New Jersey Auto Premiums Can Be Reduced; NAIC Numbers Tell Only a Smidgen of the Story
By Patrick Breslin, New Jersey Manufacturers Insurance Company
As usual, the National Association of Insurance Commissioners' annual report on the average auto insurance premium for each state was released to the news media yesterday without a copy available, or any notice whatsoever, to major New Jersey insurers. Publication of these numbers without interpretation is unfair to the public. The numbers do not explain why the premiums are this high or what can be done about it. State officials' comments are helpful, but that's only part of the story. We offer these observations, which we believe merit circulation.
Insurance companies charge different rates. In 1996, the same year as the NAIC survey, the average premium per car at New Jersey Manufacturers Insurance Company after consideration of the dividend was $697. In other words, NJM policyholders paid only two-thirds of New Jersey's average of $1,099. In fact, NJM's net cost was close to the national average of $685. NJM achieves such results routinely. Our operating procedures are very efficient - a recent A.M. Best Company, Inc., report shows that our administrative expenses were 9.2% of our premiums in 1996, the lowest of the 100 largest property-casualty insurers in the nation, and well below the national average of 26.4%. Overall costs also are held down by NJM's commitment to return dividends to policyholders based on our current operating results including some investment income, and by the good driving practices of our 290,000 policyholders and their families.
The message to consumers: Shop around. New Jersey drivers have an excellent opportunity to shop around. The New Jersey Department of Banking and Insurance publishes premium information about every company every year. The Department also annually releases a compilation of valid complaints filed against each company, which enables consumers to shop around for both price and quality of service. These publications provide companies' phone numbers too. Consumers can obtain the Department's information by calling toll-free 1-800-446-SHOP and on the Internet at www.naic.org/nj/NJHOMEPG.HTML. New Jersey's "take-all-comers" law, one of the strongest in the nation, requires insurers to provide coverage to drivers who meet underwriting criteria - no matter where in New Jersey that driver lives. So a consumer who wants to go to a different company can do so.
Dividends are not included as a factor in the NAIC numbers. National carriers sometimes pay dividends, but they do so on a state-by-state basis, so the impact is different in each state. NJM is a unique company in that our dividends are substantial and we have a large market share only in New Jersey. Without factoring dividends, the NAIC numbers do not reflect what New Jersey drivers really pay. NJM's dividends alone, if factored into New Jersey's average premium, would decrease the state's average by about $30.
The "average premium" numbers depend upon not only the rates charged by insurance companies but also the coverages purchased by consumers. With the high amount of litigation in New Jersey and large liability awards, responsible drivers typically buy much higher liability coverage than required by state law. The NAIC report does not quantify whether New Jersey drivers buy higher limits than drivers in other states do - a serious problem with the survey.
As the NAIC notes, "Comparisons of average expenditures and average premiums between states can be misleading." Demographics must be considered. Federal Highway Administration statistics for the past 15 years consistently show that both the rate of accidents and the rate of injuries in New Jersey are among the highest. Accidents and injuries translate directly into insurance costs.
In addition, New Jersey state law mandates that all drivers purchase the nation's second-highest level of medical coverage for auto accidents - $250,000 per person per accident compared with much lower amounts in our neighboring states, $50,000 in New York (the fourth-highest) and $5,000 in Pennsylvania (fairly typical countrywide). Buying more coverage makes the average premium higher. NJM advocates giving all motorists the option to keep this benefit if they wish, but also the power to choose a lower limit for a lower premium.
By law, New Jersey has a dual insurance system of high medical benefits without regard to fault while at the same time permitting lawsuits for "pain and suffering" even for only minor injuries. The "verbal threshold" which limits lawsuits for about 88% of drivers is not strong enough to eliminate lawsuits, and hence liability costs, for minor injuries. Further, 12% of motorists opt to pay extra in order to sue for any minor injury. Their decision to buy "no threshold" coverage increases New Jersey's overall average by about $50.
If New Jersey consumers want to maintain these high levels of benefits and lawsuits, there is nothing wrong with keeping the current expensive system. If the emphasis is on reducing costs, however, the system must be changed. Merely mandating a premium reduction won't work.
The NAIC has released two 1996 auto insurance studies recently - not only the average premium by state but also the company profits by state. Look at both studies, and the trend is very clear - for multiple years, insurers consistently have been charging high premiums in New Jersey but earning lower profits than in other states. The auto insurance system in New Jersey provides high benefits and is inefficient. Any serious effort to reduce premiums must attack those problems with the system. Profits must be watched, too, and fortunately New Jersey has the nation's toughest Excess Profits Law to make sure that lower costs for insurance companies are passed on to consumers. NJM's own philosophy of customer service ensures that we will do so voluntarily, as demonstrated by our dividends for the past 80 years.
The Legislature and Governor Whitman took a good step forward during the past two months by enacting new fraud penalties sponsored by Sen. John J. Matheussen, Assemblywoman Barbara Wright and Assemblyman Guy F. Talarico, and endorsed by Attorney General Peter Verniero. More needs to be done about fraud, about controlling lawsuits (a stronger verbal threshold) and about ensuring that medical tests and treatments paid for by auto insurance is really needed (medical review by medical peers, not lawyers). These steps are essential.