Decade After Transformative Auto Reforms, NJ Tackles Lingering Issues

February 21, 2012

Like Massachusetts, New Jersey had an automobile insurance system in turmoil. Unlike Massachusetts, the industry never stopped pressing for further reforms since the initial 2003 breakthrough.

In the years since the reforms, the industry has successfully shot down a territorial rating proposal and saw a medical fee schedule upheld by state courts. Now the focus is taking on personal injury protection costs in the no-fault system.

"That's one of the pressure points for the auto line," said Rich Attanasio, vice president of property/casualty ratings at A.M. Best, of PIP costs and medical inflation. "It is a concern, from our perspective. It is having a negative impact on some companies' results."

Out of New Jersey's 46 auto writers, 17 had no-fault adjusted loss ratios above 100 in 2010, according to BestLink.

Insurers can try to handle the PIP costs by raising rates, but "it's not sustainable to keep doing that given the magnitude of rate needs," Attanasio said.

Some 90% of rate requests are related to PIP coverage, according to Eric M. Goldberg, American Insurance Association regional vice president for the Mid-Atlantic region. He said PIP costs are offsetting the benefits of the earlier reforms.

The New Jersey Department of Banking and Insurance has outlined revisions to the PIP system, including the creation of new medical fee schedules and the amendment of existing fee schedules to curb over-reimbursements (Best's News Service, Jan. 20, 2012).

"Priority one, two and three is getting those PIP reforms enacted," said Paul Tetrault, Northeast state affairs manager for the National Association of Mutual Insurance Companies. Pat Breslin, NJM Insurance Group director of corporate communications, agreed.

"It's important today, it was important two years ago, it was important 12 years ago," Breslin said, calling the latest effort a "significant step in the right direction."

Lessons from the first round of auto reforms should be applied to the PIP issue, according to former Insurance Commissioner Holly Bakke.

For years, the auto insurance debate was incorrectly framed as "fault versus no fault," said Bakke. "It was as if answering the question of fault or no fault would solve the auto problem," she said. "I very much believe in rethinking what the problem is before you try to solve it. We solved the auto problem by asking what was best for the consumers."

What consumers really wanted were lower costs, said Bakke, a principal at Strategic Initiatives Management Group, LLC — a group that works to improve financial sector practices with institutions.

"The goal of the whole program was to give consumers choice in cost, coverage and company," she said. This choice was not just about the number of companies operating in the market, but what products the companies are offering, how they sell those products — be it by traditional agent, online or by phone, where they sell policies and how they underwrite.

"We didn't have that before," she said. "Previous regulations had made it more one-size fits all."

Currently, the PIP issue is framed as insurers versus providers, with fee schedules and arbitration as key issues.

She wonders if there is not another, more pro-consumer, way to solve the PIP issue — a way to shift the question to look at ways of giving consumers more choices and better medical outcomes. She posits having different levels of fee schedules rather than the current single one. "Maybe different service levels would provide more choices in cost and coverage ." She also said focusing on consumers would lead to exploring coverage and cost in terms of quality of care, better medical outcomes and effective and efficient treatments.

Pre-reform New Jersey was a "classic example" of a regulatory system that while trying to protect consumers with regulation, was actually hurting them, Bakke noted.

Before the reforms, State Farm was abandoning the market, sending a flood of applicants to other insurers, including NJM. Breslin said the onslaught was taxing the company's call centers and "consumers were not choosing to shop, they were being forced to shop."

Traffic coming to NJM post-reforms has slowed, but by number of vehicles insured, NJM has grown to be the top writer in the market, according to the New Jersey Department of Banking and Insurance. "We have continued to grow without advertising," Breslin said. "We are active in the competitive market, but the pace has slowed.

"New Jersey's a great market for auto insurers, in terms of demographics," he said. The state has a high average income, with drivers who tend to drive newer, more expensive cars and want higher liability coverage. "It's the kind of market insurers want to compete in."

The New Jersey reforms should serve as a model for other states and the ongoing federal versus state regulation debate, Bakke said. "If we were to build a system that works for consumers, we wouldn't build the one we have now," she said of the current state regulatory environment.

She notes there are things both the state and federal regulatory systems do well, but said the focus should not be on "state versus federal" but again on the consumer.

"Competition works for consumers," she said. "When we look at New Jersey and Massachusetts, both of them recognized competition was essential. That should inform the type of regulatory system we want."

(By Rick Cornejo, managing editor, BestWeek: rick.cornejo@ambest.com)