In the four years since the New Jersey Automobile Insurance Competition and Choice Act was signed into law, everyone in the state has had the opportunity to revisit their analyses, polish their crystal balls, and balance their Ouija boards. Some are proudly saying, See? We were right. Others insist that just because the sky hasnt fallen yet doesnt mean it wont. And many have been blindsided by developments that, not having been driven by the new law, almost no one saw coming.

It Feels So Good When the Pain Stops

Two years ago, reporting on the short-term effects of the 2003 act, Insurance Advocate described the pre-act conditions of the New Jersey market: on average, the highest automobile insurance rates in the country; various regulations that were driving insurers to distraction and into the red; 19 auto insurance companies, collectively responsible for writing 28 percent of all policies in the state, under close scrutiny for poor financial condition.

Since then, the picture has changed radically. New Jersey may still have among the highest, if not absolutely the highest, rates in the country, but according to Insurance.com, on average drivers in the state saw a 26.6 percent drop in premiums between 2005 and 2006 alone, putting it at the top of the list of states with the largest decreases.

Just look at the carrier ads on billboards, said Richard Stokes, regional manager and counsel for PCI, who covers New Jersey and Delaware.

And Jeanne Heisler, government affairs representative for IIABNJ, and an owner of the Ronan Agency, observed that were seeing the ability to save quite a few people quite a bit of money.

While many attribute the decline to increased competition, which is unquestionably a significant factor, Heisler believes the reforms in general made a contribution, giving carriers more flexibility, and enabling them to implement new strategies.

Jill Muratori, PIANJ legal counsel, agrees that the reforms of 2003 have really been doing the trick. But while she said that the state may lose its place at the top of the highest-cost list, it wont fall far.

Nor did anyone expect it to: the underlying circumstances havent changed, Stokes pointed out, adding that, from the start, reformers said, Look, this reform isnt going to make New Jersey a Montana.

As for competition, there is no question that carriers are going head-to-head for business. Most independent agents have several companies now, Heisler said. Theyve been able to add companies, and so they re-quote their clients on a regular basis.

It is, Stokes said, a mature market, which bodes well for consumers.

In May, 2007, the state released its 2006 Auto Insurance Consumer Information Report, which ranks insurers by the ratio of valid complaints to the number of vehicles insured. According to Jim Gardner, spokesman for the Department of Banking and Insurance, complaints overall have dropped dramatically since the reforms began taking effect " by nearly half, in fact, between 2003 and 2006. And he credits that to greatly-improved availability and affordability of coverage.

Pinto " the Case, Not the Car

One development that would appear to have taken just about everyone by surprise is the fallout from a lawsuit that came before the New Jersey Supreme Court in 2004, challenging the legality of the so-called step-down provisions in commercial auto insurance policies.

As PIANJ past president Paul Monacelli described it in November 2006 testimony before the State Senate Commerce Committee, the provisions allow insurance companies to reduce the coverage available to employees [who] are not individually named on their employers business auto policy. Should an employee be injured while occupying a vehicle owned and insured by his or her employer, the uninsured/under-insured motorist coverage limit that applies is that of the employees auto policy, not the employers, which would typically be considerably higher. Though Monacelli said New Jersey alone has such provisions, some believe a few other states may have similar arrangements.

The provisions were hardly new. Stokes suggested that they may go as far back as 1968.

But, as Heisler pointed out, few people realized they were on the books. All that changed with the courts 2005 ruling in Pinto v New Jersey Manufacturers Insurance, which held that the language of the step-down clause was enforceable and that case law recognizes the legitimacy of step-down provisions.

That should have been the end of that, but the court didnt stop there. The justices found that employers can cover employees as named insureds provided appropriate language is added stating such an intention, in which case the employers coverage limit would apply. But, at the same time, they [imposed] on insurers, their agents, and brokers a duty to inform employers about the necessity for such language so that employers can make informed decisions about whether their employees will have the status of named insureds under the employers business automobile insurance policies.

