Fiducitation: Auto Insurance Rate Regulation – A Case Study

Author: Fiducite Staff Capital Markets Team

Date: October 11, 2001            © Copyright 2001 by Fiducite.com, Inc.

Date: January 30, 2002   ©, Inc.  

Fiducitation: A synthesis of Internet resources, including:

 

Instructions:   Each citation has four parts: Fiducite Annotation, Clip, Source, and Cached File. The Annotation explains the significance of the citation; the Clip is a text or graphic excerpt to help you decide whether to view the complete document, which can be viewed by clicking on the Source URL or the embedded Cached File. All information is attributed to its source.

 

Synopsis

 

Over the past two decades, academics, regulators, think tank policy analysts, and insurance companies have tried to determine whether reliance on competition is favorable to the prior approval rate regulation.  While there may be no definitive answer due to the complex nature of insurance, the information and analysis strongly suggest that deregulation would benefit most consumers.  Conversely there is virtually no evidence supporting prior approval rate regulation is beneficial on any measure. Take the case of the state of New Jersey, which has been one of the most ardent adopters of prior approval rate regulation.

 

In all but one year since 1989, New Jersey has had the highest average private passenger automobile insurance premium in the country.  In 1998, the drivers of New Jersey were spending 62% more than drivers in the rest of the country, with an average of $1,138 for private passenger automobile insurance.  From 1976 to 1997, only eight new insurers have entered New Jersey, one of which has already folded.  In that same time 23 insurers have exited, and over 40 percent have applied to withdraw from the New Jersey market.  In 1988, the Garden State’s residual market, administered by the Joint Underwriting Association, accounted for 50% of auto insurance premiums in the state and accumulated a deficit of more than $3 billion.  Since the FAIR Act in 1990, New Jersey switched to a state run Market Transfer Facility, which has accumulated an additional $1 billion of debt, and has forced insurers to “take-all-comers”, thereby reducing the residual market to 4.9% in 1998.

 

In 2000, New Jersey had a population of 8,414,350 with 1,134 people and approximately 7000 registered motor vehicles per square mile, making it the most densely populated state in the United States. The Garden State’s cities consistently rank at or near the top of most auto theft tables and have been notorious for its fraud rings. Although these adverse conditions make it more difficult for insurers to write fair premiums while staying solvent, the state government’s heavy regulations have only made it harder.

 

Over the last 20 years New Jersey has passed six major auto insurance acts, many of which were band-aids to previous legislation that went awry.  Each of the six acts, including the Automobile Insurance Cost Reduction Act signed in 1998 by Governor Whitman, which brought temporary price relief, have all given more control to the state, moving it further away from the versatility and predictability of a free market. Both insurers and consumers have expressed extreme dissatisfaction, but the state consistently responds by retreating further into a strict prior approval rating system. 

 

While the prior approval system may have been a necessity in the past, New Jersey’s strict prior approval system is not working in the current environment. To resolve the auto insurance crisis in New Jersey, the governor and legislators need to end governmental control, and enact market driven policies. Although the New Jersey auto insurance market has been beleaguered by regulations for years, there is hope that it can mimic the reform instituted in South Carolina in 1998, or in Illinois in 1978.

 

Table of Contents

 

Synopsis. 1

Table of Contents. 2

Auto Insurance Regulation Overview.. 2

New Jersey Auto Insurance Studies and Statistics. 3

New Jersey Regulators and Legislation. 5

New Jersey Auto Insurance News. 6

The Argument for Deregulation. 7

The Argument for Regulation. 9

 

Auto Insurance Regulation Overview

 

Overview of Rate Regulation and Recent Developments

Annotation: This document is an excellent overview of the insurance market in the United States. It provides a concise but thorough history as well as a table at the bottom of the page that details each state’s current insurance rating system.

Clip: In 1914, the U.S. Supreme Court (German Alliance Ins. Co. vs. Lewis, 233 U.S.389) articulated the rationale for closely regulating the business of insurance. In the Court's opinion, insurance was a business "affected with a public interest," first because insurance is often a legal or contractual prerequisite for other market activity, and second because the complexity of the insurance contract places the average consumer at a comparative disadvantage in the marketplace. This ruling served as the justification and impetus for increased state regulation.

