymouth District
Other Testifiers:
Sherman “Whip” Saltmarsh, President, Saltmarsh Insurance, Former State Representative
Jane Logan, CPCU, Insurance Broker and Consumer Advocate
- Massachusetts Division of Insurance
- Paula Aschettino
- Joint Statement by Massachusetts Insurance Federation, American Insurance Association, National Association of Mutual Insurance Companies, and Property Casualty Insurers Association of America
- Sherman “Whip” Saltmarsh
