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Misguided Car-Insurance Changes

May 5, 2007


NEW JERSEY'S revitalized automobile insurance market has emerged intact from criticism that it permits insurers to consider education and employment in calculating driver risk. The state Senate Commerce Committee has rejected a bill to forbid the practice.

The only committee member who supported the bill when the panel voted in March was Sen. Nia Gill, a Montclair Democrat and a sponsor of the measure. She argued that education and job status were proxies for race and income, which insurers are forbidden to consider.

As to the merits of the bill, one might expect a high school dropout working in a fast-food restaurant to do as well on a state road test as an economist with a doctorate from Harvard. However, insurers say that more is involved in driving day in and day out than physical ability.

Judgment is involved, and prudence. If a person has obtained a bachelor's or higher degree and holds a responsible job as a manager or professional, chances are that he or she is a good insurance risk. That has been the experience of the Geico insurance company.

Other users

Indeed, when regulators in Maryland raised questions about use of education and employment in risk assessment, the company submitted data proving they were valid criteria.

In New Jersey, nine other insurers use education in evaluating risk, and two others use occupation. Only Geico and one other firm, Electric Insurance, use both. However, Geico says that it also considers 23 other factors in assigning motorists to risk categories.

It returned to the New Jersey market just three years ago, after advertising nationally for three decades that its policies were "not available" here. Since it came back, it has done a roaring business, becoming the third-largest insurer in the state, covering 620,000 vehicles.

The state Department of Banking and Insurance advises motorists to shop around for coverage. If Geico's proposed premium seems high, another company may charge less.

What's important is that competition has returned to the insurance business in New Jersey, and motorists are benefiting. Geico calculates that it is saving policyholders an average of $750 a year. There has been a big change since 2001.

At that time, the automobile insurance business in New Jersey was a shambles. Insurers were closing up shop. They said that the regulatory climate here was hostile, that the rules and the bureaucrats would not let them make a profit.

State Farm was the biggest insurer, with 825,000 policies. The company's requests for rate increases had been rejected repeatedly. It was losing money. So it decided to leave the state. The law didn't allow it to do this summarily, though. It had to phase out its departure. It began to do this, refusing to renew 4,000 expiring policies every month.

The owners of these policies had trouble obtaining replacement coverage. Insurers were looking for ways to reject applicants, not to sign up new ones. Some people began driving without insurance.

McGreevey pick

There was a new man in the governor's office, James E. McGreevey. He was a liberal Democrat. It turned out that he had other inclinations as well, which would lead ultimately to his resignation. However, he did accomplish three things. He fixed a fiasco with the E-ZPass toll collection system. He fixed another fiasco with motor-vehicles emission inspections. And he fixed automobile insurance.

He did this by hiring a competent administrator, Holly Bakke, and essentially giving her carte blanche. He and legislative leaders agreed to relax insurance regulations, giving companies more latitude to raise rates, to decide which drivers to insure, and to charge higher rates for drivers likely to incur claims. This was risky for the politicians. If the insurance companies responded by boosting rates sky-high and refusing to write policies in the inner cities, there would be a tremendous uproar. This didn't happen, thanks to Bakke.

She set about convincing the industry that if it played square, she and the governor would, too. She made a convert of the formidable Maurice Greenberg of the American Insurance Group, persuading him to reverse a decision to pull out of New Jersey.

State Farm saw what was happening and stopped canceling policies. As for Geico, which had become a unit of Berkshire Hathaway, led by Warren Buffett, the celebrated Sage of Omaha, it announced "Good news" for New Jersey. It was returning to the state, effective immediately, and Buffett gave Bakke much of the credit. "She would be a success in any line of work," he said.

It was against this background that Nia Gill and minority and consumer advocates, including the NAACP and New Jersey Citizen Action, mounted a campaign to forbid insurers to base rates in part on drivers' education and employment. This would have meant a return to politically correct rate-setting. Minorities and low-income people would benefit.

To remain profitable, however, the insurers would have to raise rates on other drivers, and there were many more of these than there were people whose premiums would be reduced. There was little stomach in the Legislature for returning to the bad old days. Of the Senate Commerce Committee's five members, four two Democrats and two Republicans voted against releasing the bill for a floor vote. Good.


James Ahearn is a contributing editor and former managing editor of The Record.

(c) 2007 Record, The; Bergen County, N.J.. Provided by ProQuest Information and Learning. All rights Reserved.

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