Link: http://www.iii.org/media/hottopics/insurance/ratereg/                                  Cached File:

 

 

NAII: Talking Points of Regulatory Modernization

Annotation: This page of the National Association of Independent Insurers web site discusses several leading issues involved with the modernization of insurance regulation.

Clip:

·         Consumers, regulators, and insurers are best served by a marketplace in which competition is the primary regulator of insurance rates.

·         Competition has been endorsed, tried, tested and proven successful.

·         Public policy makers have nothing to fear and much to gain by moving from prior approval to a competition-based rate regulatory system.

 

Click on icon below to go to cached file. Or to go to the live link of this page, press on link below, and then click at bottom of page on “Personal Lines Rate Regulation”, then click on “Talking Points”. 

Link: Live Link- Must click on Rate Regulation and then Talking Points                 Cached File:

 

 

New Jersey Auto Insurance Studies and Statistics

 

Private Passenger Auto Insurance In New Jersey: A Three Decade Advert For Reform (April 2001)

Annotation: This 77 page report written by John D. Worrall from Brookings Institute, is a must read to understand how the New Jersey auto insurance market became so tangled in legislation.


Clip:                        TABLE 6

TIME TABLE FOR SELECTED LAW CHANGES

NJ PRIVATE PASSENGER AUTO INSURANCE

 

1972 New Jersey Automobile Reparation Reform Act

·          Introduced Elective No-Fault

·          Unlimited PIP Medical Benefits

·          $200 Monetary Threshold

 

1983 NJ Automobile Full Insurance Underwriting Assoc.

·          The Joint Underwriting Association

·          Caps on rates

 

1988 Insurance Reform Act

·          Flex Rating

·          Excess Profit Law

·          Introduce Verbal Threshold

·          PIP Co-Pays

·          Mandatory Comprehensive Deductible

·          Allowed 2% non-renewals of policies, and one non-renewal for every two new policies

·          No Filing “in concert” (No Full Bureau Rates)

 

1990 The Fair Auto Insurance Reform Act of 1990 (FAIR Act)

·          Market Transition Facility (ended the Joint Underwriting Association)

·          Re-introduced The Assigned Risk Plan

·          Introduced “Take-all-comers” Rule

·          Eliminated Unlimited PIP Medical Benefit (set $250,000 mandatory benefit)

·          Required License Surrender (all lines) For Market Exit

·          Pre-insurance Physical Damage Inspection

 

1997 Public Law 1997, Chapter 151

·          Tier Rating

·          Urban Enterprise Zones (UEZ’s)

·          Introduced Expedited Filings (repealed Flex Rates)

 

1998 Automobile Insurance Cost Reduction Act

·          Strengthen Verbal Threshold

·          Fraud Prosecutor

·          Revamp Rating Territories

·          Introduce Basic Policy

·          Named Driver Exclusion

·          PIP Choice (eliminated mandatory $250,000 PIP medical)

·          PIP Arbitration System

·          Medical Cost Controls

·          Insurance Ombudsman (investigate complaints)

TABLE 10

EXIT AND ENTRY (1976-1997)

NJ PRIVATE PASSENGER BUSINESS

 

EXIT

   1976   GEICO

   1976   UNIGARD

   1977   SAFECO

   1978   Warchester Mutual

   1978   Peerless

   1979   National Grange

   1981   Nationwide

   1981   Security of Hartford

   1983   Progressive

   1990   Crum & Forster

   1990   John Hancock

   1991   Horace Mann

   1992   Commercial Union

   1992   Interboro Mutual

   1992   Reliance

   1992   Wausau

   1993   American Reliance Indemnity

   1993   CUNA Mutual

   1993   St. Paul

   1994   Atlantic Employers (CIGNA)

   1994   Property & Casualty Co. Of MCA

   1994   Home Insurance Companies

   1994   Motors Insurance Company

 

ENTRY

   1989   Home State Insurance (Insolvent)

   1990   N.J.CURE

   1992   Palisades Insurance Company

   1993   National Consumer Insurance Company

   1994   Proformance

   1996   Lanser Inurance Company

   1996   Metropolitan Property & Casualty Ins. Co.

   1997   American International Ins. Co. of NJ (AIIG

Link: http://camden-www.rutgers.edu/dept-pages/Link         Cached File:

 

New Jersey Regulatory Reform: Rhetoric Vs. Reality

Annotation: More than half way down this article from the publication “Regulation: The Cato Review of Business & Government”, Dave Joel reviews the current New Jersey administration’s changes as well as the past legislation that has brought New Jersey’s auto insurance industry to the boiling point today.

