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by Bob Brooke

Auto insurance remains high in Philadelphia and all of New Jersey. An annual survey by the National Association of Insurance Commissioners found New Jersey motorists pay an average of $1,099 per car for auto insurance, easily placing New Jersey as the most expensive auto insurance state in the nation. Philadelphia motorists weren’t far behind. With the cost of insurance so high, how do auto insurance companies make a profit?

“New Jersey is one of the worst states in terms of profitability,” said Brian Sullivan, publisher of the Auto Insurance Report, a national insurance newsletter. “Even though companies charged high rates, they made the least because of high insurance costs brought on by too many high claims, a high cost of living, and exploding fraud.”

Sullivan also pointed out that Philadelphia, as with any city, has higher auto insurance rates due to a higher density--with more accidents per capita--higher crime rates, and higher repair costs. “Insurance rates are directly related to underlying costs,” he said. “Profits are low in places where an insurer can’t charge more than expenses.”

Also, the regulatory environment in New Jersey has traditionally kept profits low, while Philadelphia’s city environment keeps costs up, thus companies selling in either place don’t make any profit or very little. Then why do they continue selling insurance in both places?

In fact, some companies like Geico pulled out of New Jersey years ago. Nationwide never sold in New Jersey. Ed Orodeckis, president of Eastern Operations of Farmers Insurance in Baltimore, said, “We have no desire to go back to New Jersey. It’s a terrible state for personal lines. There are so many regulatory issues.”

Then how come all of the above companies continue to sell in Philadelphia where insurance costs are just as high? According to Randy Rohrbach, director of Pennsylvania’s Office of Insurance Regulations, for a company to write auto insurance in Pennsylvania, it must write policies throughout the state, including Philadelphia. Currently, 205 companies write auto insurance in the state, and there are no exceptions.

While some companies, like Allstate Insurance, make some profit in Philadelphia, most do not. “The more you sell the more money you can make,” said Gwen Carter, corporate relations manager for Allstate Insurance Co. in Pennsylvania. “We originally had one agent in Philadelphia. Now we have 27. We’re more visible, with more offices.” For Allstate, volume makes the difference.

In fact, not having visibility in Philadelphia is how many insurance companies avoid the profit issue. Even though every company must write insurance in the city, if consumers can’t find an agent who handles a particular company, they’ll purchase insurance from another company. If a consumer wants to purchase a particular company’s insurance and can’t find an agent in Philadelphia, they can use one located in the suburbs. However, the rate they pay will be based on their city residence.

But many Philadelphia residents avoid paying those high city rates by claiming they live in South Jersey. New Jersey, as part of its new insurance reform law, instituted the Office of the Insurance Fraud Prosecutor, which is responsible for cracking down on fraud, including rate jumping. Philadelphia’s District Attorney, Lynn Abraham, launched a similar campaign. Offenders face strict fines and/or jail sentences.

Unlike Pennsylvania, where no restrictions exist on profits, New Jersey law restricts the profit a company can make on a policy to 6 percent. According to John Piene, executive director of the Insurance Council of New Jersey, a non-profit trade association made up of 29 companies writing 83 percent of the auto insurance policies in the state, the Excess Profits Law requires a company to keep a 3.5 percent return on equity plus a 2.5 percent margin of error. “Insurance rates in New Jersey have profits built in,” he said. “Companies have to justify every element of a rate. All amounts over 6 percent must be returned to policyholders as dividends. And all rates need prior approval by the Department of Insurance and Banking.”

Piene added that industry profits have been bad in recent years. Because of this, over twenty companies have pulled out of New Jersey since 1990, creating a lot of consolidated risks.

On the other hand, New Jersey Manufacturers Insurance Company is making a profit, according to Pat Breslin, spokesperson. “Our rates are 25-30 percent lower than other companies,” he said. “We offer a low-cost product and return excess amounts over 6 percent back to policyholders as dividends.” But Breslin also said that the amount of rate reduction required by law is overly generous without firm proof and will potentially cut into the company’s earnings.

So what are regulators on both sides of the Delaware River doing to encourage insurance companies to sell to consumers? In New Jersey, both insurance companies and consumers hope the new reform law will foster more competition among insurers. “I'm hoping that carriers will now start competing for high-risk business and the prices will go down,” said Winnie Comfort, spokesperson for the New Jersey Department of Banking and Insurance. “They'll find that their losses aren’t equal to their expectations. And maybe with the new medical rules and arbitration system, it will bring prices down.”

New Jersey’s insurance reforms began when Governor Christie Whitman and the Legislature eliminated insurance company surcharges, an antiquated system enacted in 1990 which put a surcharge on a consumer’s policy each time he or she had an accident. In its place came a tiered rating system, which is supposed to foster competition among insurance companies. They also ended the automatic yearly rate increases granted to insurance companies, saving New Jersey drivers $150 million in higher rates, as well as preventing good drivers from paying a $1 billion bad driver debt. In addition, they added 50 fraud investigators to reduce the high cost of fake claims to the auto insurance system, and created a $25,000 fine to insurance companies that don't bother to report fraud. Finally, they created various business incentives for auto insurance companies to increase the availability and access to auto insurance in designated urban areas.

But the most visible change comes with the new reform law, which guarantees 13-15 percent savings for consumers, affordable car insurance for every good driver, minimized cost shifts to health insurance, and reform without encouraging additional lawsuits. As the most densely populated state in the nation, with more registered cars and trucks per highway mile than any other state, New Jersey has more lawsuits per 100,000 residents than any other state, for which insurance companies must add an average of $160 to insurance bills for fraud.

“We recently helped bust a multi-million dollar fraud ring in Patterson, New Jersey, which used fake accidents, fake treatments, and phantom clients,” said Maureen Sullivan, spokesperson for Allstate Insurance in New Jersey. “New safeguards governing unnecessary medical treatment should help us make more of a profit this year.”

The new law also provides for a clearer and stronger limit on lawsuits. Up to this year, New Jersey had 125 percent more bodily injury claim suits than any other state. Also, there were too many cases of people suing who weren’t seriously injured. “Changes such as the limiting of loss litigation in New Jersey help lower our costs and reduce rates while still making a profit,” said Betsy Bottino, spokesperson for Liberty Mutual Insurance Co. of Boston. A similar limited torte statute, enacted in 1990, has dramatically lowered rates in Pennsylvania.

But that hasn’t lowered the rates in Philadelphia. The city has a serious problem of losses and loss payments, according to Rohrbach. Currently, bodily claims--30 percent higher than the rest of the state--exceed property claims by over 300 percent. And where the average bodily injury claim is $5,000 per claim throughout the state, it’s $8,000 per claim in Philadelphia. “It’s also a more expensive market in which to do business,” he said. “The costs of goods and services are generally higher than in other parts of the state. Plus, people are more likely to bring a lawsuit in Philadelphia than elsewhere in the state. Every time there’s fender bender in the city, 55 out of 100 end up in a bodily injury claim suit. People suing for bodily injury and pain and suffering
drives up insurance.”

Pennsylvania legislators have created a car theft authority and an anti-fraud authority, both of which have helped to lower insurance costs in the state. Five out of six new anti-fraud investigative units throughout the state are based in Philadelphia.

And while underwriting auto insurance is a business, Michelle Fields, spokesperson for State Farm Insurance, Pennsylvania’s and New Jersey’s leading insurance carrier, said, “We don’t make a profit in Philadelphia and never have. We consider providing auto insurance to be a social obligation, setting our rates based on what our costs will be. In it’s truest definition, insurance spreads the risk among a group with similar exposure to loss.”

This article originally appeared in The Philadelphia Business Journal.

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