Drivers in low-income and minority communities in Massachusetts could face higher auto insurance costs if a long-running incentive program for insurance companies is scaled back, the Massachusetts attorney general’s office and some insurers warn.
The incentive program is designed to encourage insurance companies to offer coverage in underserved communities such as Chelsea, Lowell, East Boston, Springfield, and Brockton, as well as to riskier drivers. But an industry group is now calling for that program to be reduced by more than 20 percent statewide, arguing that it is not as necessary in a competitive market.
That move could push more drivers into what’s known as the high-risk pool, which is the insurer of last resort for those who can’t get commercial coverage, according to the office of Attorney General Maura Healey. The change could affect bad drivers —
Being pushed into the high-risk pool would mean fewer choices, higher premiums, and more fees.
“These credits [encouraging companies to offer coverage] play an important role in providing low-income residents with greater access to auto insurance products,” said Jillian Fennimore, a spokeswoman for Healey. “They also incentivize insurers to do business in diverse communities across Massachusetts.”
The Commonwealth Automobile Reinsurers, which manages the high-risk pool, began reviewing the credit system last year as part of its routine examination of the automobile market and those it insured.
Plymouth Rock Assurance Corp., the state’s sixth-largest auto insurer and one of the few companies opposing the reduction of the credit, took the unusual step of asking the Massachusetts Commissioner of Insurance to schedule a hearing on the plan, which was held Thursday.
The company said robust incentives for insurers are still necessary if the state wants to make sure that drivers in some low-income communities aren’t overly represented in the high-risk insurance pool, where the average premium can be at least 70 percent more expensive.
The average annual premium for a driver statewide was $992 in 2013, the most recent year available, compared to $1,707 for drivers in the Massachusetts Auto Insurance Plan, as the high-risk pool is known. Policies in the high-risk pool also don’t include benefits available in commercial markets, such as accident forgiveness and roadside assistance, and can have higher late payment fees.
Under the current system, “companies have an incentive to actively compete for that business,” said Paula Gold, an attorney for Plymouth Rock, helping lower the cost of insurance for consumers. “Credits are beneficial to consumers, and, in fact, the consumers who may most need it in this state.”
The incentive plan essentially gives insurance companies credit for voluntarily selling policies to about 430,000 drivers who are considered higher-risk because they live in urban areas and are more likely to have their vehicle damaged, or have more speeding tickets, more accidents, or a history of failing to pay premiums. By covering drivers voluntarily, these insurers shrink the size of high-risk pool and hence are allowed to use the credits to reduce the number of drivers they would otherwise be required to take from the high-risk pool.
The new proposal, which would take effect in April, reduces the number of drivers that insurance companies could count for credit to about 332,000, a 23 percent decrease.
To some insurers, the incentive plan is outdated and unnecessary since the state deregulated the auto insurance market eight years ago. More insurance companies sell auto policies in the state, because they can now set their own prices, and more are willing to write policies in low-income communities, they argue.
In the past decade, the number of drivers unable to get insurance on the commercial market has shrunk from 6.5 percent of the more than 4 million Massachusetts drivers to less than 2 percent. Now, just 68,000 automobiles are insured in that high-risk pool, according to the Commonwealth Automobile Reinsurers, a group made up of insurance companies and agents that manages the program.
Insurance companies share these higher-risk drivers, each insuring a percentage of the pool based on how much business they do in Massachusetts.
Natalie Hubley, president of Commonwealth Automobile Reinsurers, declined to comment. But members of her group have said there’s less need for the incentives because more buyers can buy insurance on the competitive market, as evidenced by the shrinking high-risk pool.
Advocates of the change expect it to have little impact on consumers because the high-risk pool has continued to shrink, despite smaller reductions in credits in the past. Insurance companies have many reasons to offer urban drivers with good driving records insurance without extra incentives, said Owen Gallagher, an Boston insurance attorney who also runs a website called agencychecklists.com, which tracks state insurance trends.
As insurance companies struggle with low interest rates and volatile financial markets that narrow returns on their investments, writing more policies to safer drivers can help them boost earnings, Gallagher said.
It’s uncertain how much of a role credits play in encouraging insurance companies sell auto policies in these underserved communities, he said.
“The question is how far will they continue going into these markets if the credits are reduced,” Gallagher said.Deirdre Fernandes can be reached at deirdre.fernandes
@globe.com. Follow her on Twitter @fernandesglobe.