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Letter to the Editor

A.M. Best Reports: Potholes Growing Larger for New Jersey Auto Insurers

OLDWICK, N.J. -- According to an A.M. Best report, the New Jersey automobile market, long a bumpy road for insurers and consumers, is developing even larger potholes.

Since June 2001, two of the nation's top 10 private-passenger auto insurers have announced their intention to exit New Jersey. A third insurer already is exiting, and two others have obtained regulatory relief.

The Automobile Insurance Cost Reduction Act of 1998 sought to decrease auto rates for consumers and loss costs for insurers, but the reform hasn't kept insurers from wanting to exit the state, nor has it attracted market leaders to enter. Out of the top 10 private-passenger auto writers in the nation, only half, including State Farm, write business in New Jersey. There are about 60 insurers actively writing auto insurance in New Jersey, far fewer than in similarly populated states.

State Farm Indemnity Co., the largest auto writer in the state with a 17.2 percent market share, and American International Insurance Company of New Jersey, the eighth-largest writer and a subsidiary of American International Group Inc. of New York, filed plans with the New Jersey Department of Banking and Insurance in June to withdraw from the market. Together, these two companies write about 20% of New Jersey's private-passenger auto premiums and insure roughly 1 million vehicles in the state.

According to the National Association of Insurance Commissioners, New Jersey motorists paid on average about $1,200 per insured vehicle in 1999, the highest rates in the nation. New Jersey officials have disputed the No. 1 ranking, arguing that the NAIC study doesn't accurately reflect mitigating factors, such as recent reforms.

Some of the factors expected to keep the New Jersey auto market in turmoil over the medium term include the following:

• New Jersey has among the nation's highest liability loss costs and a regulatory environment that many insurers contend doesn't allow them to charge adequate premiums, creating a noncompetitive market.
• Loss experience on no-fault liability has been exceptionally poor, with annual direct adjusted loss ratios exceeding 105 since 1986, well above the national average.
• New Jersey drivers pay the highest liability premiums in the nation to cover loss costs, reflecting a high frequency of accidents, a very litigious environment, widespread fraud and liberal no-fault benefits.
• New Jersey also has the highest vehicle density in the United States, generating an extremely high frequency of accidents.
• New Jersey has one of the strictest excess-profit laws in the nation.
• Private-passenger auto rate changes require prior approval.

The continuation of New Jersey's "take-all-comers" law will significantly strain the surplus of many writers. This, combined with the potential for 1 million vehicles to be left behind by the exiting carriers, will test the rating structures and capacity of all private-passenger auto writers in the state, and it could draw greater numbers of insurers to the department's doorstep for relief. Displaced insureds might be forced into the residual market.

As long as politics and social policy, rather than economics, drive New Jersey's auto insurance market, it is inevitable that, on average, consumers will end up paying more than they are paying now.

The full 12-page report is available online at BestWeek.

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