STATE EFFORTS TO ADDRESS URBAN AUTO INSURANCE COSTS

STATE EFFORTS TO ADDRESS URBAN AUTO INSURANCE COSTS Introduction For the last three decades, if not longer, the impact of automobile insurance rates on policyholders has been a topic of discussion and controversy in various parts of the nation. Interest in this area no doubt stems from rising losses that have resulted in higher insurance premiums for the policyholder. This is particularly true in urban communities, as the cost of auto insurance is typically higher in metropolitan areas due to their higher cost of living, greater traffic density leading to more crashes, more expensive health care and repair costs, higher vehicle theft rates, and greater levels of claiming behavior. In an attempt to keep rates more affordable, especially for those living in the cities, some regulators and legislators have attempted over time to implement different types of initiatives to address the high cost of auto insurance in urban areas. To be successful, these efforts must be targeted to the factors that lead to higher urban auto insurance rates mentioned earlier. There have been a number of varying proposals raised in different states. This paper, prepared by the, offers examples of potential solutions that have been put into place as a remedy to alleviate affordability concerns in urban areas (in some cases, the entire state) and what the impact of these changes has been. Some have been met with success, while some have had a negative impact. Table 1 is a summary of these reforms and their impact. Most have resulted in positive effects such as a reduction in losses, hence a reduction in rates, an increase in the number of insured drivers, or greater availability of insurance provided to consumers. Some of the more successful programs are implementing health care cost controls, lowering coverage limits, utilization of fee schedules, eliminating duplication of recoveries, and greater anti-fraud fighting efforts. Table 1 Cost-Containment Initiatives in Different States State Reform Measure Effects California Ended bad faith doctrine, greater fraud-fighting efforts, restricted uninsured drivers ability to sue, strong seatbelt law, more vigorous enforcement Loss costs have fallen dramatically of DUI law, reduced blood-alcohol standard California No-Pay/No-Play Reduced costs; potential Colorado Optional managed care, allowing insurers to direct injured parties to state-approved health care organizations reduction in uninsured drivers Lowered statewide average injury losses, while national losses continued to rise

Massachusetts Michigan New Jersey Page 2 State-made rates; elimination of age, gender and marital status as rating factors Elimination of gender and marital status as rating factors Abolishes take all comers and creates stronger anti-fraud measures High auto insurance rates, with vast majority of drivers paying rate subsidies; relatively few auto insurers Implied taxes on lower-risk drivers; higher involuntary market Reduced rates and uninsured drivers; more companies entered the market Reduced frequency of CPT codes billed for recovery; New Jersey Medical fee schedule covers most commonly used CPT codes regulatory burden has eased Anti-Fraud program, including a re-definition of Reduced rates for New York one who commits fraud, stricter penalties and policyholders reduced time to report injuries or file claims New York Medical fee schedule Reduced rates Ohio Tort reform, limiting non-economic and punitive Losses are expected to fall damages Act 6, including choice no-fault; lower minimum limits/optional coverages; mandatory discounts Decrease in claim frequency Pennsylvania and deductibles; coverage restrictions for and claim severity; statewide impaired or fraudulent drivers; use of medical fee averages are lower than schedule and peer review; duplication of recovery countrywide Note: The shaded cells indicate reforms that show no positive benefits to consumers. State Initiatives to Contain Auto Insurance Costs A more thorough description of the different cost-containment efforts is provided in this section. California California initiated several reforms in the 1980 s to respond to rising costs resulting from an adverse tort environment. The following reforms resulted in a substantial decline in loss costs in the 1990s: 1 The end of the bad faith doctrine with the Moradi-Shalal decision, which put the brakes on fraud, attorney involvement and excessive claiming/overpaying of claims to avoid bad faith. Aggressive and coordinated fraud fighting by insurers and state-local law enforcement. Proposition 213, where uninsured drivers were prohibited from suing for pain and suffering. Comprehensive reform of the residual market to eliminate disincentives for cost control. 1 Milliman, Inc., Revisiting the Lingering Myths About Proposition 103: A Follow-Up Report, September 2004

