State auto insurer chided for bonuses

The representatives of the agency, the Maryland Automobile Insurance Fund, said the decision, among many other revisions to the agency's financial goals, was in response to difficult economic conditions for the business and the customers they serve.

Despite the agency's loss of $19.6 million in 2008, state auditors have found that MAIF doled out $1.4 million in bonuses after its trustees downgraded program policies in the middle of the year. Had the agency's incentive program remained consistent, those bonuses would have amounted only to $250,000, auditors said.

M. Kent Krabbe, MAIF's executive director, said when the trustees were confronted with a bookkeeping gap between revenue and expenses, they decided to readjust their goals instead of taking other detrimental alternatives.

"To raise that revenue drastically, we would have had to dramatically raise premiums on our customers or lay people off," he said. "And we elected to do neither."

In the Department of Legislative Services' report released earlier this month, auditors questioned the prudence of these hefty bonuses, especially at a time in which the state as a whole is suffering from "financial stress." But auditors added that though they did not find these policy choices favorable, the agency's trustees were perfectly within their right to authorize the changes.

"It just raises some questions as to the propriety of that process," said Tom Barnickel, deputy legislative auditor of the department. "They gave bonuses out that year even though they lost money."

The General Assembly created MAIF almost 40 years ago after legislators required the state to provide an auto insurance resource for motorists rejected by private insurance companies.

MAIF's headquarters is located on Forest Drive in Annapolis.

The independent state agency is funded through its own insurance premiums' revenue and doesn't receive any state money. Despite its financial independence, the agency answers to the General Assembly, and seven of its 12 trustees are governor-appointed.

Though the agency's decisions have fallen under scrutiny since the release of the audit, Krabbe said the issue is essentially a moot point.

Because of a state Budget Reconciliation and Financing Act provision taking effect in 2010, MAIF, as well as most state agencies, will no longer be allowed to issue bonuses based on individual performance, regardless of the fact that MAIF doesn't receive taxpayer money.

More uninsured?

But what the issue does expose is the agency's suffering bottom line and what that means for Marylanders driving alongside uninsured motorists.

MAIF officials estimate that it provides coverage for about half the number of motorists today than four years ago: In 2005, the agency covered about 120,000 motorists, but that customer base has dropped to about 65,000 to date.

"You wonder how many of those 65,000 are out there driving without insurance right now," Krabbe said. "I mean, no one knows for sure, but it's got to be a significant number."

And locally, the picture is similarly in decline. The agency had 901 active policies for Anne Arundel County residents in 2005 but now counts just 726 policies.

The impact of the recession on consumers has caused many financially struggling motorists to drop their auto insurance altogether, taking on the immense safety and legal risks of driving without coverage.

One in six drivers nationwide could be on the road without insurance next year, according to a new study conducted by the Insurance Research Council. Researchers predict that the percentage of uninsured motorists will increase from 13.8 percent in 2007 to 16.1 percent in 2010.

The report found a strong correlation between the number of uninsured motorists and the population of unemployed workers. For every 1 percent that the unemployment rate rises, the uninsured motorist rate also increases more than three-quarters of a percentage point.

The council's officials said the rise in uninsured drivers points to "an unfortunate consequence of the economic downturn."

Historically, MAIF's business always has swelled when the economy has contracted. During recessions, private auto insurers tend to take fewer risks in the stock market and the customers they will cover. The customers turned down by the private auto industry usually then turn to MAIF, Krabbe said.

But MAIF's business keeps dropping. Krabbe said agency executives believe it is, in large part, an outcome of much harsher financial conditions for consumers compared with prior recessions.

"You can (physically) drive a car without insurance, but you can't drive a car without gasoline," Krabbe said. "If you're really pressed, you may choose to pay the electric bill and fill up the gas tank but not get the car insurance."