Auto insurance subsidies are habit-forming

Economists say that if you want to have a glut of any commodity, then create a government subsidy for it. In Massachusetts, our government subsidizes poor driving. It has done so for the last 30 years by providing below-market auto insurance rates to the state's lousiest drivers.

Ending such subsidies and returning to market-based pricing inevitably causes the subsidized folks to pay more, which makes this step hard for politicians to take. The Boston Globe's Bruce Mohl reports on the issues in ending Massachusetts' decades-long subsidy of its worst drivers:

[Insurance Commissioner] Burnes has issued two bulletins that effectively cap how much an individual's auto insurance premium can go up next year...The first bulletin says any insurer that files rates that would result in more than a 10 percent premium increase for an individual driver or a 10 percent increase in any driver's individual coverages would be subject to a mandatory hearing before the Division of Insurance. While the bulletin doesn't rule out increases beyond 10 percent, Burnes said any rate increase in excess of 10 percent is "presumptively not credible."

The second bulletin effectively says the state's highest risk drivers cannot see their rates rise more than 10 percent. Under the current regulations for auto insurance competition, drivers that have no insurer that is willing to cover them voluntarily will be assigned to a carrier and charged either the lower of that carrier's rate or a rate generated by Commonwealth Automobile Reinsurers, the agency that oversees the distribution of the state's high-risk drivers.

CAR yesterday released its rate request for next year, which is based on losses generated by the 168,000 drivers in the high-risk pool. CAR said the average premium of those drivers is $1,380 and should rise, based on loss data, to $2,092, a 51 percent increase. To comply with the commissioner's 10 percent cap, CAR proposed an average premium of $1,508, an increase of 9.3 percent.

Burnes said the cap will mean the state's relatively few high-risk drivers will continue to be subsidized by the remaining 3.8 million drivers, who will pay slightly more. "We're trying to have a managed transition," she said.

Continued subsidies won't make the situation any easier to manage a year from now. What will is for risky drivers to begin receiving market signals (higher prices) that cause them to modify their behavior (driving more carefully or taking the T).