Bay State's battle over car insurance rates

Michelle Brennan has given up driving to work. For the past year, the Boston executive has elected to take the train from her suburban home, effectively doubling the time of her commute, rather than continue driving.

The reason: She was tired of paying $1,500 a year for car insurance for her 20-year-old Mercedes. "They need to straighten the laws out so it makes more sense to own a vehicle," she says.

Like many of her fellow Massachusetts suburbanites, Ms. Brennan faces artificially high car insurance quotes. The commonwealth's unique system of price controls results in suburban drivers and most rural residents paying a bit more for insurance, while many city dwellers pay less.

Now Gov. Mitt Romney is pushing to change the nation's last bastion of auto insurance price controls. It is a battle of free enterprise versus protecting the inner-city poor - or even the middle class - with a little presidential politics thrown in.

Specifically, Governor Romney wants to eliminate the state's fixed and established rate system, which he frequently compares to something in the Soviet Union. But the fight for Mr. Romney, a Republican who is considering a presidential bid, has not been an easy one.

Instead, his reform campaign has been questioned by the legislature and derailed by the courts. In short, Massachusetts is stubbornly holding on to its title as the last garrison of auto insurance price controls.

In the 1950s, most states set "bureau rates" under a fixed-price system similar to what Massachusetts has now. But in the following decades, states gradually adopted more market-based approaches.

In 1998, New Jersey passed legislation that would end its fixed-rate system. The state has yet to implement the market-based approach, although it is expected to do so next year. The change will leave Massachusetts as the only state that retains a pure fixed rate.

Like motorists in all other states, city drivers in Massachusetts pay significantly more than others. Accidents and car thefts are more common in cities, leading to significantly higher premiums.

But Massachusetts does not allow insurers to charge above a certain price. As a result, the Bay State forces insurers to take on high-risk customers they expect to lose money on, most of whom are urban dwellers.

To make up for their losses, the insurers charge their low-risk customers more. Massachusetts switched to a market-based system in the early 1970s, but insurance rates in the cities skyrocketed.

Consequently, the state returned to price controls. Romney hopes to avoid a spike in rates this time around by gradually implementing the plan over four years.

While other aspects of Romney's proposal are popular, the worry about a dramatic increase in urban car insurance premiums has lead to the stalling of the plan in the Democratic-controlled state legislature.

"For a person in an urban area, $1,500, $1,800, $2,000 is an affordable policy; $6,000 is not," says state Sen. Andrea Nuciforo Jr. (D) of Pittsfield. "We need to make sure we do it in a way that makes sure the product is not unaffordable for certain classes of drivers."

Mr. Nuciforo notes that Massachusetts has one of the lowest rates of uninsured drivers in the nation. If rates increase in the cities, he argues, the number of uninsured might increase as well.

Many economists, however, are less concerned about keeping car insurance affordable in cities. They see the end of price controls as encouraging more firms to enter the state, fostering more competition, and reducing inefficiencies in the market.

"Whenever the auto insurance system is used as some kind of income redistribution scheme, disaster always results," says Robert Hartwig, senior vice president and chief economist of the Insurance Information Institute, an industry group.

But the decisionmakers in Massachusetts are not economists. On June 20, a Massachusetts superior court ruled that Insurance Commissioner Julie Bowler lacked the authority to implement one of Romney's reforms. Romney had hoped to switch the state to an assigned-risk plan, which would have altered the system by which the state assigns costly drivers to insurers.

Massachusetts has the fourth most expensive auto insurance rates in the nation, but not even reform advocates believe legislative action will significantly change the numbers.

The most expensive states for auto insurance are almost entirely in the Northeast, in part due to the region's high rate of accidents and high healthcare costs. Massachusetts, in fact, has the highest rate of car accidents in the country.

Instead, the advocates believe suburban and rural drivers will see modest decreases. Chris Goetcheus, a spokesman for the Massachusetts Division of Insurance, says changes will also allow insurers to offer product diversification, tailoring their policies to the needs of their customers.

"Our current system, it's just like the former Soviet Union," Mr. Goetcheus says. "You can have any pairs of shoes as you want, as long as they're red. That's our auto policy in Massachusetts."