If insurance companies breathed a sigh of relief, agents saw a snake in the grass. Heisler indicated that while agents are not necessarily for or against the step-down provisions per se, the court decision puts the onus on agents to find people this coverage when its not available and not easy to explain. Moreover, she said, Its not practical to name every employee as an additional insured and to expect employers to remember to add a new hire, and agents would be exposed to potential lawsuits because a lawyer will say, You didnt explain it to the employer properly.

Whatever the courts intentions may have been, the effect was to send agents, as well as those opposed to the step-down provisions themselves, straight to the Legislature.

Case Closed

In May 2006, New Jersey State Assemblyman Neil Cohen introduced a bill that [P]rohibits the use of step-down provisions to limit uninsured and under-insured motorist coverage in certain circumstances. As the bill statement explains, the bill expressly provides that a policy that names a corporate or business entity as a named insured shall be deemed to provide the maximum uninsured or under-insured motorist coverage available under the policy to any individual employed by the corporation or business entity, regardless of whether the individual is an additional named insured under that policy.

With that, the battle was joined. The agents almost unanimously noted that the problem for them was not the provisions, but the near impossibility and the risk of complying with the courts requirements.

Anderson described it as a new duty that is impossible to achieve, adding that it has substantially increased the risk of litigation against insurance producers and placed them in an untenable position with their customers.

To the agents cant be done, the carriers responded with strongly-worded concerns about the effects of eliminating the step-down provisions. Paul Tetrault, Northeast regional state affairs manager for NAMIC, emphasized underwriting freedom and the ability to have options. In his June 2006 testimony before the State Senate Commerce Committee, he said that underwriting is the most fundamental function of insurance, adding that if restrictions should always be cause for concern, such concern should be particularly high when underwriting restrictions are proposed where there is a history of marketplace troubles, as in New Jersey. Eliminating the step-down provisions, he said, restricts freedom of underwriting and would constitute a misguided step backwards for the state.

Testifying before the same committee in early May, 2007, Stokes chose to focus on freedom of business. Consumers should have the freedom to use stepped-down provisions to contract for an appropriate type and level of insurance, he said. This legislation would essentially take away another right of business consumers to make their own decision about their business needs and requirements.

And David Snyder, vice president and assistant general counsel for AIA, said that the provisions both help insurers manage their costs and enable businesses to manage their risk and buy less insurance than they would otherwise have to.

Did the justices anticipate that their decision would open this particular can of worms, or is this truly a matter of the law of unintended consequences? Thats impossible to know. What is almost certain, however, is that sometime this year " possibly as early as this month " the bill eliminating the step-down provisions will be presented to the governor for signature and will take effect immediately. It has already passed the Senate by unanimous vote, and has been referred to the Assembly, whose next voting session is on June 11. Whether the consequences of its all-but-assured passage will be dire or negligible will have to wait.

Only God Can Make a Tree

Quoting New Jersey poet Joyce Kilmer in a February 12 article in Insurance Advocate, John Kerry Dyke added that Kilmer did not know our New Jersey Department of Banking and Insurance, whose commissioner, Steven Goldman, has proposed a new regulation called TREE, or Territorial Rating Equalization Exchange.

The heart of the matter is the disparity in premium costs between high and low loss-risk areas, or territories " to put it more bluntly, the issue of subsidies. Since the early 1980s, New Jersey has put a cap on urban auto insurance rates, limiting them to no more than 35 percent above the statewide average. As Dyke reported, the Auto Insurance Cost Reduction Act (AICRA) of 1998 then called for a phasing out of the cap, combined with the redrawing of the rating territory maps, which are outdated by a good 60 years. The 2003 act reaffirmed the elimination of the cap, setting its sunset in 2006. In the meantime, New Jersey established the Urban Enterprise Zone (UEZ), which was renewed last fall and lasts through 2009. The UEZ provisions require carriers to write the same percentage of coverage in high loss-risk areas as they write in the entire state.

Now there is TREE, which, as Dyke explains, essentially takes money from large rural and suburban insurers and gives it to insurers that write in cities, an industry-wide system formula [that] will eliminate any disincentives.

