Robert Charles Lauer, Baltimore native, family man, and veteran manager at the Dundalk marine terminal, was unable to use his car for a few months this year. There was nothing wrong with the car, nor with Lauer's driving ability. Instead, Lauer was prohibited from driving because he did not possess $500 worth of state-required auto insurance -- insurance Lauer said he just could not afford to pay.
"Right now I'm letting the car sit out front," said Lauer, who lives with his wife and five children in Southeast Baltimore. "It's really hard -- my wife doesn't drive. There's a grocery store two blocks away from where I live, but when it's time to go to the bigger discount stores or downtown, it's really a problem -- we just have to take a bus or a cab if we can."
Lauer's predicament, shared by thousands of other consumers, in many ways represents what many consider the greatest failing of Maryland's auto insurance system. Since 1973, after then-Gov. Marvin Mandel set out to reform the state's insurance law, all drivers have been required to have insurance. Yet, the prices charged by private auto insurance companies to this captive market -- and their refusal to service many drivers --have made insurance for a growing number of citizens difficult, and in some cases impossible, to obtain.
Inflation and Maryland's no-fault system, among other factors, have raised insurance prices for all drivers in recent years but the people who have been charged the most for state-required insurance -- and thus have been least able to obtain it -- have been those refused standard policies in the private market and shoved into special high-price pools where they are charged more than twice as much, often on the basis of standards the state would reject for any of its other programs.
At least half of the drivers refused insurance by standard companies in Maryland, and therefore forced to pay far higher rates to obtain what the state requires of them, have driving records that show no accidents or traffic violations. They are refused on grounds such as their age, sex, marital status, type of job and whether they previously have had insurance.
When the mandatory insurance requirement was passed, Maryland created a unique new program to answer the needs of those turned away by the insurance companies -- the Maryland Automobile Insurance Fund, a state-operated insurance company that promised to offer these drivers coverage at fair prices. State officials believed that MAIF would induce private insurance companies to insure a larger share of the state's drivers -- especially those who had clean records or lived in inner-city areas -- and at the same time lower the rates and improve services for those it did not.
Never has delivered
In fact, MAIF never has delivered these results. An equally large percentage of drivers in today's market still are unable to buy insurance at the standard private rates. State insurance officials believe that many of these drivers, residents of Baltimore, are victims of redlining. And the state agency's rates, originally set at a low price for accident-free drivers, have more than tripled in the last nine years and now are more than 2 1/2 times those in the private market.
It was MAIF that Lauer, a resident of Baltimore's inner city, turned to unsuccessfully this spring when he needed insurance. He says that he has never had an accident or a traffic ticket, and state motor vehicle records support his claim. Still, he was unable to obtain insurance in the private market, in part because his coverage had once been cancelled when he had been unable to afford a payment. When Lauer went to MAIF, he was charged $150 down and $50 more a month for his coverage through a premium finance company -- far more than the amount that he previously had considered beyond his means.
"I paid $150 and then couldn't keep it up," Lauer said. "I have a large family and it was way too high. There was no consideration for that. After two months I lost the state insurance -- and never got anything back." Finally, later this summer, Lauer went back to MAIF, got another insurance policy, and is trying once again to meet the payments.
The troubles of drivers like Lauer are in a sense punishing all consumers. Because of the lack of insurance at affordable prices, particularly in the state agency, a rapidly increasing number of drivers -- estimated now as as high as 120,000 -- are choosing to drive without insurance, violating the law and, when they have accidents, creating havoc for innocent drivers and pedestrians.
This situation has provoked an intense debate about the value of Maryland's auto insurance system, a debate in which even the perception of the problem -- much less its solution -- varies radically from industry executives to regulators and consumer advocates. Whatever their views on the current availability of state-required insurance, however, all sides agree that the Maryland Autombile Insurance Fund -- the agency that was supposed to deal with much of the problem -- never has accomplished what its creators, Marvin Mandel and the state legislature, envisioned when they reorganized the state auto insurance system nine years ago.
When Mandel and his aides began studying possible reforms in the state's insurance laws in 1971, one of the largest problems seemed to them to be the huge number of drivers in the state who carried no insurance, either because they could not get it or because they did not want to pay for it. These drivers had in a sense become freeloaders in the insurance system, officials reasoned, for when they caused accidents, the damages were often paid not by them, but by a special fund to which insurance-carrying drivers were effectively required to contribute.
In other states, the answer to this problem had been a mandatory insurance law, requiring all auto owners to purchase liability insurance that would cover any damage they caused to other cars or drivers. Solving the uninsured motorist problem in this way raised for Mandel's staff what may have been the most controversial aspect of the state's insurance system: the more than 180,000 drivers who the insurance companies then refused to do business with at their standard prices.
For these drivers, the only way to get coverage was through the industry-controlled "assigned risk" program for "high-risk" customers. There were so many complaints about this system that state officials felt they could not force thousands of uninsured drivers to join it.
