Politics Can Lead to Bumps in the Road for Auto Insurance

Overregulation in the auto insurance industry may be an accident that has already happened in some states; but regulators can look to other states as examples of how regulatory requirements can be uniform and yet flexible to accommodate the needs of the system.

In a recent appearance before Congress, Thomas Ahart, president-elect of the Independent Insurance Agents of America (IIAA), testified that too much politicizing goes on in a number of states when it comes to auto insurance.

Ahart cited problems with the rate regulation systems in New Jersey and Massachusetts, saying the regulatory approach of these states “is motivated by the political desire to minimize insurance rates.” In his testimony, Ahart noted that for more than two decades, New Jersey drivers have had to pay the highest auto insurance rates in the country, adding that state reforms back in 1998 have done little to ease premium levels.

Just in the last three months, several insurers, including New Jersey’s largest, State Farm Indemnity Co., have indicated plans to leave the state. State Farm Indemnity, responsible for more than 800,000 policyholders in the state, reports its surplus continues to dwindle as a result of a high amount of claims it is forced to pay. The company requested a 16.8-percent rate hike in 2000, but insurance regulators did not act on the request, which is currently in front of a state administrative law judge. Going in the opposite direction, at a hearing in July, New Jersey’s Department of Insurance suggested that the company could drop rates by 6 percent.

“Even to think the Department would say something like that is amazing,” Ahart commented. “GEICO’s not in here, Liberty Mutual’s getting out, Progressive is not here, Nation-wide is not here, State Farm wants to get out. So you consider all those top companies, clearly they would want to be in here if they were making money.”

While New Jersey has been a focal point to many of how not to drive an auto insurance program, Illinois is being lauded by others as a state where things are in high gear. Illinois has been a purely open competition state since the early 1970s.

“As such, we do not regulate auto insurance rates or keep detailed statistical information on rate activity,” said Nan Nases, public information officer for Illinois’ Department of Insurance. “Illinois is a highly competitive state with over 300 companies writing auto insurance.”

According to Nases, that number has remained fairly consistent, with some companies entering the market and some leaving, but still no influx of new carriers. “Our competitive market is further illustrated by the fact that only about half of one percent of auto policies written in Illinois are in our assigned risk pool,” Nases noted. “We are in the process of updating our premium comparison report which reflects how Illinois auto and homeowners rates compare to those in comparably sized cities in other states. That report has consistently placed Illinois rates in the low- to mid-range.”

To the West, Reid McClaran, deputy chief counsel for the California Department of Insurance, looks at Prop. 103, which debuted in 1989, as having worked for the most part despite the fears of many.

“California had turned into a problem state with very high rates back in the late ’80s which precipitated Prop. 103,” McClaran said. “My recollection is that we were either number two or three [most expensive].”

As of 1999 figures, California ranked as the 25th most expensive state to buy auto insurance. “So that’s a huge drop, and there are some economic figures which have assisted us,” McClaran noted. “We do have a large staff of analysts in our rate regulation division who carefully analyze each application for a rate change and very frequently have a major impact on which rate is finally approved. I think that process has been very useful.”

McClaran doesn’t forecast any dramatic changes in the near future. “I guess it depends on what happens elsewhere. Looking back at Prop. 103 when it passed, there were a great many insurers that seriously restricted their writings and took a number of measures they thought would safeguard them against what they considered an uncertain regulatory environment. I think it’s fair to say most or all of those concerns turned out to be unfounded.”

McClaran sees the California market as reasonably healthy and a good place to both buy and sell automobile insurance. “We do see continued interest in new insurers and existing insurers with new products,” he said. “I think it’s fair to say we don’t have any kind of a crisis or overwhelming concerns with auto in California. There has been—as I’m sure there has been in the larger urban states—a focus on available auto insurance in underserved communities. Insurers who have a future here and want to make the large profits are going to need to find what we call the underserved communities.”

According to Ahart, state regulation and free markets must be able to survive side-by-side.

“Not to say that there shouldn’t be any regulation—I clearly believe in state regulation,” Ahart said. “Yet, there has to be some free markets. When we had deregulation of commercial lines in New Jersey, we had some of the same arguments that it was going to be terrible for small companies, it would put them out of business. What it actually did was increase competition and brought better products to the market and some that are actually less expensive. Some of these smaller companies found their own niches that they could work very well with.”

While New Jersey wades through the political detours in its auto insurance program, Ahart noted that when you stand back and look at the country as a whole, the auto insurance market is reasonably healthy.

“Overall, auto insurance has been a very popular line throughout the country and where you have it where it is highly regulated, it is not so popular,” Ahart commented. “For agents, it’s perfect, especially for independent agents who know their community and have trusted relationships in the community and can give choice to people. It makes sense for them to be in that line.”

Automobile insurance rates are regulated in 49 states, according to the IIAA. Of those, 31 have an approval system requiring carriers to file rates for approval through the state commissioner before using them in the marketplace.

In remaining states, insurers can change prices without previous approval, but generally must file the rates with the insurance commissioner who can subsequently disapprove them, with only Illinois not allowing disapproval.

Personal auto insurance is the largest line of property and casualty insurance in the U.S., accounting for more than $118 billion in annual premiums. The top average expenditure for auto insurance in 1999 was New Jersey with $1,033.88, according to the Insurance Information Institute. North Dakota ranked 50th with $468.80. California ranks 25th with a price of $659.35, with Washington 18th and Oregon 28th, respectively.