N.J. Auto Reforms May Signal Regulatory Climate Change Nationwide

When Governor James E. McGreevey signed The New Jersey Automobile Insurance Competition and Choice Act (S-63/A-2625), he launched another effort aimed at solving the state’s automobile insurance crisis. This time, however, unlike past efforts at “reform,” it may actually begin rolling back three decades of accumulated regulations, which, like weeds choking a garden, were making automobile liability insurance less accessible and more expensive in the Garden State—the exact opposite of what they were intended to do.

“We were at a point where several series of reforms—all aimed at bringing down premiums—simply hadn’t worked,” said David J. Madara, executive vice-president of Bollinger Inc. and immediate past president of the Professional Insurance Agents of New Jersey. He described the past efforts as being “ill-focused and inadequately implemented,” particularly the AICRA (Automobile Insurance Cost Reduction Act) of 1998. What started out as an attempt to address fraud, medical costs, and the state’s high premiums ended up mandating a 15 percent rollback on automobile insurance premiums, and imposing a complicated set of criteria for determining rates.

Madara, a third generation insurance man (the Madara Company, which recently merged with Bollinger, was founded by his grandfather in 1918, and was headed by his father until his retirement four years ago), indicated that AICRA, along with other legislation, contributed to a climate that discouraged companies from doing business in New Jersey. It also created an “agents’ nightmare,” as it became very difficult to produce meaningful quotes due to all the differing criteria, and gave companies that were operating in the state an incentive to leave as well as the means to do so. “All the carriers were scared to death of the marketplace, and worked out exit strategies,” Madara said. This usually involved the formation of “pup companies” [wholly-owned subsidiaries, often reciprocals, that did business only in New Jersey]. As a result the market became more chaotic, and premiums continued to rise.

Seven companies alone withdrew from the market in 2002. By the end of May 2003 no less than 27 insurance companies had withdrawn auto coverage from the state over the last 10 years, including The Hartford, Ohio Casualty, Harleysville, Central Mutual, Merchants Insurance and most recently Prudential. A wake up call came in June 2001 when State Farm Indemnity, the national insurer’s New Jersey operation and the state’s biggest auto policy writer, announced it was leaving.

The American Insurance Association said the decision came as a result of decades of government over regulation. “This is the culmination of a longstanding failed policy of allowing government forces to dictate what happens in New Jersey’s auto insurance marketplace,” stated David F. Snyder, AIA assistant general counsel. “Since the early 1970s, New Jersey has made numerous attempts to ‘fix’ the state’s auto insurance market. Ironically, each successive ‘fix’ has added more bureaucracy, more red tape, and ultimately more costs for everyone … We still believe that New Jersey can have a very positive system that serves all consumers, but having a company the size of State Farm stop writing business is a very bitter pill to swallow.”

State Farm eventually negotiated an agreement with the Department of Banking and Insurance (DOBI) to continue writing renewals, with the proviso that it could drop up to 4,000 policyholders a month. The insurance industry became convinced that it had to take action. It formed the Coalition for Auto Insurance Competition (CAIC), an organization dedicated to bringing meaningful reform to the state’s auto insurance market.

Not just another lobby
Although insurers led the way, CAIC was not just another insurance industry lobbying group. It incorporated two unique features: 1) it got agents organizations, producers associations and direct writers to all sit down at the same table to discuss their shared problems; and 2) it brought in representatives of other industries and groups. In addition to all of the insurance associations, the original members included Citizens for a Sound Economy, Commerce and Industry Association of New Jersey, New Jersey Society for Economic and Environmental Development, New Jersey Retail Merchants Association and the Food Council of New Jersey. Many other groups, including consumer representatives, joined it along the way.

“I’ve never seen so many people work together so hard to get something done,” Madara said. As PIANJ president, Madara was heavily involved in the effort. He noted that while agents and companies frequently “lock horns” over their competing interests, this time it was different as they all realized that they shared a common goal.

What they accomplished testifies to the dedication of Madara and his colleagues. “Nobody got everything they wanted,” he said, “but the legislators listened to us,” and the bill went through. In an e-mail message Donald Cleasby, NAII assistant VP and general counsel, said, “We are pleased with the end result. The bill that passed kept all of the key regulatory reforms we felt were essential to prevent continued deterioration of New Jersey’s auto insurance market. We did not get everything we thought was needed, but we got something on everything we thought was needed.

“Take all comers will be eliminated (BUT not until 2009 and even then the Commissioner can reinstate it upon a finding of a noncompetitive market); the formula for calculating excess profits will be updated (BUT most of this will be done by regulation whereas we wanted more of it done by statute); rate approval is addressed (BUT it is still prior approval and not a competitive rating law) and withdrawal plans need no longer be approved by the Department before being implemented.”