Vehicle and highway safety improvements which worked in concert with the above factors. A strong seatbelt law that resulted in the highest seatbelt usage of any state in the nation. More vigorous enforcement of DUI laws, and a reduced blood alcohol standard. No-Pay/No-Play Program In 1996, California adopted a program known as no-pay/no-play. In short, this concept reduces a person s right to recovery from an auto accident if he is uninsured at the time of injury. The premise behind this is that persons who are responsible enough to purchase insurance should not have to subsidize others who violate the law and do not obtain coverage. According to this state s no-pay/noplay initiative (Proposition 213), both uninsured drivers and drunk drivers are prohibited from suing for non-economic damages such as pain and suffering. Three different entities have results pertaining to no-pay/no-play: When testifying before the New York state insurance assembly committee in 2000, NY deputy commissioner Gregory V. Serio stated that $327 million were returned to the drivers of California in the form of cost savings, due to Proposition 213. 2 The Institute for Civil Justice/RAND studied this concept and found that a no-pay/no-play program in Texas, if implemented, could reduce personal injury costs by about 6 percent, or the auto insurance premium by about 3 percent. In other words, had this initiative been put in place in 1996, the average decrease in premium would have been about $23 per policy, a savings of about $182 million. It is also believed that those who are uninsured may purchase insurance, since the potential cost of being without coverage would increase. 3 The California Insurance Commissioner estimated that no-pay/no-play resulted in a six percent decrease in uninsured motorists in that state 4. Colorado Managed Care Program An optional managed care system on no-fault personal injury protection (PIP) coverage was implemented in Colorado in November 1991. At its simplest, the use of state-approved managed care organizations allows insurers to have input into medical care and places conditions on the claimant's ability to shop around for physicians. The program was optional in that insureds were allowed to choose participation in it. During the four-year period prior to managed care, Colorado's PIP claim severity increased 60 percent from 1987 to 1990. But from 1991 to 1995, after the program was put into place, the average 2 Testimony of the New York State Insurance Department Before the New York State Assembly Insurance Committee, May 18, 2000 3 Institute for Civil Justice/RAND, Issue Paper, The Effects of a No-Pay/No-Play Plan on the Costs of Auto Insurance in Texas, 1998 4 Department press release Insurance Commissioner Quackenbush Announces Department Survey Showing Significant Decrease in November of Uninsured Motorists, October 22, 1998.

cost per claim decreased by about 4 percent ($4,719 in 1995 vs. $4,898 in 1991) 5. Claim costs were being driven by the actual economic losses and to the extent that policyholders stayed within the managed care network, the overall cost of medical care was less, therefore reducing the overall settlement and awards. The bodily injury (BI) liability claim frequency in Colorado was also seen to decline substantially since the implementation of optional medical care. The number of BI claims paid per 10,000 insured cars went down from 42 in 1990 to 38 in 1996, a 10 percent decrease. One possible reason for this was better management of medical costs, preventing fewer claims from crossing the $2,500 monetary threshold for tort liability in this state. The significant reduction in BI claim frequency helped the loss cost for this coverage drop substantially, too. Compared to 1990, the BI loss cost in Colorado was 13 percent lower than in 1996 ($67.26 in 1996 vs. $77.38 in 1990). Countrywide, the same loss cost was about 7 percent higher than what it was six years ago ($109.68 in 1996 vs. $102.79 in 1990). 6 These trends suggest that the concept of managed care was initially working as intended. Specifically, the average claim payments and hence loss costs for PIP were falling during the beginning years of this program. Claim frequency and loss costs for BI were also lower than what they were five years before the managed care system first started. It is believed that implementation of managed care in Colorado successfully kept the cost of claims from being even higher. Without such a system, costs would have continued rising as demonstrated in other states. It should be noted that the managed care program was an optional one when it was first established. Since many policyholders did not choose the program, the improvement in losses was not sustained; in fact, the state s personal injury protection claim cost rose faster than the countrywide average in the late 1990s. Colorado s managed care was dissolved when the no-fault law sunset at the end of June 1993. Any effort to duplicate the Colorado program should avoid this shortcoming. Massachusetts Elimination of Rating Factors/State-Made Rates Massachusetts is a high-cost and very urbanized state, which contributes to the high price of insurance paid by policyholders. It currently has one of the most rigid forms of personal auto rate regulation in the country, as rates are established by the insurance commissioner when there is found to be an absence of competition. One of the earliest known attempts to reform the auto insurance system took place in the commonwealth in the late 1970s. Unlike most states, insurers here are prohibited from using the driver s age (with the exception of 65 years and older), gender and marital status in their ratemaking process. Instead, all individual rates are essentially determined by two factors: (1) the driver s class (e.g., years of driving, principal driver, amount training, and vehicle use); and (2) where the automobile is garaged. These classes are fixed by the insurance department. As a result of the current regulation, a complex pattern of subsidies for certain classes and territories and surcharges for others that force most Massachusetts drivers to pay even higher premiums have been in existence for a long time. It is estimated that 87 percent of the drivers in the commonwealth 5 Fast Track Monitoring System reports, compiled by the National Association of Independent Insurers, Insurance Services Office, Inc. and National Independent Statistical Service 6 Ibid

