Proposed N.J. Regulation Offers Relief on Excess Profit Rule

March 11, 2002

The New Jersey Department of Banking and Insurance is proposing a regulation (PRN2002-103) that would change the way insurers calculate profits on personal automobile insurance.

New Jersey statutes establish a reasonable profit for personal auto and require insurers whose earnings exceed that rate to return “excess profits” to their policyholders. If adopted, the new rule would allow insurers to calculate their profits using incurred losses, instead of paid losses as current regulations require.

The Alliance of American Insurers (AAI) responded favorably to the proposal, saying that it would go a long way toward improving the accuracy of excess profit reports. “By changing the way insurers report losses from when a claim is paid to when it is incurred, this regulation would paint a much clearer picture of insurers’ profitability, or lack thereof, in the state,” Richard Stokes, government affairs representative for AAI’s northeast region, said. “Currently, profit reports of New Jersey insurers are highly inflated because the claims paid method takes a very narrow view of losses. Reporting losses as they are incurred gives a broader, longer-term perspective by taking into consideration claims that might be in litigation, thereby providing a more accurate picture of what liabilities an insurer faces in the future.”

Stokes added that adoption of the regulation would be a welcome step toward the higher collective goal of making New Jersey’s insurance market more competitive. “While we would prefer repeal of New Jersey’s excess profits law,” he said, “this is the type of change the alliance believes is necessary to improve the state’s regulatory climate.”

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