The Long Road To Personal Automobile
Insurance Reform In New Jersey
March 2006
Bernie Flynn
Senior Vice President & General Counsel
1
NJM Insurance Group
New Jersey Automobile Insurance
History – 1970s
• No-Fault System adopted in 1972
• Residual Market/Assigned Risk
mechanism grew to cover 1.2 million
drivers (one out of every four)
• Tight regulatory control over rate
setting
• Companies began to exit the market,
including GEICO and Nationwide
2
New Jersey Automobile Insurance
History – 1980s
• Overburdened Assigned Risk Plan replaced
by a Joint Underwriting Association (the
“JUA”) in 1982
• 15 servicing carriers with no risk of loss
managed the policies of the JUA
• JUA drivers were charged voluntary market
level rates and it was lucrative for agents to
dump risks there
• By 1988, about 50% of NJ’s drivers (over 2
million) were insured through the JUA and
the financial deficit approximated $3.3 billion
3
The Fair Automobile Insurance
Reform Act of 1990 (FAIR Act)
• Jim Florio elected Governor on the
promise of:
• Getting rid of the JUA
• Eliminating the $222 per car Residual
Market Equalization Charge (RMECs)
imposed on all NJ drivers to subsidize the
JUA
• Generally reforming the auto insurance
system
4
The 1990 FAIR Act
• $3.3 billion deficit paid by:
• Surcharges and assessments imposed on insurers,
hundred of millions which could not be passed through to
policyholders
• Increased Motor Vehicle Fees
• Assessments on doctors, lawyers and body shops
• Aggressive depopulation of JUA mandated - 40,000
drivers absorbed into the voluntary market each
month for four years.
• JUA became the Market Transition Facility (MTF) for
two years (and ran up an additional $1 billion in
debt) until new Assigned Risk Plan implemented
(PAIP)
• Take-All-Comers requirement instituted
• Insurer Lock-In-Law very restrictive
5
1997 Automobile Insurance Reform
• Governor Whitman eliminated the flex rating system
instituted by the FAIR Act (which served to keep
carriers afloat during the depopulation of the
JUA/MTF)
• Flex rating was replaced by an expedited rating mechanism
for increases up to 3% on average – to be implemented by
the Department of Insurance regulation
• Urban Enterprise Zone program mandated – shifted
drivers from carriers top heavy with urban risks to
carriers which did not have urban market shares
equivalent to or higher than their suburban market
shares
• Surcharge programs eliminated, tier rating programs
authorized
• Nonrenewals restricted
6
1998 Automobile Insurance Reforms – Automobile
Insurance Cost Reduction Act (AICRA)
• AICRA became law on May 19, 1998:
• Required a mandatory 15% average rate
reduction for full coverage policies
• Authorized the creation of the Office of the
Insurance Fraud Prosecutor
• Set forth a new Verbal Threshold intended to
eliminate lawsuits for non-serious, non-permanent
injuries
• Provided for new PIP system permitting utilization
review and establishing medical protocols for
treatment of common auto injuries
• Directed that rating territories be redrawn and the
35% cap imposed on certain urban territories be
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lifted
Auto Rate Regulation In New Jersey =
Strangulation
• July 1, 1997 Governor Whitman issued
a press release after repealing the flex
rate law declaring a “Rate Freeze”
• From 07/01/97 until 11/06/01
• Expedited rate making process not adopted by
Department
• 65 prior approval rate filings made
• 6 average rate decreases approved
• 4 average rate increases approved
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Shock Waves
• April 6, 2001 – Commissioner declared State Farm’s
NJ subsidiary to be in hazardous financial condition
• Largest personal auto writer in NJ with 17% of the market
(850,000 insured vehicles) relieved of:
• Take-All-Comers obligation
• PAIP assignments
• UEZ requirements
• June 12, 2001 – State Farm filed to withdraw from
the NJ auto market
• June 15, 2001 – AIG’s subsidiary (200,000 insured
vehicles) followed suit and filed to withdraw
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The Seeds of Change
• November 6, 2001 – Jim McGreevey
elected Governor
• Don Bryan – Acting Commissioner
• Following election:
• Necessary prior approval rate increase
requests approved
• Expedited rate regulations finally adopted (up
to 3% on average)
• Holly Bakke appointed Commissioner
in early 2002
10
Momentum For Regulatory Reform
• Commitment by Governmental Leaders
to improve market
• Effective Lobbying and Grass Roots
Campaign by Industry
• Typical political concerns about the price
of auto insurance overwhelmed by the
inability of many NJ drivers to find
coverage
• Availability crisis dominated the debate
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Automobile Insurance Competition and
Choice Act of 2003 (May)
• Rate Reform
• Expedited Rate Process expanded from 3% to
7%
• Relaxation of some Prior Approval requirements
• Excess Profits made less onerous, but not
eliminated
• Three-year look back period moved to seven
years
• Withdrawal (Lock-In-Law) restrictions
loosened
• Take-All-Comers to be eliminated over a
five-year transition period.
12
Market Developments
• Expedited Rate Process working as
designed
• Mercury General enters market – August
2003
• Credit Scoring permitted for Mercury General
immediately – opened to industry use in 2004
• GEICO enters market – August 2004
• State Farm begins writing new business –
January 2005
• AIG begins writing new business –
2004/2005
• Progressive enters market – October 200513
Competition
Prevails
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Remaining Issues
• No-Fault Cost Drivers
• Tight Michigan-like Verbal Threshold weakened
by June 2005 NJ Supreme Court decision
• Since 2001 there has been no Physician PIP Fee
Schedule and NJ has never had a Hospital Fee
Schedule
• PIP Medical Costs are out of control
• The Department continues to impose urban
territorial rate caps
• AICRA of 1998 authorized reform of rating
territories – still not implemented
15
February 27, 2006
The Newark Star Ledger
"GEICO's two rates:
White-collar and blue-collar"
Legislator vows to ban practice of using
education and occupation to underwrite
and price risks
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