The Long Road To Personal Automobile Insurance Reform In New Jersey

Slide 1:The Long Road To Personal Automobile Insurance Reform In New Jersey March 2006

Bernie Flynn Senior Vice President & General Counsel NJM Insurance Group

Slide 2:New Jersey Automobile Insurance History – 1970s

No-Fault System adopted in 1972 Residual Market/Assigned Risk mechanism grew to cover 1.2 million drivers (one out of every four) Tight regulatory control over rate setting Companies began to exit the market, including GEICO and Nationwide

Slide 3:New Jersey Automobile Insurance History – 1980s

Overburdened Assigned Risk Plan replaced by a Joint Underwriting Association (the “JUA”) in 1982 15 servicing carriers with no risk of loss managed the policies of the JUA JUA drivers were charged voluntary market level rates and it was lucrative for agents to dump risks there By 1988, about 50% of NJ’s drivers (over 2 million) were insured through the JUA and the financial deficit approximated $3.3 billion

Slide 4:The Fair Automobile Insurance Reform Act of 1990 (FAIR Act)

Jim Florio elected Governor on the promise of: Getting rid of the JUA Eliminating the $222 per car Residual Market Equalization Charge (RMECs) imposed on all NJ drivers to subsidize the JUA Generally reforming the auto insurance system

Slide 5:The 1990 FAIR Act

$3.3 billion deficit paid by: Surcharges and assessments imposed on insurers, hundred of millions which could not be passed through to policyholders Increased Motor Vehicle Fees Assessments on doctors, lawyers and body shops Aggressive depopulation of JUA mandated - 40,000 drivers absorbed into the voluntary market each month for four years. JUA became the Market Transition Facility (MTF) for two years (and ran up an additional $1 billion in debt) until new Assigned Risk Plan implemented (PAIP) Take-All-Comers requirement instituted Insurer Lock-In-Law very restrictive

Slide 6:1997 Automobile Insurance Reform

Governor Whitman eliminated the flex rating system instituted by the FAIR Act (which served to keep carriers afloat during the depopulation of the JUA/MTF) Flex rating was replaced by an expedited rating mechanism for increases up to 3% on average – to be implemented by the Department of Insurance regulation Urban Enterprise Zone program mandated – shifted drivers from carriers top heavy with urban risks to carriers which did not have urban market shares equivalent to or higher than their suburban market shares Surcharge programs eliminated, tier rating programs authorized Nonrenewals restricted

Slide 7:1998 Automobile Insurance Reforms – Automobile Insurance Cost Reduction Act (AICRA)

AICRA became law on May 19, 1998: Required a mandatory 15% average rate reduction for full coverage policies Authorized the creation of the Office of the Insurance Fraud Prosecutor Set forth a new Verbal Threshold intended to eliminate lawsuits for non-serious, non-permanent injuries Provided for new PIP system permitting utilization review and establishing medical protocols for treatment of common auto injuries Directed that rating territories be redrawn and the 35% cap imposed on certain urban territories be lifted

Slide 8:Auto Rate Regulation In New Jersey = Strangulation

July 1, 1997 Governor Whitman issued a press release after repealing the flex rate law declaring a “Rate Freeze” From 07/01/97 until 11/06/01 Expedited rate making process not adopted by Department 65 prior approval rate filings made 6 average rate decreases approved 4 average rate increases approved

Slide 9:Shock Waves

April 6, 2001 – Commissioner declared State Farm’s NJ subsidiary to be in hazardous financial condition Largest personal auto writer in NJ with 17% of the market (850,000 insured vehicles) relieved of: Take-All-Comers obligation PAIP assignments UEZ requirements June 12, 2001 – State Farm filed to withdraw from the NJ auto market June 15, 2001 – AIG’s subsidiary (200,000 insured vehicles) followed suit and filed to withdraw

Slide 10:The Seeds of Change

November 6, 2001 – Jim McGreevey elected Governor Don Bryan – Acting Commissioner Following election: Necessary prior approval rate increase requests approved Expedited rate regulations finally adopted (up to 3% on average) Holly Bakke appointed Commissioner in early 2002

Slide 11:Momentum For Regulatory Reform

Commitment by Governmental Leaders to improve market Effective Lobbying and Grass Roots Campaign by Industry Typical political concerns about the price of auto insurance overwhelmed by the inability of many NJ drivers to find coverage Availability crisis dominated the debate

Slide 12:Automobile Insurance Competition and Choice Act of 2003 (May)

Rate Reform Expedited Rate Process expanded from 3% to 7% Relaxation of some Prior Approval requirements Excess Profits made less onerous, but not eliminated Three-year look back period moved to seven years Withdrawal (Lock-In-Law) restrictions loosened Take-All-Comers to be eliminated over a five-year transition period.

Slide 13:Market Developments

Expedited Rate Process working as designed Mercury General enters market – August 2003 Credit Scoring permitted for Mercury General immediately – opened to industry use in 2004 GEICO enters market – August 2004 State Farm begins writing new business – January 2005 AIG begins writing new business – 2004/2005 Progressive enters market – October 2005

Slide 14:CompetitionPrevails

Slide 15:Remaining Issues

No-Fault Cost Drivers Tight Michigan-like Verbal Threshold weakened by June 2005 NJ Supreme Court decision Since 2001 there has been no Physician PIP Fee Schedule and NJ has never had a Hospital Fee Schedule PIP Medical Costs are out of control The Department continues to impose urban territorial rate caps AICRA of 1998 authorized reform of rating territories – still not implemented

Slide 16:February 27, 2006The Newark Star Ledger

"GEICO's two rates: White-collar and blue-collar" Legislator vows to ban practice of using education and occupation to underwrite and price risks