An Unlikely Lesson
I grew up in New Jersey, and one of the lessons I soon learned by the time I was old enough to drive a car was just how screwed-up the automobile insurance business in that state actually was. For the longest time, New Jersey ranked as one of the states that exercised the most control over how auto insurance companies could operate. Most significantly, rates were regulated tightly and subject to approval by state bureaucrats. Despite these regulations, or, rather, because of them, New Jersey consistently had the highest automobile insurance premium rates in the nation.
Several years ago, though, the political leaders in the state had an amazing idea…..why not let the market for automobile insurance work without government insurance ? The results, as even the New York Times admits, are really quite interesting:
Joseph Alfano, who works for an office supply company in Clifton, N.J., got a pleasant surprise when he renewed his car insurance this summer. The premium on his 1997 Mercury Mountaineer dropped nearly 30 percent, to $1,273 a year.
It went down almost $500,” Mr. Alfano said. “That’s significant money.”
Mr. Alfano’s good fortune is common these days in New Jersey. For the first time in decades, prices for coverage are falling in the state and insurance companies are fighting for drivers’ business. Roadside billboards cry out with special deals; radio and television are peppered with car insurance advertisements.
It is a mammoth change in a state where auto insurance has been a long-running nightmare and it puts New Jersey in line with auto insurance practices in most of the country.
More tellingly, it provides a case study in what happens when competitive forces are unleashed and markets are allowed to operate more freely. And while some drivers are worse off, the vast majority of consumers have gained from the changes.
Basically, what happened is that, starting about three years ago, New Jersey lawmakers finally began unraveling the complex regulations that governed how automobile insurance companies could do business in the state and allowed them to set their own rates and compete on their own terms.
Insurance regulators say more than 75 percent of New Jersey’s drivers are now paying less for auto insurance and that further reductions are expected.
Auto insurance prices have been declining around the country, as fewer accidents have been reported and big inroads have been made against fraudulent auto insurance claims. But nowhere are prices falling as sharply as in New Jersey. And insurance experts say that the easing of regulation in New Jersey has been by far the most important factor.
Most important among the changes that have resulted from the relaxing of the insurance regulations is an increase in competition. In the past, citizens of New Jersey suffered largely because many insurers (the most prominent of those being Geico) simply chose to stop doing business in the state rather than deal with the regulations coming out of Trenton. With those regulations gone, that’s changing:
With nearly 20 new companies doing business in New Jersey — introducing much more variation in price and service levels among insurers — nearly a third of the state’s three million drivers have switched carriers. Geico, the most successful of the new companies, said that it had signed up the drivers of more than 500,000 cars and trucks since it began operating in New Jersey two years ago.
This certainly isn’t a surprising result when one considers how things worked under the old system:
[R]egulators made it more difficult for insurers to raise rates. One consequence was that in good years insurers held off from requesting lower rates for fear that when their fortunes turned, they would not be permitted to reverse the process.
At the same time, because the rates were capped and insurers were required to provide coverage to all but the most horrendous drivers, the companies said they were often selling insurance at less than their estimated costs. The more coverage they sold, the insurers contended, the more money they lost. So they tried to keep good old customers, but avoided new ones. They often let their phones ring off the hook.
To keep rates tolerable in cities like Newark and Camden where auto accidents were more common and theft was rampant, state officials permitted insurers to compensate by increasing prices more in the suburbs. But to avoid selling to higher- risk drivers, insurers operated few agencies in the cities and set limits on how many policies agents could sell.
One of the biggest shocks I had when I moved from New Jersey to Virginia 16 years ago was the astronomical difference in auto insurance premiums. If nothing else, it made plain the true cost of government intervention in the market. The fact that it’s taken this long for the citizens of the Garden State to be liberated from auto insurance socialism is, quite honestly, a travesty.
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