are imposed surcharges ranging from $4 to $235 to offset premium decreases ranging from $2 to almost $2,000 of the remaining 13 percent, who are primarily young male drivers in urban areas. 7 Due to the poorly working regulatory system and the inability to use sound predictors of loss, many companies have withdrawn from the Massachusetts market and new companies are discouraged from entering. Only 19 auto insurers currently write there. The commonwealth continues to have one of the highest average auto insurance premiums in the nation. Michigan Essential Insurance Act: Elimination of Rating Factors As part of an attempt to address concerns in urban areas, the Essential Insurance Act (EIA) was enacted in 1979 and put into effect in 1981. One of its objectives was to develop a risk classification system to ensure greater fairness. Hence, the rating factors of gender and marital status were eliminated from the ratemaking process. A comprehensive economic study of the rationale and effects of the EIA 8 found that one of the results of a limited risk classification system was the creation of cross-subsidies among policyholders. In other words, lower-risk drivers had their insurance rates increased to offset the rate reductions given to higher-risk drivers. An ancillary effect was a reduction in incentives to drive more carefully, hence raising expected accident costs and rates. The author of the study believes that initial benefits regarding affordability may exist, but in the long run, any improvement diminishes due to greater claim frequency and severity and higher rates for all. Another consequence of rate subsidies is that the involuntary market will increase since those not paying their fair share of losses and expenses will find it harder to obtain insurance in the voluntary market. Thus, restrictions to the rate classification system with the intent to make coverage more affordable for some invariably result in implicit taxes (i.e., higher premiums) for the majority of policyholders. They are merely a temporary solution. New Jersey Automobile Insurance Competition and Choice Act New Jersey SB 63/AB 265 created the Automobile Insurance Competition and Choice Act, signed on June 9, 2003. Among other provisions, it abolishes take-all-comers requirements, expands expedited rating, eases withdrawal restrictions and implements strong anti-fraud measures. Greater competition and a reduction in uninsured drivers are now taking hold as a result of the new law. 9 For example: Both GEICO and Mercury Insurance Company announced their decision some time ago to enter the market due to the new law. The latest to announce entry into the state (in September 2005) is Progressive Direct Insurance Company, another major carrier. 7 Robert J. Shapiro, High Rates and Little Choice: The burden of Automobile Insurance Regulation on Massachusetts Consumers, June 2005 8 Auto Insurance in Michigan: Regulation, No-Fault and Affordability, Mackinac Center for Public Policy, Scott E. Harrington, 1989 9 Source: New Jersey Department of Banking and Insurance

