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For consumers in New Jersey, times are tough and getting tougher. I’m not talking about the nation’s economic slump; I’m referring to the state’s automobile insurance mess, which is reaching new lows. After 20 years of political meddling, over-regulation, and central planning that would make the Politburo blush, the system is collapsing. More than 20 insurance companies have already fled New Jersey, with five of the ten largest insurers in the nation refusing to write policies in the Garden State. Now State Farm Indemnity, one of the major carriers in the state, is throwing in the towel. Beginning this month, the insurance company will be dropping 4,000 policies a month as part of the exit order from the state.
The problem will become that much more vivid when those seeking to replace their insurance start shopping around for new policies. In a state where automobile insurance has become a disaster, it’s not surprising that nobody wants to do business. Finding new coverage will be a real challenge. There are fewer carriers remaining to pick up the coverage, and many actually are exempted from requirements to pick up new customers because they are in terrible financial shape and cannot afford to take on new coverage. Tragically, this will undoubtedly increase the number of drivers who choose to drive without insurance.
Why is New Jersey in such bad shape? The insurance crisis is a clear example of the dangers of over-regulation. Most economists have questioned the need for regulating the insurance marketplace. Numerous studies have found the market to be competitive, and as Robert Litan of the Brookings Institution noted, more than 100 firms normally compete in the average state. Despite these findings, which are not new, several states have established sweeping regulatory regimes to cover the industry. New Jersey and Massachusetts have been the worst offenders, and it’s consumers in these states who feel the sting of excessive regulation.
In New Jersey, regulators have created a crazy quilt of regulations that make it impossible for insurers to rationally serve their customers. The products they offer and the prices they charge are all controlled by the state. Typically insurers assess the risk that a driver poses and price insurance accordingly. This provides the policyholder with incentives to drive carefully while allowing the insurers to cover their losses should an accident occur. In New Jersey, however, insurers have little say in who they serve or what product they offer. “Take all comers” laws require insurance to be offered to virtually all drivers. In addition, the state has territorial rate caps that limit the ability to price insurance according to risk, which results in low risk areas subsidizing high risk areas. Insurance companies are also prohibited from changing rates or creating new types of coverage without state approval, which moves at the speed of bureaucracy and can take up to one year. To top things off, there is an “excess profit” law that requires insurance companies to issue refunds if, by some slim chance, they earn more than 6 percent profit.
While it may seem these laws would help consumers, they really have done nothing for drivers in a state where high population density, high theft rates, and a high degree of insurance fraud had already made insurance expensive. Today annual premiums of more than $3,000 are not uncommon. And the regulations on insurance have only exacerbated the problem. Insurers cannot price products according to the needs of an individual customer, leading inevitably to some drivers subsidizing others.
For better or worse, the crisis is coming to a boil, and the state government has been forced into action. Gov. Jim McGreevey has announced that he will address the issue this fall, and state Assemblyman Lou Greenwald has introduced “The New Jersey Auto Insurance Competition and Choice Act,” which is a promising start for returning common sense to the insurance market. Other states faced with insurance crises have abandoned regulation in favor of more competitive markets, with favorable results. It’s time for New Jersey to do the same. By increasing consumer choice and providing incentives for insurers to come to New Jersey rather than leave, real reform offers a way out of the current morass.