Auto Market Shrinks in New Jersey as Major Carriers Exit

By | July 16, 2001

First, State Farm Indemnity announced plans to leave New Jersey’s auto insurance market; then it was a subsidiary of American International Group noting similar intentions. Several other companies are now contemplating their future in the market in the Garden State. Will more line up to take the exit out of New Jersey and what many call its “highly politicized” auto insurance market?

The announcement that AIG was leaving the auto market came just a week after State Farm—which is the state’s largest auto provider with some 850,000 policyholders—announced it was pulling out due to a system which it claimed was too political and too heavily regulated. AIG’s unit, American International Insurance Company of New Jersey, has policies with some 200,000 motorists.

According to a release from the New Jersey Department of Banking and Insurance, State Farm Indemnity had requested a 17-percent rate increase on its auto insurance policies, but the Department did not concur with the request. State Farm claims it has lost $6 to $9 million a month in the state, and should those numbers continue, the company indicated it wouldn’t be able to meet its claims by next year or 2003.

Reforms slow to come
Phil Supple, public affairs spokesman for State Farm, indicated that State Farm Indemnity “had no practical choice but to withdraw from the New Jersey auto market because of what we see as a highly politicized auto insurance regulatory system.”

Supple mentioned the Automobile Insurance Cost Reduction Act of 1998 (AICRA) in which State Farm and other insurers reduced their rates dramatically, at least 15 percent, with the promise of reforms in return for reducing rates. So State Farm was left asking “just where are the reforms?”

“Those reforms have been slow or non-existent in their development, mainly due to a politicized environment in New Jersey,” Supple said. “The reform, and thus the cost savings which were supposed to offset that rate decrease, have been non-existent. We’re withdrawing at this time, which allows us to take responsible steps to protect our policyholders. We have enough in our reserves (policyholder protection fund) to pay the claims that are necessary up until the time we can exit the market in an orderly fashion which serves our customers and the state’s interests best.”

New Jersey Insurance and Banking spokesman Peter Hartt said State Farm’s representation of the ’98 AICRA Act was not a “fair characterization,” stating, “There are facts readily available to dispute that. All of the costs pertained in provisions of AICRA have been implemented. The one that hasn’t been completed (not a cost-containment measure) is the territorial rating system. The map that exists now is 50 years old, and obviously there have been a lot of demographic changes. The higher rates are generally in the urban areas. The law says unequivocally that insurers can not use a new map to increase the premium, it has to be revenue neutral.”

Insurance Council speaks out
John Tiene, president of the Insurance Council of New Jersey, said the “Department does everything based on politics.”

According to Tiene, the bottom line is the premium follows the costs of providing the product, literally for decades. “New Jersey has attempted to try to force the price below the cost of providing the product. You can’t artificially keep the price down if the costs are going up.”

Tiene said companies wanting to leave the Garden State are not without precedent.

“We’re operating with 20 percent fewer companies writing auto than most other states. Does the future look any better for the auto insurance business in the state? There’s no prospect for change for these companies.”

According to figures released by the Insurance Council of New Jersey (ICNJ), a nonprofit, insurance research insurance organization sponsored by 33 New Jersey licensed property/casualty insurance companies, auto insurance premiums fell slightly in 2000, but still rank among the highest in the country.

The average auto insurance premium for New Jersey residents as of Dec. 31, 2000, was $975.90. At the end of 1999, the rate was slightly higher at $985.24, marking the first time going back to 1995 that the Garden State’s average auto insurance premium resided under $1,000 for two straight years.

Agents, company see major losses
For State Farm Indemnity, Supple indicated the company’s agents in the state are disappointed and frustrated.

“They’ve been seeing this situation unfold for years and years,” Supple stated. “This will not be an overnight process. There will be time, once the Banking and Insurance Department approves our plan, that policyholders will have one year to find new insurance.

“We’re willing to work with the Department. But we’ve had substantial losses in our policyholder protection fund. We’re spending about $1.11 for every $1 earned premium, including investment income. You can’t really be expected to stay in that type of situation. We’ve lost about a quarter-billion dollars since 1999. No one should be forced to work at a loss in the business they have.”

Tiene said he’s seen major concern on the part of agents. “They’re very concerned that the company they write for now isn’t going to be there in a year,” he said. “[State Farm] is an Illinois-domiciled company, and if their numbers are as published, it is clear the company can’t survive too much longer before it is insolvent.”

One company with no plans to leave is New Jersey Manufacturers Insurance Co. (NJM), a direct writer established in 1913, offering workers’ compensation, homeowners, and commercial and personal auto coverages.

Pat Breslin, head of communications for NJM, said his office was “surprised, we had no advance clue” when State Farm announced its intentions.

Breslin said the Department of Insurance has been slow to move to address concerns of a number of auto insurers, including rate caps in urban areas, and implementing parts of the law in relation to cost reduction. “We look at the Department of Insurance as a significant problem,” Breslin commented. “Very slow-moving—it is not attached to reality.”

Are rate increases a ploy?
Supple said State Farm Indemnity’s withdrawal is not a ploy to receive the requested 17-percent rate increase. “Absolutely not,” he said. “We do not play with the lives of our employees, agents, customers, etc. just to get that. That increase actually would only help us with a little more breathing room for an orderly withdrawal and would not change our minds about leaving the state.”

According to Supple, although New Jersey has taken some bold initiatives to solve the auto insurance problem, some of them have made it worse.

“The state ends up bailing people out, rates go up,” Supple noted. “New Jersey has more cars and people per square mile than any state in the country. There are some fraud problems, some theft problems. When you’re an insurer and your job is to repair and replace automobiles, it is very expensive to do that.”

Hartt said if State Farm Indemnity, AIG and others pull out, New Jersey would be looking at a situation that was familiar a decade ago and a decade before that. “We had a number of companies in response to significant reforms threatening to leave and in many cases, didn’t. Last time it happened [1990], the state adopted the Fair Act, which essentially said you can’t deny coverage to people for a reason such as where they live, what kind of car they have, unless they’re an extreme example of horrible risk.”

What does the future hold?
According to Tiene, it has become apparent relatively quickly that the marketplace can’t handle the volume. “Most of the business written in New Jersey is through Jersey-only companies. There’s no capital to back it. When the business starts to migrate, you’re going to get a hemorrhage. That is the concern that we have.”

According to Breslin, politics has played a big role in the auto insurance market. “No official in office is going to do anything about auto insurance until the elections are over. Auto insurance has been so politicized that it is understandable that the general public doesn’t appreciate the issues.” And they are issues that aren’t likely to go away anytime soon.

New Jersey Auto Market Fast Facts

  • Average auto insurance premium as of Dec. 31, 2000: $975.90
  • Nearly 95 percent of residents noted overall satisfaction with their auto insurer.
  • More than 65.5 billion vehicle miles are traveled on New Jersey roads.
  • About 36.5 percent of state residents believe high auto insurance rates are related to demographics (population, traffic and vehicle density).
  • About 18.1 percent blame high costs on an overabundance of lawsuits.
  • About 9.1 percent identified both uninsured motorists and insurance company profits as reasons for high premiums.
  • Nearly 86 percent of residents agree with legislators that decades-old practices of drivers in low-cost areas subsidizing insurance in high-cost areas should end.
  • Nearly 85 percent agree that the geographic rating map in place to calculate auto insurance premiums needs to be updated to reflect present highway use, driving patterns and motor vehicle operations.

Source: The Insurance Council of New Jersey retained The Santander Group of Monroe, N.Y., to conduct this survey.

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