State Farm Indemnity has abandoned plans to withdraw and will begin writing new policies. 47,000 previously uninsured drivers are now insured and contributing to the system. More than 500 new agents have been appointed by carriers, making insurance more accessible. About $300 million have been returned to nearly 2 million drivers by auto insurance companies. Drivers now have more tools than ever before to comparison shop for auto insurance. Since 2002, the number of top 20 national companies writing business in the state almost doubled. Medical Treatment Protocols Effective in July 2001, New Jersey adopted the final portion of the medical fee schedule rule, 10 whereby the physicians fees adopted cover the Current Procedural Terminology (CPT) codes that are the most commonly used for treatment of auto accident injuries. They represent about 85 percent of all codes billed for PIP reimbursement. For those CPT codes that are no longer on the fee schedule, the insurer s limit of liability is the providers usual, reasonable and customary fee, as provided in N.J.A.C. 11:3-29.4(e). The Department of Banking and Insurance adopted the physicians fee schedule with the 92 most commonly used CPT codes. Since the frequency with which individual CPT codes are billed for PIP reimbursement has declined, the insurance department has determined that their regulatory burden has been minimized while carrying out the cost containment objectives of the Automobile Insurance Cost Reduction Act of 1998. This reduction is corroborated by insurance data showing that New Jersey s PIP claim frequency has fallen 21 percent since 2001. 11 New York Anti-Fraud Program Insurance fraud committed by consumers is a serious and growing problem throughout the nation, costing in some cases hundreds of additional premium dollars per policy. In its Regulation 68 related to fraud and abuse, the insurance department instituted reforms reducing the timeframe for medical providers to submit claims to insurers for payment (from 180 days to 45 days) and for claimants to report injuries to insurers (from 90 days to 30 days). 10 In 1991, medical fee schedules were established on a regional basis for the reimbursement of health care providers providing services or equipment for medical expense benefits. Auto insurers are required to make payment under the no-fault PIP coverage according to these schedules that fix the price for medical goods and services. According to New Jersey NJSA 39:6A-4.6, no health care provider may demand or request any payment from any person in excess of those permitted by the fee schedule established. In addition, no person should be liable to any health care provider for any amount of money that results in the charging of fees in excess of those permitted by the fee schedule established. 11 Fast Track Monitoring System @ 2 nd Qtr. 2005

Under Regulation 83 (which applies to New York s no-fault law), sellers of durable medical equipment were billing auto insurers under rules that were open to interpretation. 12 To resolve this situation, another program was initiated last year that involves linking durable medical equipment (e.g., neck braces, walkers) reimbursement costs to the fees listed in the New York State Medicaid Management Information Provider Manual. This is also believed to result in cost savings for both insurers and their customers. U.S. Senator Chuck Schumer (N.Y.) remarked that insurance claim costs dropped almost 13 percent during the first nine months of 2003, due in part to fraud-fighting efforts stemming from both the reform measures and those of the state s Frauds Bureau. 13 Clearly, the Regulation 68 changes, as well as the insurance department s other regulatory changes, were very helpful in reducing New York s fraud costs. Furthermore, a law in New York was just passed this session that would decertify health care providers from submitting claims and receiving payment under the no-fault PIP coverage if they engage in deceptive billing or other fraudulent practices. Other practices include: being engaged in misconduct or incompetent practice in connection with medical services; exceeding the limits of professional competence in rendering medical care; soliciting professional treatment, examination or care of an injured person in connection with a no-fault claim; refusing to appear before a duly authorized investigating agency or to produce relevant information concerning conduct in connection with a no-fault claim; and engaging in patterns of overcharging, excessive treatment, or other improper actions with respect to rendering medical services to auto accident victims. This program is still being implemented. Hence, there are no statistical results that can be examined at this time. Fee Schedule A fee schedule to control costs is also part of the New York auto insurance no-fault law. Such a schedule is used to fix the price for certain medical goods and services. Insurance data show that the no-fault losses in this state have fallen substantially. From 2002 to 2004, the average PIP claim cost dropped 30 percent (from $8,489 to $5,867) during this two-year period. 14 The Insurance Information Institute found that New York auto insurers were paying out 86 cents in claims for every premium dollar collected in 2002, but now they are paying out 61 cents in claims. 15 12 New York Insurance Department press release, Three More Insurers Reducing New York Auto Rates, June 26, 2005 13 Press release, Schumer Reveals: NY Auto Insurance Fraud Capital of US Most New Yorkers Will Have Higher Car Insurance Bills in 2004, January 17, 2004 14 Fast Track Monitoring System, PCI, Insurance Services Office, Inc. and National Independent Statistical Service, as of 1 st Qtr. 2005 15 Insurance Information Institute, Hot Topics & Issues Debates, No-Fault Auto Insurance

