CURE In the News

Business News New Jersy - August 7-13, 2001

Automotive AntidoteDoes NJCURE Have the Answer for New Jersey's Drivers?

By Marshall McKnight

New Jersey is near the top in the nation for many splendored things. It has great beaches, ruby red sunsets, hundreds of historic landmarks and more diners than anywhere else. On the not-so-good list are toxic waste sites, the number one population density, poor air quality and the priciest auto insurance.

For decades, New Jersey’s auto insurance industry has served as a perennial political football. While the players may have changed, the campaign game plans on both sides of the aisle remain the same. This election season promises to be no different. What should be done about New Jersey’s high auto insurance rates is once again being punted around the Garden State hustings.

This year’s political pre-game show has featured announcements by several big auto insurance writers, including State Farm and AIG, that they’ve had enough and plan to leave the state’s auto market. In June, the National Association of Insurance Commissioners in Kansas City, Missouri released its annual premium survey, which showed auto insurance in New Jersey still costs more than in any other state in the U.S. Insurance executives and many experts say state regulations, most recently measures enacted in 1998, which control auto insurer profits and rollback rates, make it unattractive to do business here.

Theories on why New Jersey autos cost so much to insure abound. An active legal community, a large number of cars on the road and a flawed no-fault system designed Peter Jonson, chief financial officer, left, James Sheeran, chairman, and Vincent Travis, secretary, of Reciprocal Management. by lawmakers receive much of the blame for the state’s high auto insurance costs.

At least one Garden State company says it has a solution. This West Windsor firm sees what’s happened to New Jersey auto insurance as a disease rather than a good game gone bad. Officials from the not-for-profit New Jersey Citizens United Reciprocal Exchange say they have the cure for what ails the state’s auto insurance malady. Called NJCURE for short, this 11-year-old auto coverage carrier is based on a model that’s as old as the concept of insurance itself.

A reciprocal exchange is a group of people with similar backgrounds and interests who agree to pool their money and insurance companies ever formed in America were reciprocal exchanges. The theory behind this type of insurer is that it can keep losses down by including only relatively low risk members in the exchange. The not-for-profit operation then passes the savings on to the members in the form of lower premiums and keeps any surplus for its members’ benefit.

The benefit for NJCURE customers is clear. Many of them are saving up to 50% on their insurance premiums while getting similar or better customer service compared to the statewide industry. This year coverage. That represents only a small fraction, just over four tenths of one percent, of all the cars chugging along on New Jersey’s clogged highway system. But it’s a start, says NJCURE co-founder James Sheeran.

The company has come a long way from the “lick ‘em and stick ‘em days” when NJCURE’s some dozen employees knocked on doors to recruit members and handled mail room responsibilities themselves to save money. Market share has grown tenfold from an initial 2,000 cars insured in 1990, its inaugural year. It has also been turning profits into additional surplus. It now has a capital base of $5.7 million, up from $3.8 million in 1998.

Back in 1990, “the insurance market was in a terrible state of affairs,” Sheeran, the state’s Insurance Commissioner from 1974-1982 under Gov. Brendan Byrne, recalls. “There were all kinds of problems.”

Several major companies bailed out or stayed out of the state, including half of the nation’s largest auto insurers. By the end of the 1980’s, nearly half of all drivers found themselves paying high risk rates in what was then called the Joint Underwriters Association. Its acronym, JUA, still curls the lips of insurance insiders and draws derisive sneers from many.

Cries of reform echoed loudly in Trenton’s State House halls. A series of reforms came and went, but nothing the Governor or state lawmakers did seemed to work, say industry analysts.

Sheeran, 78, along with his wife, Dr.Lena Chang, 62, an actuary, founded NJCURE and helped it grow through a series of state insurance regulation changes. The company tagline reads, “The Not-forprofit solution for New Jersey Auto Insurance.” Sheeran and Chang concede their company is not a cure-all. For one thing it has strict underwriting standards and only about 8% of the drivers who apply end up actually signing up for coverage.

Peter Jonson, CFO for Reciprocal Management, the company which runs NJCURE says it will take drivers with spotless records and forgive those who have a couple of points on their license or a minor fender bender on the books. But a DWI conviction is a deal breaker. Drunk drivers need not apply.

So far this year, the waves created by pull-out threats from State Farm and AIG have washed more customers to NJCURE than expected. Jonson says the company’s gross premiums will probably reach $21 million by the end of 2001.

“Business has definitely picked up,” says Jonson.

NJCURE executives argue that if other New Jersey drivers follow their example and form more reciprocal exchanges, the state could lose at least one dubious distinction: the highest auto insurance rates in the country.

