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New Jersey has one of the most heavily regulated insurance markets in the nation. Historically, New Jersey’s consumers have paid the highest rates in the nation for automobile insurance, and they continue to do so today in the wake of a number of failed attempts to reform the insurance market over the past 30 years. In fact, a recent survey found that in New Jersey 17 percent of consumers believe that automobile insurance is the most important problem they face, while in other states only 1 percent of the consumers rate automobile insurance as a significant problem.
Automobile insurance will continue to be a problem in New Jersey unless fundamental reforms are introduced that eliminate burdensome regulations and provide consumers with more choice in the market for automobile insurance. Recent academic studies of the insurance sector suggest that the market throughout the country is actually quite competitive, which means that once the regulatory barriers to competition in New Jersey are removed, consumers will be able to purchase insurance from a wide array of providers. Moreover, new technologies are providing even more information to consumers and enhancing the competitive aspects of the insurance market.
Despite the competitive nature of the market, however, New Jersey remains plagued with an over-regulated, unresponsive regulatory structure that has done little to help consumers. On the contrary, the current regulatory structure is driving insurers out of the state and reducing the choices available to consumers. More than half of the 15 largest automobile insurers in the country have left New Jersey or are planning to do so in the near future. Four of the six largest insurers in the nation have pulled out of New Jersey, and one more is in the process. At the same time, many consumers pay unusually high prices for insurance because regulators have created a system in which good drivers subsidize poor drivers, lawsuits and medical fees drive up costs, and fraud and abuse are rampant. As Rutgers University Professor John Worrall notes, “The New Jersey experience should prove to be an object lesson in how not to regulate rates, and how to write bad insurance law.”
Competition Provides Real Choice
The most recent reforms, adopted in 1998, were meant to quell consumer outrage over the high costs of automobile insurance. Expensive insurance policies were the result of a high-cost, mandatory hybrid of no-fault insurance and an expensive tort system, along with an overbearing regulatory system in which regulators continued to compound problems by adding new regulations to address problems created by previous regulations. The 1998 “reform” was a compromise in which consumers were promised a 15 percent rate rollback while insurers were assured of changes that would reduce the cost of doing business, such as repealing regulatory restrictions that tend to force good drivers to subsidize bad drivers.
Unfortunately, rates remain mired in the regulatory process and political pressure rather than economics tends to drive the approval process. Consequently, insurers continue to exit the market and consumers have fewer choices for automobile insurance. If consumers are to find relief from costly insurance provided by a shrinking pool of insurers, New Jersey must undertake fundamental reforms of the market. Rather than seeking new regulations to fine-tune the failed regulatory structure, regulators must turn toward markets and competition to benefit consumers. Costly and lengthy regulatory approval processes must be replaced with a more flexible approach that allows insurers to tailor their policies to the needs of the individual consumer. Territorial rating burdens, arbitrary caps on insurers rates of return, and restrictions on rate adjustments must be eliminated.
The Competitive Solution
New Jersey’s dense population and high income will always produce rates above the national average. However, evidence from other states demonstrates the ability of competition to provide consumers the automobile insurance they need at affordable prices. The market for automobile insurance is not, by any definition, a monopoly and the overgrown regulatory framework in New Jersey has proved to be more of a hindrance than a help to New Jersey’s consumers. Policyholders would fare much better in a competitive environment, which creates incentives for insurers to enter the state rather than leave. Reform is possible, but it requires consumers to challenge the current regulatory structure and support efforts to implement fundamental changes to insurance in New Jersey.
For too long, New Jersey’s consumers have been burdened by an archaic system of insurance regulation that has choked competition and driven providers out of the state. Rather than another round of regulatory “fixes,” New Jersey needs to seriously consider a more competitive alternative for automobile insurance. Recently, Citizens for a Sound Economy joined a new coalition seeking to reform automobile insurance in New Jersey. The Coalition for Auto Insurance Competition (www.njcaic.org) promotes competition and consumer choice as the right solution for New Jersey’s insurance woes. For more information on New Jersey’s auto insurance crises and to learn how you can help, write to firstname.lastname@example.org.