Auto insurance rates in New Jersey are expected to rise this year. However, instead of looking at it as bad news, take it as a sign that reforms in the industry are working as intended.
In 2003, NJ Governor Jim McGreevey called for a sweeping legislation to overhaul the State’s auto insurance regulatory structure. Among its purpose is to create a more competitive marketplace for insurers, and to give consumers more choices, protection and empowerment.
This law enabled attainment of higher profits by insurance companies. Because of the reduction of time frame given to state regulators to decide on requests for changes in rate, increases were implemented faster.
As an effect, numerous competitors in the industry emerged and a price war had ensued. However, it also had a big impact on company profits.
According to Auto Insurance Report, from a 12.5 percent profit in 2003 to 10.1 percent profit in 2007, insurance companies’ revenue continuously declined to almost a flat line last year.
Brian Sullivan, editor of Risk Information, stated, “Currently, insurance companies are not making money because of their own folly.” A trend that has emerged is that different institutions are competing so hard for customers that they are charging too little.
Sullivan emphasized that such movement in the market is “the strongest indication that reforms set in motion to do has worked.”
There are other factors are attributed to this decrease and the most notable of which is the situation of the US economy.
John Dyke, a trustee of the New Jersey Auto Agents Alliance said that profits are down because “drivers are trying to take less expensive policies in the recession.” Apart from this, he mentioned that the industry is in a cyclical downturn.
It must also be noted that approved rate increases only averaged 2.14 percent in 2008 and 6.86 percent in 2009. The Department of Banking and Insurance allowed said increases because they were impelled by higher medical costs.
A step-up in rate is usually determined by several factors including administrative costs, financial strength of the company, premiums, history of increases, and actual and projected claims. This is put vis-à-vis reasonable projected revenues.
On previous years, nationwide profit averaged only 4 percent in 2009, a downfall from 8.1 percent in 2008.
Dyke continued that with this trend in profits both nationally and locally, drivers in New Jersey should expect even more rate increases. He stressed that like other business enterprises, “the industry is affected by the economy.”
He also implied that due to the workings brought about by reform, companies that “have waited a little bit too long” to increase rates are expected to do it this year.