State officials believed that the rates charged to assigned risk drivers were far too high. In Baltimore, the base rate for assigned risks had reached $192 by 1972, compared to $114 for a comparable standard policy, even before various surcharges were counted in. Mandel's staff and leading legislators were also suspicious of the high number of drivers in the assigned risk plan, particularly the 80 percent of them who had "clean" records of no accidents or tickets. Many of them, it was believed, were not bad drivers at all, or even "high risks," but simply people who were discriminated against.
"The companies were dumping good business into the assigned risk plan as a way of increasing premiums unjustly," maintains Insurance Commissioner Edward Birrane, who worked on Mandel's reforms as a official of the state Motor Vehicle Administration. In other words, insurance companies allegedly were rejecting customers they could have accepted, knowing that they would get the same number of customers back from the assigned risk office with a license to charge them far higher rates.
If the state were going to require insurance coverage, state officials reasoned, the state had to guarantee that consumers had a reasonable alternative -- at an affordable price -- if they were turned down by the standard private companies. That was why a state insurance agency was attractive. A state agency could be trusted to charge fair rates to its customers on a nonprofit basis, and it would likely provide better service because high-risk customers would be its only business.
It also was thought that insurance companies suddenly would start selling policies to more drivers when faced with a state agency. If they had been unfairly rejecting customers in order to charge them more as assigned risks, the theory went, companies would have to start selling those drivers standard policies or lose their premium payments altogether to the state agency.
Thus was born the Maryland Automobile Insurance Fund, MAIF, the first state agency of its kind in the nation -- and so far the last. MAIF, linked to the new compulsory insurance requirement, became the most highly-noticed and controversial feature of Mandel's insurance bill in the 1972 legislature, and passed despite the objections of insurance executives who descended on Annapolis from all over the country.
Although the concept of MAIF was not particularly radical -- its structure and operations were basically those of an assigned risk plan -- the agency in the end became a vehicle for some of the most idealistic theory of the insurance reformers. As a state task force labored on the formidable task of creating a major insurance company from scratch in the summer and fall of 1972, several crucial departures were made from the business practices of both the assigned risk program and the private companies -- innovations that blended social policy into the state's insurance market in an unprecedented way.
In the end, it would be these innovations that would be the undoing of MAIF. For, while giving the new agency the task of solving the broad problems of insurance prices and availability, MAIF's creators were not willing to admit that a new system -- or more state money -- was necessary to do the job. Instead, they believed that the simple act of turning over the insurance companies' program for rejected drivers to the state would cure the problems they saw. The bulk of the evidence over nine years indicates they were wrong.
One of the dramatic innovations originally built into MAIF was the pricing of the policies the state would sell. Although industry officials had reams of statistics to back up their contention that drivers in the assigned risk program as a group paid premiums that were fair considering the cost of their cumulative accident claims, state officials decided to slash the MAIF price for "clean" drivers with no points and accidents 33 percent below the old assigned risk charge.
Another important change came in the drawing of MAIF's rating "territories" -- geographic areas where residents are surcharged varying amounts because of the area's accident rate. Frequently controversial as a means of assessing driver's premiums, company rating territories also were regarded as a way of isolating inner city areas and eliminating potential customers through high surcharges. MAIF's directors decided to have only three territories --instead of the usual 14 -- and to expand the traditional territory of Baltimore City outward, so that it was not arbitrarily bounded by the city line.
There was a particular emphasis on Baltimore City in these changes, for it was there that MAIF's directors felt that the most drivers had been treated unfairly. Again, this was a curious kind of policy; for MAIF, theoretically and officially, was supposed to serve only the state's worst drivers. If that were true, high rates would be acceptable, and even desirable, as a means of keeping bad drivers off the road.
Yet, MAIF's first guidelines reflected the perception that many of its customers, particularly in Baltimore City, did not deserve to bepenalized with sky-high insurance rates.
Certainly, the innovations, whether made wholly as social policy or not, suddenly made insurance more reasonable -- or affordable for the first time -- for thousands of drivers suddenly compelled to buy it. Eight thousand customers poured through MAIF's doors on its opening day in early 1973, and two years later, as rates remained the same, it had become the largest seller of automobile insurance in the state. Private insurance companies, embarrassed by the state's low rates, actually requested rate decreases at first to keep up, according to Birrane.
The rates and standards that made MAIF an inexpensive haven for drivers rejected in the private market soon began to exact a troublesome financial cost -- and this was the unexpected problem that brought MAIF's highest social goals square up against its more mundane fundamental structure.
In cutting MAIF's rates and revising its territories, Mandel's lieutenants expected that MAIF still could succeed financially, without state subsidies. They left intact the usual rule that the rates of the company had to match what it paid out in accident claims, for they simply did not believe that the rates of the assigned risk plan were necessary to cover the cost of the accident claims of its clients.
A Wrong Assumption
That assumption turned out to be decisively wrong. MAIF started to lose money almost immediately, showing an accounting shortfall of $400,000 the first year. By 1974, the accounting debt was $14.7 million, and in 1975, it was $15.2 million. MAIF's premiums were not covering the accidents caused by its drivers.
