N.J. auto restrictions: a troubling turn

You don’t need to conduct any kind of sophisticated market research in order to understand the effects of New Jersey’s 2003 auto insurance reform law. Just drive down the New Jersey Turnpike, where you can’t miss seeing billboards advertising national carriers that weren’t in the market or were on their way out prior to the law’s passage. If you need more evidence, turn on the car radio and hear those same companies advertising, actually trying to attract customers.

Such things were utterly foreign to New Jersey prior to passage of the reform law, which opened up the previously constrained market to competitive forces. Before the Legislature and governor took the courageous step of enacting the statutory changes backed by industry groups including the National Association of Mutual Insurance Companies, the state offered a veritable case study in the kinds of problems that can befall an insurance marketplace when insurers are not allowed to underwrite freely and compete effectively. Coverage was more expensive than it is today. Even at higher prices, it was becoming more and more difficult to obtain. And insurers, frustrated with legislative and regulatory impositions, were making plans to leave.

The success of the reform law has been remarkable both because the gains that have been achieved thanks to the infusion of competition have come so quickly and because they have been so substantial. Capacity is plentiful, and over $500 million has been returned to New Jersey drivers in the form of dividends, rate reductions, and discounts.

Quickly lost

But regardless of their magnitude, such gains can be lost as quickly as they were achieved. The way to lose them is simple: impose restrictions on insurers’ ability to underwrite freely and compete effectively. If that is done, most assuredly the billboards will come down, the radio ads will be taken off the air, and the market will slide right back into a sorry state. Yet such restrictions have in fact been proposed this year following a remarkable amount of publicity regarding a few companies’ use of education and occupation as rating factors. This issue was addressed in a comprehensive fashion at a recent hearing of the Senate Commerce Committee.

Restrictions on underwriting freedom are always cause for concern because they interfere with the proper functioning of the market, leading to problems for consumers as well as insurers. Underwriting is an absolutely fundamental function in insurance. It is the independent assessment, analysis and pricing of risk that constitutes an insurance market. When insurers’ ability to underwrite is hampered by artificial constraints, the market stops functioning appropriately to the detriment of all marketplace participants.

(For more on this topic, see “The Case for Underwriting Freedom: How Competitive Risk Analysis Promotes Fairness and Efficiency in Property/Casualty Insurance Markets,” a public policy paper written by NAMIC’s Director of Public Policy, Robert Detlefsen, Ph.D. The paper can be viewed at www.namic.org/pdf/040916UnderwritingPaper.pdf.)

But while underwriting restrictions are troubling wherever and whenever they are proposed, they are particularly troubling in a place like New Jersey, at a time when the market has only recently witnessed marked improvements following decades of difficulties that were the result of marketplace restrictions. Indeed, it is essential for New Jersey policymakers to keep in mind that the state’s auto insurance reform law has been successful in enhancing competition precisely because insurers have been given the freedom to underwrite and price business.

Wrong message

Imposing marketplace restrictions would threaten to reverse the substantial gains achieved and would constitute a misguided step backward for New Jersey’s auto insurance market. It would send exactly the wrong message to insurers in the market and to those considering entering, that despite its experience, New Jersey still does not understand the function of underwriting and the importance of competition.

Thankfully, there appears to be broad and deep understanding in New Jersey that the competition introduced by the reform law has been successful. The success has been noted not just by insurers and trade associations, but also by agents, consumers, legislative leaders and regulators. Lawmakers have taken notice of the fact that they no longer hear the complaints that they were accustomed to receiving year after year. In the recent past. auto insurance has been the top issue in gubernatorial elections, but it did not even register in the most recent contest.

At the Senate hearing, New Jersey Insurance Commissioner Steven Goldman provided a review of the way in which policymakers in the state, motivated no doubt by good intentions, made attempt after attempt to control the market, with only disastrous results. Improvement has come only after such efforts were abandoned and competitive forces were allowed to work. Significantly, Commissioner Goldman stressed the fact that the market is still in a state of transition, as marketplace participants adjust to an unfamiliar way of doing things. Moving away from competition would be particularly dangerous in such a transitional market.

New Jersey drivers are enjoying the benefits of a competitive auto insurance market for the first time in memory. The billboards are a welcome sight, the radio ads an appreciated sound. Lawmakers and regulators should take care to protect the progress that has been made rather than risk losing it by imposing restrictions that would inevitably impair the market.

Paul T. Tetrault, JD, ARM, AIM, is Northeast State Affairs Manager for the National Association of Mutual Insurance Companies. He can be reached at ptetrault@namic.org.

Topics Carriers Auto Legislation Underwriting New Jersey Market