In a statement released after the bill was signed, Cleasby commented, “The success of this law proves conclusively that if reform can happen in New Jersey, it can happen anywhere.” He made it clear that while “this is significant reform for New Jersey,” what may be even more significant is the “change of direction that New Jersey policymakers made in adopting these reforms.” Past efforts “usually entailed more regulation and less market flexibility being imposed on auto insurers,” Cleasby said. “This new law does just the opposite. It is a recognition by the New Jersey Legislature and the governor that what is wrong in New Jersey is not what auto insurers are doing or not doing, but the regulatory climate they must operate under. That’s a big change in direction.”

The NAII is spearheading efforts to make fundamental changes in personal lines insurance regulation from those focused on price controls to a competition-based system. Doing so “can provide almost instant improvement to even the most difficult insurance markets,” said an NAII working paper entitled “Regulatory Talking Points.” It feels that “well functioning, competitive insurance markets keep rates down, spur innovation among companies, prevent price gouging and allow regulators to focus on monitoring market conditions, market conduct practices and insurer solvency.”

The NAII attacked the idea that a prior approval system is effective in controlling premiums. “In fact,” the organization noted, “it is competition that keeps rates down. Price controls require regulators to inefficiently use their time to approve rates that are governed by competition.” States that have succumbed to the lure of closely regulating rates “are more subject to political manipulation with adverse consequences—higher prices and fewer choices for consumers.” New Jersey’s situation offered the NAII a perfect case in point.

“In key states like New Jersey, Louisiana and Texas, legislators are moving toward modernizing personal lines, which will allow other states or the NAIC to look at the concept in a new light. It proves that in spite of conventional wisdom, personal lines regulatory modernization is not politically impossible to achieve,” Cleasby said.

Madara, Cleasby and others are perfectly aware, however, that while they have won a battle, they have not won the war. The first task they face is to work closely with the DOBI to try and assure that the regulations issued under the reform law will follow it as closely as possible. Despite the inevitable glitches, “we’re all still committed to working together,” said Madara. “The PIA will work closely with the DOBI on the regulatory process; they have welcomed our presence.”

Assuming the law and the rules work as they’re supposed to, the next task is to interest auto insurance carriers to enter the New Jersey Market. With the exception of State Farm, none of the major auto insurers—GEICO, Progressive, National, etc.—do business there. CAIC spokesman Ernest Landante framed the problem in personal terms. “You see these ads on TV for auto insurance at low rates and all kinds of things,” he said, “then at the end they always say ‘not available in New Jersey.'” He pointed out that the state is the most densely populated in the U.S. with one of the highest per capita income levels in the country. “It should be a sought after market.”

It’s not—at least not yet, but there have been discreet inquiries. California-based Mercury apparently had a large stand at the recent joint PIANY-PIANJ Convention in Atlantic City, and was talking to a lot of agents. Leaders of The Independent Insurance Agents of New Jersey, which represents over 700 small businesses in the state, recently met with insurance company executives at a Future One conference in New York to discuss the New Jersey automobile insurance marketplace. Following the Future One presentation, they continued their “sell” of the New Jersey marketplace to various company executives attending a meeting hosted by Commissioner Holly Bakke at the NAIC’s Summer Session. According to their report she was enthusiastically telling companies, “New Jersey is open for business!”

That certainly wouldn’t have happened if the reform bill hadn’t been enacted. It holds out the prospect of a reasonably regulated market and gives insurers, who now shun the state, an incentive to begin doing business there. This in turn would bring in more expertise and, by increasing the choices for both agents and consumers, eventually create the climate for the NAII’s competition-based system to work. As Cleasby said, “if it works in New Jersey …”

A model state
He’s clearly enthusiastic about the possibilities. “For those of us who support state regulation of insurance in the U.S., but insist that it must be improved, we can now use New Jersey as a model of a state that has done just this.”

Cleasby summarized the “lessons learned” in New Jersey as follows:

First, if the industry provides the needed focus and resources, we can achieve regulatory reform and modernization where most needed and even when the political situation does not seem ideal.

Second, regulatory reform and modernization for personal lines insurance can be accomplished. It is not politically impossible to accomplish this. Industry efforts to modernize insurance regulation, particularly for rates and forms, should not be limited to commercial lines as they often have in the past.

Third, states are capable of improving the state regulatory system. Congress should not assume, as some in the insurance industry may have them assume, that the states are incapable of achieving this.

If those lessons come to fruition in other states, McGreevey’s signature on the reform bill could profoundly affect not only New Jersey’s long suffering automobile owners, but also the focus of personal lines insurance regulation in the rest of the nation.