1 the long road to personal automobile insurance reform in new jersey march 2006 bernie flynn senior...
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The Long Road To Personal Automobile Insurance Reform In New Jersey
March 2006
Bernie FlynnSenior Vice President & General Counsel
NJM Insurance Group
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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
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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
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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
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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
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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
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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 lifted
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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
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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.
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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 2005
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CompetitionPrevails
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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
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February 27, 2006The 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