They're calling it competition, and considering what Massachusetts has in place now, I guess it is. Just don't confuse the state's plan to jigger with car insurance rates anything approaching free-market reforms. The heavy hand of the government will still be felt.

Massachusetts arguably has one of the most closed, regulated markets in the country. It's the only state where the government decides how much your premiums will be. It's so bad that it's the one state where GEICO, the giant Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) insurance company, won't even consider writing policies. Allstate (NYSE:ALL) and Progressive (NYSE:PGR) also refuse to write coverage there.

It's been 30 years since Massachusetts had a market-based insurance system, but it was quickly abandoned when urban drivers saw their rates climb, reflecting the greater risk of insuring such vehicles. Now everyone pays higher insurance premiums. Massachusetts is the fourth-most-expensive state in the nation to insure a car, based on 2004 rates which are the most recent available from the National Association of Insurance Commissioners. New Jersey, which only introduced some market-based reforms in 2003, tops the list.

When the new data comes out, Massachusetts will probably drop in rank. Not because it's actually cheaper to insure cars there -- even consumer activist organizations recognize that the state has the highest accident rate in the country, some 40% higher than No. 2, Rhode Island -- but rather because the state insurance commissioner has mandated that it be so. For the past three years, the state has required decreases in premiums -- 1.7% in 2005, 8.7% in 2006, and 11.7% in 2007.

Despite the omnipresence of the government in the marketplace, some companies have managed to survive, and quite profitably. Commerce Group (NYSE:CGI) and Motley Fool Stock Advisor recommendation Safety Insurance Group (NASDAQ:SAFT) have eked out livings by holding costs steady, or in Safety's case, even decreasing them.

That's not to say there haven't been pressures. Even as the largest insurer in the state, Commerce saw second-quarter earnings dip as its loss ratio rose, which in turn boosted its combined ratio to 97.6%, a substantial increase over last year's 87.7% combined ratio. It was a similar story at Safety Insurance, though its combined ratio is much lower, at 88.2%, than its in-state rival.

Part of that reflects Safety Insurance's policy of "rate pursuit," closely monitoring the classification of drivers and vehicles. By assigning the proper amount of risk to each insured driver, it's only endured one time in the past 15 years in which its premiums declined more than the mandated amount.

The Massachusetts proposal is a step in the right direction, since it would allow insurers greater freedom in setting rates. While a whole host of "don'ts" would be imposed on them if the measure is approved -- don't consider gender, don't consider marital status, don't consider home ownership -- it will provide at least of modicum of common sense in the rate-setting arena.

When the politicans determining insurance premiums have to consider whether the decision will affect the votes they'll receive at the polls -- the insurance commissioner in Massachusetts is an elective position -- you can't expect them to be dispassionate. The steep rate cuts mandated during last year's election show that separating politics from insurance rates will at least be a partial cure to what ails Massachusetts.

Berkshire Hathaway and Safety Insurance are recommendations of Motley Fool Stock Advisor. Insure yourself against market underperformance; a 30-day free trial to the newsletter service that's trouncing the market by 38 percentage points is yours for the asking.

Fool contributor Rich Duprey owns shares of Safety Insurance but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. Berkshire Hathaway was also recommended in the Inside Value newsletter. The Motley Fool has a disclosure policy.