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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