March 23, 2010

Finance Committee will review restrictions on auto insurer of last resort

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By Len Lazarick
Len@MarylandReporter.com

Senators are working this week on legislation to clamp down on practices at the Maryland Automobile Insurance Fund including high bonuses and spending on marketing and consultants.

Senate Finance Chairman Mac Middleton will convene a workgroup this week to hash out the legislation, backed by a majority of his committee.

The sponsors say the spending uncovered by an audit makes the independent agency too much like a private insurance company rather than an insurer of last resort for people who can’t get coverage.

“It’s an agency out of control,” said Finance Vice Chair John Astle, D-Anne Arundel, the bill’s lead sponsor. Astle, who has jousted with MAIF executives for years, said he’s trying to reform the agency.

“I don’t want to blow [MAIF] up. MAIF is extremely important,” he said.

MAIF can only insure drivers who have been rejected by two private auto insurers or had their coverage canceled. Most of its clients have bad driving records, and a third of its clients are from Prince George’s County. Other large segments are from the Eastern Shore and Baltimore City.

Middleton said the negotiations will be delicate.

“We have to do this in a very collaborative, non-threatening environment to put cool heads together,” Middleton said. “We didn’t set [MAIF] up to be a competitor with the private market” but “we expect them to be a professional insurance company.”

MAIF has defended itself strongly against charges that it’s trying to be a private market competitor, noting that it has lost both market share and premium income over the past six years, according to testimony it gave the committee last week.

In 2003, MAIF covered 6.4 percent of the insurance market in Maryland, generating $221 million in premiums. That has steadily declined over the years, and last year MAIF only covered 2.7 percent of the drivers in the state and had under $100 million in premiums.

“It is simply wrong to suggest that MAIF is competing with the private market,” MAIF Board Chairman Derrick Davis said in written testimony to the committee. (He is no relation to House Economics Matters Committee Chairman Dereck Davis) “MAIF is doing exactly what it was set up to do…. We are shrinking as private industry insures more and more Marylanders. This is viewed by MAIF as a good thing, and a successful result of its statutory mission.”

But lobbyist Bryson Popham said the market share should be even lower, because MAIF keeps customers on even if they have no accidents and their driving record has improved.

Popham represents Agency Insurance Co. of Hanover, which also insures high-risk drivers. Jack Stansbury, who runs Agency Insurance, said MAIF was losing money by holding down rates, in violation of state law.

MAIF has admitted it held down rates so more people could stay insured, and that was one of the reasons for their losses. The agency cited legislative direction from the 1990s to hold down rates.

The sponsors of the bill were particularly upset that MAIF’s board of directors handed out $1.4 million in bonuses in 2008 despite a $20 million loss, at the same time other state employees were taking furloughs.

“There would have been no bonuses” without action by the board to change the criteria for the awards despite the loss, said Sen. George Della, D-Baltimore City, another persistent MAIF critic.

In response to questions from Della, Davis said it was MAIF Executive Director Kent Krabbe who recommended the bonuses to the board. Krabbe got the highest amount, $36,000.

There’s a full report on the audit, and Krabbe’s testimony at a January hearing, at MarylandReporter.com.

The bonuses will not be given this year and next due to language Gov. Martin O’Malley put in the state budget. As state employees, MAIF workers also had to take furloughs – essentially a temporary pay cut – saving the fund $792,000, according to budget analysts. But MAIF said the furloughs will actually cost the agency $1.2 million in claims, storage, attorney’s fees and slower collections.

MAIF gets no state funds, and depends entirely on premiums from its subscribers.

The bill also seeks to prohibit MAIF spending on marketing, public relations and lobbying, on which it spent $96,000 in 2008. The spending also included unspecified “strategic consulting services.” But MAIF said it actually spent about $10 million on consulting services, including money paid to actuaries and investment advisors to manage its investment portfolio.

“To say that you can’t have any consultants I think would be a gross injustice to MAIF, and not a wise thing,” Middleton said. But he was not sure what would be appropriate for MAIF bonuses, given that the agency competes for staff with others in the insurance business.

But Middleton said MAIF should not retain customers who are not high risk and can be insured by private companies.