“Reciprocal exchanges are non-profit by statute, and the reciprocal model may provide cost advantages for an insurer during its start-up process,” says the state’s Banking and Insurance Commissioner, Karen Suter.

“It’s really the way to go,” says Sheeran passionately as he proudly tours the company’s facility where more than 100 people work. “It gives people an incentive to save money on their premiums.”

How much can they save? A BUSINESS NEWS comparison of a rate quote from NJCURE for a Highland Park resident who owns a 1998 Mercury Tracer, with what Allstate, the state’s third largest auto insurer, would charge to cover the same vehicle shows a savings of 43% with NJCURE. It quotes a rate of $1,173 compared with Allstate’s $2,076.

State officials insist that New Jersey drivers are already saving on their premiums thanks to the 1998 reforms, which rolled back rates 15% and placed a six percent cap on profits. Lower numbers are showing up in New Jersey auto insurance bills, but aren’t reflected in NAIC statistics yet, says Peter Hartt, a spokesman for the state’s Department of Banking and Insurance. Tired of waiting for new reports based on two year old data, the state made its own survey last year and came up with an average premium price of $955.22, says Hartt. That’s about $78 lower than NAIC’s number and might knock New Jersey off its infamous number one perch. The NAIC puts the average cost for an auto policy in Washington, D.C. at $988.02.

“The only thing we know for sure,” says Hartt. “is that rates have gone down for a couple of years in a row.”

Last year, when Prudential showed a sizable auto insurance profit, the state acted. It asked the Newark company to kick back $25.1 million in excess earnings to 325,000 of its policyholders.

“The excess profit law is working as it was intended to protect consumers,” Suter said last July. “Despite claims that the recent auto insurance reforms are hurting some insurance companies, Prudential and other major insurers clearly have demonstrated that it is possible to make a profit selling auto insurance in New Jersey’s new competitive market.”

New Jersey has only about half as many auto insurers writing business as some other states, such as Illinois, says Rutgers economics professor John Worrall. He says New Jersey has 67 companies selling auto insurance while Illinois has 129. Having a bigger pool of writers, he says, helps make the market more competitive and hold down premiums.

“How can you have an industry with as many firms as that competing for business, but regulated like it’s a monopoly?” Worrall says of New Jersey. “I don’t understand that kind of logic. It mystifies me. My philosophy is let the market see what people buy with no price regulation.”

NJCURE’s tried and true business model is a viable one, says Worrall. Another selling point with NJCURE is that it writes directly to the customer, as do many big insurers. NJCURE says that takes out the proverbial “middle man” and saves costs.

That point predictably rings up a “no sale” with Gary Newborn, president of the Independent Insurance Agents of New Jersey, a Trenton trade group. He says studies show operating costs for direct writers as expressed in their expense ratios are about the same as carriers using independent agents. Often, cost savings aren’t actually passed on to consumers even if there is a savings, he argues.

“Saying we have a better price because we don’t have agents is really a disingenuous argument,” says Newborn, who has an insurance agency in Flemington. “In New Jersey, it’s impossible to sell insurance without a licensed person on staff. What they mean is that they are not using an agent that lives in your community and maybe doesn’t have to be accountable to the public in that community. It’s an advertising gimmick and not really a genuine representation of a company’s expenses.”

“I don’t think the form of an insurance company, whether it’s a reciprocal, a mutual or stock company, is much of an issue,” says Worrall. “Consumers don’t give much of a damn about that. They want coverage at a good price with good service.”

Reciprocal exchanges in New Jersey’s auto market are holding up well in customer service even though they only account for about four percent of the total market. NJCURE along with USAA of San Antonio, Texas, and Palisades Safety in Hoboken, all reciprocal exchange companies, had some of the lowest complaint ratios in the business last year according to the Department of Banking and Insurance rankings.

Sheeran attributes NJCURE’s customer service record to an active training program. He describes the claims department as a close-knit group that often socializes together and works like a team. A relatively small number of pending files helps too, he says. The average number of active claim files is around 100, which is low compared to 300 or more found in the departments of some companies.

Keeping the number of claims down makes it easier to sniff out insurance fraud, say Sheeran and other NJCURE staffers. Nationwide, fraud tends to run 20 percent of total premium costs, while New Jersey officials peg it at a third of total premiums.

Another contributing factor to the high cost of auto insurance in New Jersey is population density—the entire state is considered a metropolitan area by the U.S. Census Bureau. According to the NAIC, the ten most expensive auto insurance states have between 75 and 100 % of their populations living in metropolitan areas.

Sheeran, a true believer of the reciprocal exchange model, has run similar companies in the hospital and liquor liability markets. He hopes that companies like NJCURE will blossom. But there is a long way to go before that bloom is on the Garden State rose.

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