Clip: New Jersey's auto insurance debacle provides an example of what happens when government's heavy hand intervenes in the marketplace. Efforts throughout the years to solve the problem have been shortsighted quick fixes that have only made a bad situation worse.

Link: http://www.cato.org/pubs/regulation/reg19n2d.html                                           Cached File:

 

Listen Up, New Jersey  (October 2001)

Annotation: This is a recent article by Forbes magazine that compares New Jersey’s and South Carolina’s current auto insurance statistics and regulations. It reviews the transformation of SC’s auto insurance market and explains how it could be a model for change in New Jersey.

Clip:

By the Numbers

Two years ago South Carolina deregulated its auto insurance market and average rates fell. New Jersey retains its heavy-handed regulation, and its drivers are paying the price.

$575 Average premium in South Carolina

$1,030 Average premium in New Jersey

90% of rate hikes approved in South Carolina

10% of rate hikes approved in New Jersey

153 Number of auto insurers in South Carolina

121 Number of auto insurers in New Jersey

Link: http://www.forbes.com/forbes/2001/1001/080_print.html                                  Cached File:

 

Top 10 Largest Auto Insurance Carriers in New Jersey

This 378-page market share report on insurance is separated by type and state. Go to page 226 for NJ.

Link: http://www.naic.org/1research/Research_Division/ConfCalls/2000pcms.pdf           Cached File: NA

 

New Jersey Regulators and Legislation

 

N.J. Department of Banking and Insurance

Annotation: This department is responsible for regulating auto insurance in New Jersey. This web site provides numerous documents to both consumers and insurers, such as buyer’s guides for consumers and forms, rules, and bulletins for insurers.

Link: http://www.naic.org/nj/insmnu.htm                                                                 Cached File:

 

New Jersey State Legislature

Annotation: This site allows you to search the bills and laws in the current and past sessions by keyword or subject. In 1998 – 1999 there were over 90 bills passed regarding auto insurance, the biggest of which was the Automobile Insurance Cost Reduction Act, passed in March of 1998 during Governor Whitman’s second term. See following citation for actual bill.

Link: http://www.njleg.state.nj.us/                                                                          Cached File:

 

The Automobile Insurance Cost Reduction Act

Annotation: This is the act (58 pages) that was passed in March of 1998, which supposedly modernizes New Jersey’s auto insurance regulation. As you will see in the clip, part of the act is to fix previous legislation, such as the no-fault option implemented in 1972. It is a long and complicated document that illustrates the enormous tangle of rules and laws regarding auto insurance in New Jersey.

Clip: This bill makes a number of substantial changes to the private passenger automobile insurance system. The bill modernizes the definition section of the no-fault law, modifying the 26-year old descriptions.

 

Link: http://www.njleg.state.nj.us/9899/Bills/s0500/1_i1.pdf                                   Cached File:

 

The Facts about New Jersey's Auto Insurance Reform

Annotation: The Insurance Council of New Jersey (ICNJ) wrote this overview of the reform act. ICNJ, formerly known as the New Jersey Insurance News Service (NJINS), was established in 1977 by prominent insurance company executives as a nonprofit association whose mission was to serve as an information agency for New Jersey consumers.

Clip: The Automobile Insurance Cost Reduction Act of 1998 (AICRA) is the latest legislation to address problems associated with the high cost of automobile insurance in the Garden State. A number of dramatic changes will occur to the state's auto insurance system as a result of this new law that all drivers should know and understand.

Link: http://www.icnj.org/understanding.html                                                          Cached File:

 

 

New Jersey Auto Insurance News

 

N.J. Gov. Signs Auto Reform (June 1998)

Annotation: The article presents several opposing viewpoints regarding the AICRA, including cautious optimism and clear disappointment.

