But if that was heralded as a move in the right direction, New Jersey is about to take a very different step: Under a law adopted in 1998, price restrictions that currently preclude companies from charging city drivers more than 35 percent above the statewide average will be lifted, possibly by the end of this year.
Exactly how all of this will play out remains to be seen. What is clear, however, is that New Jersey has encountered the same dilemma as other states in their attempts to address the twin problems of insurance availability and affordability: When laws and regulations squeeze one side of the urban car insurance market, problems often pop out somewhere else. Typically, either non-urban drivers end up paying more for their insurance or companies take a financial hit. For now, says an industry representative, companies are losing money on the urban business they've been forced to write in New Jersey, where drivers pay more on average for auto insurance than in any other state.
"It's a difficult problem for government to solve," says J. Robert Hunter, director of insurance for the Consumer Federation of America and formerly Texas' insurance commissioner. Although he concedes that the urban insurance market could be made more fair, particularly for safe drivers, Hunter says the overall picture is tough to improve. When states try to restrict rates, companies simply take their business elsewhere. Only about 60 companies sell auto insurance in New Jersey, for example, compared with nearly 400 in Illinois, which does not regulate pricing at all.
At the root of the problem are the greater losses--at least in aggregate--racked up by urban drivers. Not surprisingly, accidents are more frequent on congested roads. Theft and vandalism are more common in cities, too. To a certain extent, it makes sense for city drivers to pay more for car insurance. But consumer advocates in several states argue that the higher number of losses in urban areas cannot possibly account for the huge difference in rates. Take, for example, a comparison made by Public Advocates, a nonprofit group in San Francisco, between rates filed by Farmers Insurance for male students with identical driving records and coverage in San Luis Obispo and South Central Los Angeles. According to the organization, slightly more than the statutory minimum coverage would cost $1,706 in San Luis Obispo. In Los Angeles, that figure would be $7,844.
Confronted with such statistics, politicians, regulators and community activists around the country have engaged in repeated efforts to compel companies to sell more policies in inner cities or cut their prices there or re-jigger how they compute prices in the name of giving at least good drivers a break.
Although many states forbid licensed insurers from declining coverage on the basis of an applicant's address, consumer advocates maintain that companies accomplish such an objective by having no sales offices or appointed agents in inner-city neighborhoods.
The Texas Department of Insurance took a shot at this problem when it accused Nationwide Financial Corp. in 1998 of discrimination in its auto and homeowner insurance sales against poor and minority communities. The company, while denying the charge, agreed in May 1999 to open 20 new sales offices and increase sales to parity with its statewide market share in about 100 ZIP codes where the minority population exceeds 60 percent.
But even with that achievement under his belt, Texas Insurance Commissioner Jose Montemayor is sympathetic to companies that don't see much economic incentive to opening offices in communities where many drivers don't buy insurance at all and many others buy only the minimum coverage required by the state. "You would not expect a fast- food restaurant to locate on a highway that is not very busy," he says. Although consumer advocates at times decry insurance profitability, the industry depends on investment capital to provide coverage.
By all appearances, New Jersey's effort to get companies to write policies for urban drivers is working as intended. The 1997 legislation required companies to increase their share of 27 designated urban markets to equal their share of the statewide market. Last fall, the state Insurance Department reported that, for the most part, companies had met their obligations and that the number of insured vehicles within Automobile Urban Enterprise Zones had jumped 12 percent in two years, compared with a 4 percent increase statewide in the same period of time. Presumably--although no one is really certain--the growth in insured vehicles reflects a decrease in uninsured cars tooling around places such as Newark and Camden.
The long-term test, however, will come when the caps on urban rates are lifted. That was supposed to happen back in January, but has been delayed by another touchy issue. The 1998 law directs the Insurance Department to draw a new map of rating territories to replace its 27 existing territories. Debates over the number of territories--which are intended to group communities with similar losses--will pit urban drivers against their suburban counterparts. On the one hand, many tightly drawn homogeneous territories would assuredly fuel even higher rates in the cities, because losses are higher. On the other hand, fewer but larger territories would mean lumping cities and suburbs together, which would moderate rates in the cities but boost them in the suburbs. Spreading risks over larger areas would be fairer, says the Consumer Federation of America's Hunter, because suburban drivers contribute to the congestion in cities that causes more accidents.
Underlying the price of insurance is the near-impenetrable practice of actuarial science, which determines the amount that insurance companies should collect in premium revenue and how the total should be split among all the drivers.
The basic idea is to divide drivers into groups and charge them according to the level of risk that they will file claims. But beyond the statistical fact that 16-year-old boys in cities pose a higher risk than 30-something moms in small towns, experts don't agree about how predictive are factors such as a single accident, marital status and whether a driver travels each morning with heavy traffic or against it, let alone who should decide how to apply such factors. Urban advocates, for example, regularly complain that too much weight is given in setting rates to where drivers live and too little is given to a driver's record. As a result, they say, good drivers are penalized for having city addresses.
A seemingly dramatic change in the use of such rating factors was included in a landmark ballot initiative passed by California voters in 1988. Proposition 103 ended the state's open-competition system of setting insurance rates. In the ballot initiative was a stipulation that rate-setting must be based on a driver's safety record, annual miles driven and years of driving experience, in that order, along with other factors, so long as they are given less weight in the mathematical process.
Hunter and other consumer advocates nationwide praise the Proposition 103 rules for limiting the importance of geography and lumping good and bad drivers together. But 12 years after passage of the proposition, the impact of using factors differently is unclear. Companies still count ZIP codes more than any other factor, according to Public Advocates, which has sued the state Insurance Department over its implementation of the weighting rules.
With no end in sight to that controversy, California legislators made another run last year at guaranteeing the availability of affordable insurance. The legislature created a four-year pilot program that cuts the minimum level of insurance required for certain drivers in Los Angeles and San Francisco counties. The law then set the price for the reduced-coverage policies, which became available in July, at $410 in San Francisco and $450 in Los Angeles. But legislating prices, which presumably must cover claims paid out to policyholders in order for the pilot to be deemed a success, may be more an act of faith than actuarial forecasting.
Although the prices were based on a consulting actuary's report, the document also included a lengthy list of caveats that didn't get much attention, says Tim Hart, chief of the legislative bureau of the California Insurance Department. "Legislators get very impatient with actuarial assumptions," he notes.
New Jersey officials can attest to the hazards of government-set pricing. The state operated successive insurance programs in the 1980s and '90s, as a safety net for drivers who couldn't obtain policies from private companies. The programs ended up with 60 percent of the market and a $6 billion deficit.
While some states are looking for statutory and regulatory mechanisms to cut the cost and increase the availability of auto insurance in cities, others are turning the job back over to the marketplace.
In 1996, for example, the Michigan legislature gave insurers significantly more latitude than they previously had in setting rates. By allowing companies to match rates with risks, lawmakers hoped to attract more competitors into the state and thereby increase availability even in the worst areas.
The results are mixed. Rates have jumped in Detroit but dropped in Traverse City. At the same time, however, eight new companies have begun writing auto insurance in Michigan, and applications to the state's assigned risk pool have been cut in half.
