[LEGAL] PERSPECTIVE by James A. Castleman, Esq.
Should Insurance Industry Cost Containment Standards Even Exist? Since the 1970s, the insurance industry in Massachusetts has been required to adhere to certain “cost containment” standards, i.e. standards that insurers need to meet to supposedly keep claims costs low. Notably, it was not the insurance industry itself that developed these standards. Rather, it was the Massachusetts legislature and the Division of Insurance (DOI) that imposed them. The incentive for developing these standards was the fact that in the 1970s, Massachusetts had among the highest – if not THE highest – auto insurance premiums in the country at the time, and the insured public was not happy about those premiums. One of the major reasons that premiums were so high was that Massachusetts also had among the highest auto claims costs in the country. The idea was that, if claims costs could be reduced, then insurance premiums could be reduced as well. (Of course, if Massachusetts drivers had learned to drive better, and if Massachusetts roads had been maintained better, that might have had a much bigger impact on claims costs.) In response, the legislature enacted statutes that required the DOI to develop standards that the insurance industry would need to meet to keep claims costs low. These statutes also required the organization responsible for administering the state plan for insuring high risk drivers (Commonwealth Automobile Reinsurers, or CAR) to make sure that their individual participating insurers would have plans in place to keep claims costs low. The insurance industry initially was quite resistant to being forced to adopt specific standards. Insurers did not want the government telling them how to run their businesses or to set rules about how they should make individual choices regarding how much to pay for claims or individual elements of those claims. After all, they were the ones in the auto insurance business, and most of them had been for many decades. They did not want regulators micromanaging their claims payment decisions. Nevertheless, the DOI hit hard with cost containment standards. At the time, the DOI set uniform premiums that Massachusetts insurers charged for private passenger auto insurance – all auto insurers in the state were required to charge the exact same premium for all mandatory auto insurance coverages. In order to set those premiums, the DOI held lengthy premium rate setting hearings every year in which the state insurance industry needed to try to establish what they needed to get as a fair premium for various auto coverages. When the cost containment legislation was passed, the DOI developed regulations that required the insurance industry to separately show every year what they were doing to contain costs as part of the annual premium rate setting hearings. The regulations mandated that insurers address various aspects 34 May 2022
New England Automotive Report
of claims costs, including costs of personal injury claims and individual insurer claims administration costs, as well as making sure that insurers were doing enough to detect claims fraud. For the collision repair industry, the part of the regulations that became most important were those that dealt with individual aspects of auto damage claim payments. As part of the rate setting hearings, the insurance industry needed to show that they had plans in place to make sure that they were not paying too much for body shop Labor Rates, for too many labor hours, for parts prices, for towing, for storage and for total losses. Initially, insurers attempted to show that they had adequate plans in place, while balancing that against their understanding that they were reliant on the auto repair business and that insurers needed to pay enough to keep quality repair shops in business; however, for the first several years, the DOI would not accept that insurers were doing enough to keep the individual elements of claims cost low, and the DOI punished the insurance industry by reducing the amounts that they would allow the insurers to charge for premiums. As a result, insurers found themselves trying to get body shops to accept lower Labor Rates, to reduce repair hours and to accept discounts on parts prices. The insurers expected the collision repair industry to resist, so that they could go back to the DOI and say that they had tried…but had been unsuccessful. What actually happened was the collision repair industry essentially caved to the insurers’ demands. And the result was that claims costs were reduced – at least temporarily – and that insurers had to go back the next year and tell the DOI that their plans had been effective. An unintended result was that the collision repair industry found itself sinking into a deeper and deeper hole, where many quality collision repair shops had to make difficult decisions about how to repair cars, how to pay their help and how to stay in business. In addition to the annual premium rate setting hearings, CAR set its own performance standards that required individual insurers to demonstrate that they had plans in effect that met the same standards that were set by the DOI. If they could not, then the individual insurers were punished by assessment of penalties. Notably, CAR was established to regulate only the “assigned risk pool” of high risk drivers and to spread the risk among all auto insurers writing business in Massachusetts. But statutes require that insurers treat their assigned high risk drivers in a non-discriminatory basis, i.e. the same as they treat the rest of their insureds. The result is that CAR rules regarding claims standards for high risk drivers are applied to ALL drivers – whether they personally pose a high risk or continued on pg. 38