Link:  http://www.nunews.com/archives/lh_archive/Link                                            Cached File:

 

Articles by Insure.com regarding New Jersey Auto Insurance (Aug to Sep 2001)

Annotations: The news flowing out of New Jersey regarding auto insurance in the last few months goes to show that the AICRA in 1998 has not improved the situation in New Jersey. State regulators have artificially reduced prices and have consistently denied applications for rate increases by insurers; as a result even the largest insurers (State Farm Indemnity Co.) are fleeing the state.

Clip:

·         Three more auto insurers ask to raise premium rates in New Jersey
Three more auto insurers have filed for rate increases, bringing the total to nine seeking state approval to charge motorists higher premiums, which represents about a third of the auto insurance marketplace. Cumberland Insurance gives up before it starts in New Jersey
It's not hard to leave the party at the front door when there's a big cover charge.

·         American International appeals New Jersey rate ruling to state Supreme Court
Will this mean the exit of American International from the state?

·         Insurers demand more regulations for auto insurance medical costs
Insurers are suing over the lack of laws about medical fees.

·         State Farm seeks to leave New Jersey in 2003, leaving 800,000 shopping for coverage
What happens when a state's largest auto insurer leaves in the course of six months? NJ may find out.

Link: http://www.insure.com/states/nj/index.html                                                   Cached File:

 

Race for New Jersey Governor Turns to Car-Insurance Reform (October 2001)

Annotation: With the gubernatorial race heating up in New Jersey, and the auto insurance situation in dire straits, candidates Democrat Jim McGreevey and Republican Bret Schundler are both positioning themselves for reform. Although this article is brief, it is clear that Democrat Jim McGreevey is favoring tighter regulations and Republican Bret Schundler is advocating deregulation. Look at the next two citations for more detail on their positions.

Link: http://www.nytimes.com/2001/10/09/nyregion/Link                                             Cached File:

 

James McGreevey checks in with Professional Insurance Agents of New Jersey (PIANJ)

Annotation: This interview with NJ's democratic gubernatorial candidate Jim McGreevey gives more detail regarding his plans for auto insurance reform. Although McGreevey is adamant for change, his plan of action maintains state control of prices, and focuses more on cracking down on fraud, uninsured drivers, and quicker rate trials.

Clip: Jim McGreevey states, “The problem is not prior approval, which assures consumers and the public that rates are justified before consumers pay them. The problem is the state's failure to implement prior approval in a fair and timely way.”

Link: http://www.piaonline.org/NJ/mcgreevy.html                                                   Cached File:

 

Bret Schundler checks in with Professional Insurance Agents of New Jersey (PIANJ)

Annotation: This interview with NJ's republican gubernatorial candidate Bret Schundler gives more detail regarding his plan of deregulation. 

Clip: Bret Schundler states, “I would stop the practice of mandating rate reductions by legislative fiat and inject market-oriented forces into New Jersey's auto insurance market.

Link: http://www.piaonline.org/NJ/schundler.html                                                   Cached File:

 

The Argument for Deregulation

 

Modernizing Insurance Rate Regulation: Tacking to the Winds of Change (April 2000)

Annotation: This is a high level discussion of rate regulation by National Association of Insurance Commissioners (NAIC), which uses 6 states as case studies, including New Jersey (page 32), to determine that prior approval rate regulation has no measurable benefit and competition based rate regulation does.

Clip: Scott Harrington of the University of South Carolina, one of the most prominent and prolific of current insurance researchers, has succinctly described the results of two decades of research on the question of the comparative benefits of competition and rate regulation.

"Academic economists have given little or no support for price regulation in competitively structured markets. Property-liability insurance markets are no exception. Perhaps unfortunately, quantitative estimates of the total efficiency gain from insurance rate and form deregulation are not available. Even if they were, however, such estimates would be subject to considerable error, given the complexity of insurance rate regulation and its effects on prices, contract terms, and behavior. The information and analysis that are available strongly suggest that deregulation would benefit most consumers."

Link: http://www.naic.org/URL                                                                                 Cached File:

 

House of Representatives' Financial Services Committee Hearing (August 2001)

Title: Over-Regulation of Automobile Insurance: A Lack of Consumer Choice

Annotation: This article in a summary of the hearings held on Aug. 1, 2001. All but one testimony from the witness list agreed that competitive based rate making policy is preferable to state-based rate regulation. To read the actual testimonies please click on the links under Witness List below.

