Posted on 24 Nov 2009
Several years ago, the high cost of insuring a vehicle in New Jersey was a contentious issue. Then, with auto insurance reforms in 2003, rates dropped, the issue calmed down, and overburdened state residents could concentrate on other pains such as taxes and job losses. However, the state Department of Banking and Insurance is formulating a plan proposing that auto insurance of urban drivers be subsidized by drivers in the rest of the state.
Under the plan, called Territorial Rating Equalization Exchange, or TREE, those living in suburban or rural areas would be charged extra for their auto insurance and the money would be used to pay part of the insurance bills of those living in urban areas such as Newark, Jersey City, Camden and maybe Atlantic City.
The insurance industry opposes the TREE plan. All four associations representing state insurance companies - the Insurance Council of New Jersey, the Property Casualty Insurers Association of America, the American Insurance Association and the National Association of Mutual Insurance Companies - have filed suit to stop the state from implementing TREE.
Most insurance companies - but not all - are opposed to TREE. New Jersey Manufacturers, the state's largest auto insurer, explained why this past week.
The origin of TREE, greatly simplified, is this: Prior to insurance reform, the state limited the amount insurers could charge drivers in a particular territory (say, Newark) to 35 percent more than the statewide average policy premium.
Patrick Breslin, spokesman for NJM, said claims data show it costs a lot more than an additional 35 percent to insure households in certain cities than similar households elsewhere.
So the rule had the effect of compelling insurers to lose money on urban drivers or quit writing policies for them (or even quit writing them in the state), or try to make up the money from policyholders in the rest of the state. Many urban drivers, meanwhile, could only get insurance through a joint-risk pool that companies were required to insure.
Auto insurance rates got painfully high, the people revolted and the system was reformed. The reforms have been rolling out slowly since 2003 and by March of this year, all companies had formulated new ratings territories.
The Department of Banking and Insurance developed TREE to use in case the new market-based auto insurance rates rose to extreme levels in urban areas as a result of the reforms.
But NJM and other insurers say, so far, it's a solution in search of a problem.
"Our position is that the competitive market has been addressing (urban insurance affordability), and government intervention should be considered only when and if a problem truly develops," Breslin said.
Rates are "not going crazy in cities to our knowledge," he said, and "the assigned risk pool remains very small, less than 1 percent of drivers, and that's where drivers would end up if they couldn't get insurance from a voluntary carrier."
Breslin said the disagreement with the state so far is a rather friendly one among industry professionals. He said NJM filed its own suit because, as a mutual company, it differs from other insurers.
"If a subsidy takes place, our policyholders would be forced to pay for this, so we represent our policyholders in this suit. Other insurers represent their stockholders," he said.
NJM's other objection is that TREE would commit the state to taking money from some insurance companies and giving it to others based on formulas that can't be known because the problem they would address doesn't exist.
An insurance company in favor of TREE is Princeton-based CURE Auto Insurance, which stands for Citizens United Reciprocal Exchange.
Eric Poe, chief operating officer of CURE, said auto insurance rates in Passaic County and Newark are about 220 percent of rates in other parts of the state.
Poe said it isn't fair that urban drivers should pay so much more, since they're required by law to have vehicle insurance.
"In my opinion, urban people are taking on a burden they can't bear," he said. "In some instances, they're paying two to four times what the same person pays in other places."
Poe acknowledged that under TREE, bills would go up for drivers outside of urban areas, and the money would be used to reduce the bills of urban drivers.
But the alternative, he said, is that many urban drivers simply won't get insurance, putting at risk everyone else on the road with them. He pointed to the example of New Mexico, where 25 percent of drivers are uninsured.
It will be interesting, to say the least, to see how the TREE battle plays out.
Suburban and rural drivers, no doubt, won't like the idea of helping pay the insurance bills of urban drivers - just as city drivers will like the idea of spreading the high cost of urban insurance claims across the whole state.
The insurance companies say the Department of Banking and Insurance doesn't have the authority to impose TREE subsidies, that only the Legislature can do that.