New Jersey, Massachusetts Reforms Help Open Up Auto Coverage

Efforts to improve auto insurance markets in New Jersey and Massachusetts, two of the worst states in which to write auto coverage, have yielded several important conclusions.

One of the most important is the realization that if insurers can’t use current technology to assess risks and charge rates accordingly, everyone suffers.

In addition, it’s important to implement a quick rate approval process in case of a sudden surge in claims, and to grant leniency when it comes to letting insurers leave the state, if necessary.

How underwriters handle high-risk drivers can make or break an insurance market. New Jersey and Massachusetts have also shown that a serious crackdown on fraud–especially on reducing staged accidents–helps enormously.

New Jersey, once considered an auto underwriting wasteland, has experienced the greatest change, according to industry observers.

“We’re seeing significant improvements in New Jersey,” said Scott Weinstein, a senior manager with KPMG’s Risk Advisory Services. “New Jersey has turned out to be an incredible success story.”

The Garden State’s woes started in the 1970s with a no-fault insurance law which combined personal injury protection with an inexpensive deductible. The resulting system generated enormous amounts of claims, but the state-appointed insurance commissioner rarely raised rates, fearing citizens’ wrath.

“We would submit rate filings and [the insurance commissioner] would just sit on them,” said Carla Temple, vice president of New Jersey for State Farm Insurance Group. State Farm, which tried to leave the state in 2002, is now the third-largest auto insurer in New Jersey with 13 percent of the market.

The state limited the amount that carriers could charge drivers in urban areas; its take all comers requirement forced insurers to cover anyone who walked into their offices.

“Every two years, there would a major change in the law,” said State Farm’s Temple. “It was a highly unstable market with no competition.”
In June 2003, New Jersey passed broad-based legislation to revamp its auto insurance market. Carriers requesting rate changes of less than 7 percent now get an answer within 45 days. The take all comers law is being phased out, while companies meeting certain policy holder growth rates can stop taking high-risk drivers.

The insurer of last resort, which covered more than half of New Jersey’s drivers in the late 1980s, now covers no more than 3 percent. In addition, it’s easier for companies to exit the market.

“The barrier to exit had become a barrier to entry,” said Donald Bryan, the acting commissioner of the New Jersey Department of Insurance. “We made it shorter and more defined for carriers to leave, and we took discretion away from the regulator to hold insurers in for a long period of time.”

Insurance companies–including large, national carriers like American International Group, GEICO, State Farm, and Mercury General–are coming back.

“For the first time in years, we’ve actually got companies advertising for business,” Bryan said.

While Massachusetts has made strides, industry observers say auto insurance reform efforts there have hit roadblocks. Pricing is a major problem. Rates cannot be set by geography or gender, and senior citizens get a 25 percent discount (compared to other states, where they often pay a surcharge).

In addition, a lawsuit has tied up efforts to reform how high-risk drivers are assigned.

Still, Massachusetts has cut fraud, a problem that has exploded during the last five years, particularly in states with large urban areas like New York, Florida, Michigan and New Jersey.

A special auto insurance task force in Lawrence, Mass., has helped with more than 100 arrests since the spring of 2004, compared to practically none in the previous 12-month period. The same approach is now being used in cities across the state.

Another reform will allow insurers to charge more for less-experienced drivers and those with higher accident rates.

“Over the course of the next couple of years, we are going to stop the cross-subsidization of drivers with less than six years of experience on the road,” said Chris Goetcheus, spokesman for Massachusetts Insurance Commissioner Julie Bowler.

However, underwriters cannot apply advanced risk assessment techniques in Massachusetts when categorizing customers. Auto insurers in other states have more latitude to set rates according to risk class.

“The number of classes among auto insurance customers has gone from seven to 260, just in the course of my career,” said Tim Wagner, Nebraska insurance director and chair of the National Association of Insurance Commissioners’ property/casualty committee. “Our ability to assess risk has grown exponentially.”

While the reforms in New Jersey and Massachusetts have won widespread applause, observers point out that a nationwide drop in the frequency and severity of auto insurance claims aided those markets as well.

Since the mid-1990s, engineering improvements like additional airbags, the enactment of seat belt and speeding laws, and improved claims handling have helped boost profitability in auto lines.

Technology has made it possible to segment claims by severity and handle them rapidly. The average cost per claim has been flat or has decreased by as much as 5 percent over the last few years, according to Aaron Halpert, a principal in KPMG’s insurance practice.

The average cost per claim has also always exceeded the cost of inflation. Now it’s equal or less, Halpert says.

While these positive trends couldn’t replace the legislative reform efforts, they did help them along. “I like to think of the national environment as providing a little tailwind,” said New Jersey’s Acting Insurance Commissioner Bryan.

Jacqueline S. Gold is managing editor of Insurance Insider. Article reprinted with permission from KPMG’s Insurance Insider. Copyright 2005 KPMG LLP. All rights reserved. Disclaimer from KPMG: All information provided is of a general nature and is not intended to address the circum
stances of any particular individual or entity.