Deregulation in 2003 was the key
TRENTON - New Jersey has fixed its auto insurance problem.
Five years after the state deregulated the industry, the results are in, and by almost every measure the reform has been a resounding success.
Premiums are down. Competition is up. The number of insured is up. Complaints to the state are down by more than half.
“I’m happy,” said John Porreca, 22, a Cherry Hill resident who switched companies and saw his insurance bill drop $1,000.
For decades, auto insurance was the Mideast of New Jersey politics - an intractable mess. Fraud was too pervasive, the experts agreed. There were too many motorists banging into each other on too-crowded roads. The doctors or the lawyers or the insurers, take your pick, were too powerful.
All of those verities have been swept aside since the Legislature finally got it right in 2003, in the third major shot at reforming auto insurance since 1990.
The reforms greatly relaxed state oversight of the industry, giving insurers more leeway on rates, coverage and profits.
“They’ve worked in spades,” said insurance expert John D. Worrall, a Rutgers University economics professor who was a key player in recommending fixes. “It’s nice to see the reforms take effect because the system had been byzantine.”
Rescue came just in time. By 2002, AIG, one of the state’s top 10 insurers, had announced plans to leave New Jersey. State Farm Indemnity was planning to exit, too, and in the meantime, it was dumping 4,000 customers a month. In all, more than 25 firms had quit the Garden State since the early 1990s.
Premiums were the highest in the nation - and rising.
Assemblyman Louis Greenwald, the Cherry Hill Democrat who sponsored the 2003 reform legislation in his chamber, said New Jersey had become toxic for insurers.
The state, he said last week, had “created 30 years of bureaucracy that just paralyzed the industry. We tore the entire system down and rebuilt it from the ground up.”
Importantly, the law mandated that state insurance regulators speed up their decisions on rate hikes. It said that for some requests, the insurance department had to rule in just 30 days, three times faster than the old and often-ignored deadline.
The new law also gave the department less control over profits. Previously, the state required firms to rebate “excess profit” after evaluating their income over a three-year period. In a form of “income averaging,” the new law looks at profits over seven years.
“Before, companies could be forced to return ‘excess profit’ during a time when they were actually losing money, simply because they had recently made good profits for a short period of time,” said Marshall McKnight, spokesman for the state Insurance Department.
And paradoxically, the new law lured more companies to New Jersey by giving them more freedom to quit.
The old system made it difficult for firms to stop doing business in the state. As a result, though, companies were reluctant to start selling in New Jersey for fear they wouldn’t be able to reverse their decision if business didn’t thrive.
The new law, McKnight said, “prevented a barrier to exit from being a barrier to entry.”
Greenwald acknowledged that his measure struck some as pro-business.
“I had many people come up to me and say, ‘I thought a Republican did this,’ ” he said.
Politics aside, things began improving almost immediately.
In July 2003, just a month after former Gov. James McGreevey signed the law, AIG said it wouldn’t depart the state after all. State Farm also reversed course.
“It would have been a catastrophe if AIG and State Farm had left because you would have people scrambling to find coverage from companies not interested in having their business,” said Worrall, the Rutgers professor. “It was a major coup to turn that around.”
In August 2003, Mercury General, a major insurance company from California, began selling insurance in the Garden State. It was the first new insurer to do business in the state in seven years.
At last count, nine new firms had followed Mercury’s path into New Jersey, including such big national outfits as Gecko and Progressive. Mercury, for its part, now covers a little more than 100,000 New Jersey cars.
In all, there are 225,000 more insured cars on the road today than five years ago.
After years of increases, premiums began falling in 2004. Since the law was passed, they have fallen about 4 percent. The average premium was $1,107 last year, up $8 from the year before, but down $45 from 2003.
National comparative data is available only through 2005. Those figures show New Jersey premiums falling even as insurance charges have climbed in Pennsylvania and the nation.
Even so, New Jersey, at least in 2005, had the second-highest insurance rates in the United States, trailing only Washington, D.C.
Despite the relaxed controls on profits, firms have not been making a killing in the state. According to figures from the National Association of Insurance Commissioners, profits from New Jersey auto insurance have actually fallen since 2003.
In one controversy that has flared since deregulation, consumer activists last year complained that Geico was factoring in motorists’ education and occupation to determine risks and rates. That meant less-educated, blue-collar workers could pay more.
Eve Weissman, an expert on insurance with New Jersey Citizen Action, a consumer watchdog group, said her group’s analysis found motorists’ schooling or jobs had no bearing on their risk as drivers. She said the policy had the effect of discriminating against people of color.
Geico is not the only insurer to use those factors, among others, to fix rates.
The company didn’t respond to a request for comment Friday. In the past, the firm has said those criteria were only two among many and didn’t amount to discrimination. New Jersey’s insurance commissioner, Steven M. Goldman, has sided with Geico.
Weissman did have some mild praise for the changes in the state since 2003.
“I would certainly not disagree that some consumers of auto insurance in New Jersey have seen their rates drop,” she said.
One such driver is Jack Warr, 63, who drives to his job at the Cherry Hill Mall from his home in Manahawkin. He said AIG had cut his bill by “a decent buck” since the new law passed, reducing the charge to cover the Hyundais that he and his wife drive.
Warr said he liked the idea of deregulation. Then he mused: “If they could do something like that with the property tax . . . .”
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