The problem with a straight cap, Heisler explained, is that in the past it tended to exacerbate the problem of availability in urban areas. Companies didnt appoint agents there, they didnt market in those areas, she said. Competition in the marketplace in recent years has tended to ease that problem, however, as have the UEZ requirements. Still, no one seems to believe that a cap is in itself a wise approach.

Enter TREE, which has sort-of supporters and maybe skeptics. Stokes said that he is of the opinion that the department is looking at [TREE] as a short-term measure, until they have a more mature market and can just get rid of caps completely. In the interim, they see this TREE as operating to provide some level of comfort.

Anderson and some others suggest that the new territory maps, which are expected to be adopted by the department soon, are likely to create sticker-shock among urban drivers and that TREE will soften the blow.

But Snyder, for one, has concerns about the capacity of TREE to take root and spread. I think its fairly clear, he said, that the view is that TREE is necessary to blunt the rate differences that will occur [when the maps are accepted] to better reflect risk. But he added that companies have serious concerns about TREE, not only how it will work in the short term, but the danger that it becomes a new comprehensive rate-suppression instrument. Snyder noted, too, that there is no firm elimination of TREE, raising the potential for its term and scope to become infinite: Youre going to start with a few high-rated territories, and it could grow and grow either by regulation or under legislative pressure.

Is Fairness Good Business?

If New Jersey has its unique quirks, it does share with the rest of the country a basic truism: auto insurance premiums are higher in densely-populated urban areas than elsewhere. But while nearly every state has seen the growth of urbanization and suburbanization since the mid-20th century, in New Jersey that growth has been explosive.

Heisler, whose business is based in Ocean County, pointed out that, whereas the entire county had a 1950s population of about 20,000 and roads that were mostly dirt, today the population is more than half a million.

Thus when the Insurance Department adopts the redrawn rating territory maps, a great deal more of the state will certainly " and, for the insureds, suddenly " become urban, riskier and costlier. That explains, at least in part, why redrawing the maps has taken so long: No one wants to get labeled as an urbanized area, Anderson said. It has negative connotations.

It has political risks, as well, for legislators who have to explain to constituents either why their auto insurance premiums have skyrocketed, or why their premiums are helping to subsidize those of other drivers.

Some states have one or another form of subsidy for urban drivers; Heisler estimated that perhaps a third of states do. New Jersey historically has decided, as Anderson put it, that it is in everybodys best interest if everyone in the state can afford to drive a car, and that, therefore, we have to take some of the bite out of the cost of car insuranceby artificially lowering [some peoples] rates and artificially raising others. Anderson is among those who feel that some form of cross-subsidy is appropriate and necessary.

As for the carriers, Tetrault said, Its my understanding that not all insurers feel the same way. Some are adamantly opposed to any subsidization; others are a little more comfortable or even accepting of it. NAMIC, he said, would tend to be concerned and cautious about anything that promotes subsidies in the marketplace, but, acknowledging that subsidies of various sorts are common throughout the country, he added that the key thing is not to accept them without question; to really make the determination that this is a policy decision we want to make.

Without explicitly rejecting the concept of subsidies, Snyder said that TREE is effectively a subsidy mechanism that potentially has no limits. Things like this tend to mushroom in New Jersey. AIA and others strongly advocate cost-based pricing.

And Heisler said that IIABNJ, too, agrees that market forces should prevail. Being a realist, however, she noted that no one knows yet what the maps will reflect with respect to areas with the highest loss-risk or what that will mean for premiums.

She pointed out, too, that there remains the question of exactly what is subsidized. One possibility, she explained, is basing the subsidy strictly on the minimum liability limit. People most in need of a subsidy are also most likely to need just a liability-only policy. And it does seem reasonable that, since the law requires a minimum amount of liability insurance, there should also be a mechanism to make it affordable. On the other hand, she said, insurance companies should not have to subsidize somebody living in a prosperous neighborhood of a high loss-risk territory who drives a Mercedes.

Continued Next Issue: Reforms Vs. Consumer Issues