Clip: Insurance companies are basically happy with the state-by-state system of regulating auto insurance. But apparently the "regulatory" in "regulatory system" has got to go.  That was the message sent from insurance companies and trade groups to the federal House of Representatives' Financial Services Committee at an Aug. 1, 2001, hearing on automobile insurance regulation.

Witness List

 

Article Link: http://www.insure.com/auto/federalhearing801.html                       Cached File:

 

National Underwriter – Property & Casualty Magazine (June 2001)

Annotation: These two articles from National Underwriter Magazine cite several examples of successful Competition-Based Rate Regulatory policies including South Carolina, Illinois, and Washington D.C.

Clip:

·         South Carolina adopted similar reforms in 1999 and, not surprisingly, is achieving similar results. Of more significance in this debate, auto insurance is no longer a contentious issue among voters, according to a recent poll in the state, which is good news for legislators worried about re-election.

·         In Washington, D.C., the move to a more competition-based rating system resulted in hundreds more companies writing business in the district, a 5-6 percent drop in the average auto insurance premium, and a virtual depopulation of the assigned risk plan.

·         Robert Gowdy, president of Boston-based OneBeacon Insurance Group, cited the state of Illinois as an example of the benefits of competitive rating. Illinois, he said, has had a competitive rating system since 1978. Because of population and traffic density, the presence of a large metropolis, and other factors affecting losses, Illinois would normally be expected to rank among the top 10 states for auto insurance costs, Mr. Gowdy said. However, he said, Illinois perennially ranks in the middle, between 24th and 26th, among states for auto insurance prices, and competition has been a key factor.

Link: State Regulatory Delays Decried                                                                 Cached File:

Link: Why Competition is Worth The Political Risk                                              Cached File:

 

Regulation and the Automobile Insurance Crisis

Annotation: This article from the publication “Regulation: The Cato Review of Business & Government” is a thorough discussion of rate regulation within the auto insurance market and provides unique solutions in support of deregulation.

Clip: Insurance is one of the most heavily regulated industries in the economy. Although regulation has existed for many years, considerable confusion exists about the purposes of regulation and its potential for solving problems in insurance markets. The major conclusion to be drawn is that regulation has probably done more harm than good in maintaining availability, affordability, and solvency in the auto insurance market. By providing temporary price relief, the regulatory system diverts the attention of public policymakers from finding realistic, effective measures to solve the insurance crisis.

Link: http://www.cato.org/pubs/regulation/reg15n2c.html                                   Cached File:

 

The Argument for Regulation

 

Insurers’ Marketplace Abuses Are The Biggest Problem Insurance Consumers Face

Annotation: Robert Hunter, who has nearly 40 years of experience within the insurance industry and represents the Consumer Federation of America on a Pro-Bono basis, has chosen to take the historically common stance of consumers, which is that insurers are to blame. This is his testimony before the House of Representatives' Financial Services Committee at an Aug. 1, 2001, hearing on automobile insurance regulation.

Clip: The title of this hearing assumes a problem and then searches for facts to justify the assumption. But the assumption – that “over regulation” of auto insurance is a major consumer problem in America – is simply wrong. The insurance companies have tried to turn a few anecdotes about long review times for policy forms or rates by a couple of states into a major attack on state regulation. Many of their examples of delay are caused by the insurers themselves where the state asks reasonable questions about a filing and the insurer takes months to respond. Or because state regulators do not want to simply disapprove a bad filing without giving the insurer making the filing an opportunity to fix the harmful provisions in the filing.

Link: http://www.house.gov/financialservices/080101jh.pdf                                   Cached File:

 

Counter Argument: Supporting Regulation of Automobile Insurance – California Case Study

Annotation: This is one of the rare reports on the web that supports regulation of auto insurance rates. California, which was one of the first states to deregulate their insurance market, has now become a model of regulation since it implemented Proposition 103 in 1988.

Clip: The study of the effects of regulation is frequently contentious, so we note immediately that our conclusions differ substantially from the other papers in this volume. These studies systematically conclude that regulation has created serious damage and/or that deregulation has been highly successful. In contrast, we conclude that although auto insurance has been highly regulated in California since 1988, the effects of this regulation have been benign, our study finding none of the traditional negative effects of regulation.

Link: http://www.naic.org/1committee/Improve_State_Based_wg/jrfull.pdf         Cached File: