CAN AUTO INSURANCE COMPANIES SELL IN
HIGH-RISK AREAS AND STILL MAKE A PROFIT?
by Bob Brooke
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
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
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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