Although insurance executives quietly gloated over these results, MAIF's losses did not necessarily mean that the insurance companies were sending only bad drivers to MAIF -- or that the low rates were not justified. Insurance analysts pointed out that in any pool of drivers, the majority do not have accidents. A high rate of accident claims meant that MAIF did indeed have a higher-than-usual percentage of bad drivers, but there remained thousands of other drivers in MAIF who did not have accidents -- including many probably denied insurance unfairly by standard companies.
Issue Comes to a Head
Thus, if MAIF were to operate like a standard company in collecting enough premiums to match bills for claims, the rates for the good drivers would be unfairly increased. The original intention to help Baltimore City drivers would be completely reversed.
The issue created by the losses came to a head in 1976. And this time, the insurance reformers lost. A provision was added to the law allowing MAIF to assess insurance companies to make up cash deficits, but the new language specified that the companies had the right to pass the assessment on to their policyholders directly, through a percentage surcharge on their premiums. Also, MAIF could not use assessments to subsidize rates for its drivers -- only to make up short-term cash needs.
In other words, the company had to charge rates that matched its claim costs, regardless of whether they were affordable or fair to the majority of its drivers.
In addition, the composition of MAIF's board of directors was changed so that the insurance industry controlled half the seats. The result has been that the insurance industry has dominated the operations of MAIF ever since the current conservative, industry-oriented executive director, Arthur Forbus, took office some two years ago.
Over the last five years, MAIF gradually has abandoned its original goals, coming to look less and less like an innovative answer to the problem of insurance availability, and more like the assigned risk plan it replaced. "We think we provide better service" than the old assigned risk plan, says Forbus, "but otherwise, there's really no difference."
Meanwhile, the problems that led to the creation of the agency have worsened. Since 1976, MAIF's rates have continued to rise at a steady pace, until now, with a new increase in July, they are far higher compared to private company rates -- 2 1/2 times more -- than the assigned risk plan rates were in 1972. While Baltimore City drivers with clean records pay $620 to MAIF for the state-required minimum coverage, those selected for underwriting by a typical private firm -- State Farm -- pay $236.
The agency has continued to lose money -- resulting in three surcharges on Maryland driver's premiums -- and more recently, has begun to lose customers at a rapid pace as well. MAIF had 107,467 policies in effect in 1978; now it has less than 80,000.
These trends have been exacerbated in the last several years by the entry of several "nonstandard" private companies into the Maryland marketplace for the first time --firms like Dairyland and Colonial which specialize in insuring "high-risk" drivers. In part because of the competition from these companies, which according to state officials have been luring away much of MAIF's suburban and rural business while selling little insurance in Baltimore City, the MAIF directors also dramatically revised their rate structure in July, in effect eliminating the innovations that the agency began with eight years ago.
Baltimore City rates were raised dramatically -- from a base of $488 for a "clean" driver to $620 -- and the suburban rates were lowered. The agency also went back to the old rating territory system, defining one area as the city limits of Baltimore.
Now, as the pool of drivers in MAIF grows smaller, and good drivers from the inner-city and elsewhere are mixed with a higher proportion of bad drivers from around the state, the penalties paid by the rejected inner city drivers are growing higher, allowing fewer people to afford the required insurance.
The evidence remains that there still are good drivers in MAIF who have unfairly been rejected, particularly from inner city Baltimore. Insurance Commissioner Birrane insists that private insurance companies are continuing to practice redlining and other forms of discrimination in inner city Baltimore, and some statistics bolster his claim. More than 50 percent of MAIF's policyholders are still "clean" risks, a large percentage even considering the contention of private companies that a driver whose record shows no accidents or tickets is not necessarily a profitable risk or even accident-free.
"That's where MAIF has failed," Birrane says bluntly. "It has not prevented redlining."
Some of the people not getting insurance -- like Charles Lauer simply are parking their cars. But thousands of others, state officials say, are choosing to continue driving illegally -- and their number is growing. While the number of uninsured drivers is impossible to determine accurately, a variety of statistics -- such as the number of citations issued for driving without insurance -- indicate that the figure is increasing year by year, and state insurance department officials now estimate the total is 120,000 or more.
MAIF's current leadership acknowledge these problems, and they and private industry executives say they are worried about the rising number of uninsured motorists. But, they now say, those are problems that MAIF, in its present form, cannot and was not meant to answer. The low rates and other innovations made by MAIF's creators, Forbus now contends, "was wishful thinking."
Instead, Forbus says, the goals and failed social policy that MAIF's creators built into it have become an issue that must be addressed with new legislation. "The people who are with us tend to be in the lowest socio-economic classes," he says. "And yet they pay the highest rates."
"When you get into the problem of affordability, it's not in the law. There's nothing that says we can consider affordability," he says. Since MAIF is required to set its rates according to the amount of accident claims it receives, and since the agency's claim rate is growing worse as nonstandard companies are picking up the best of the high-risk drivers, MAIF's rates will just go up and up, Forbus said. "Some day soon, the legislature is going to have to deal with it."