As a result, many auto insurers have lowered their rates, including those for drivers in the state s assigned risk plan, whose rates dropped 2 percent in August 2004. 16 Ohio Tort Reform Although primarily affecting commercial lines of business, Senate Bill 80 is an omnibus bill that was signed into law on January 6, 2005. 17 Among other things, it limits non-economic damages to whichever is greater: $250,000, or three times the economic loss up to $350,000 with a maximum of $500,000 per occurrence if the case is ordinary (i.e., if the plaintiff has only suffered non-catastrophic damages). In addition, the defendant can challenge the award by means of a post-judgment review mechanism and certain types of evidence may not be submitted during the damages phase of the trial that may be harmful to the defendants case. SB 80 also places restrictions on the amount of punitive damages that a plaintiff can be awarded and prohibits multiple punitive damage awards. One specific provision pertaining to auto insurance is that non-use of a seatbelt may be introduced as evidence in tort actions for the purpose of reducing non-economic damage awards Since the law was passed only this year, no impact on losses can be calculated at this point. Pennsylvania Act 6 of 1990 In the 1970s and 1980s, Pennsylvania insurance marketplace consisted of persistent rate increases that exceeded the rate of inflation and Philadelphia rate increases were consistently in the double digits. As a remedy, Act 6, which substantially modified the motor vehicle financial responsibility law, was signed into law in February 1990. Key features include: a choice no-fault system, whereby policyholders can voluntary restrict their ability to seek recovery for non-economic damages, such as pain and suffering, to only those cases that result in death, serious impairment of bodily function, or permanent serious disfigurement. lower minimum limits and optional coverages; minimum first-party benefits were lowered from $10,000 to $5,000; and wage loss/funeral/uninsured & underinsured motorist coverage is optional. mandatory discounts: - first-party benefits rate: 15 percent for passive seatbelts, 20 percent for driver-side airbags, and 30 percent for two airbags; - comprehensive rate: 10 percent for anti-theft devices; 16 Ibid. 17 Richard D. Schuster and Thomas R. Winters, Ohio Tort Reform. A Roadmap For Success?, February 2005

comprehensive/collision: mandatory $500 deductible; - all coverages: 5 percent for driver training course (55+). coverage restrictions on impaired or fraudulent drivers: - bars recovery for drivers under the influence of drugs or alcohol; - tougher enforcement against uninsured motorists; - penalties for insurance fraud are stiffened from a misdemeanor to a third-degree felony. utilization of medical fee schedule, whereby auto insurers medical benefit payments are controlled by generally limiting providers to 110 percent of the prevailing fee available under Medicare. elimination of duplicate recovery, whereby workers compensation coverage instead of auto coverage could be primary for some claims. insurers must contract with peer-review organizations to more effectively evaluate the reasonableness and necessity of medical services and treatment. It is believed that Act 6 is a success due to its choice and medical cost containment features. These measures have a positive impact on both the claim frequency and claim severity, hence an improvement in loss costs and rates. Since 1990, Pennsylvania s arising claim frequency and claim severity for first-party benefits coverage have not only been lower than the countrywide average, but they have been declining while national trends have been continuing to go up. A recent presentation made by one large carrier in this state 18 showed that its frequency in Pennsylvania at the beginning of 1990 was about 2.95 claims per 100 insured cars; by mid-1999, its rate fell to below 1.45 claims per 100 insured cars, or by roughly one-half (50%). In contrast, the countrywide frequency (per 100 insured cars) increased 4 percent, from about 2.40 claims in 1990 to 2.50 claims in mid-1999. Average claim costs for both Pennsylvania and countrywide were about $3,000 per claim in 1990. However, almost 10 years later, the average claim cost for Pennsylvania dropped to about $2,400 (a 20% decrease), while the countrywide claim cost escalated to nearly $4,500 (a 50% increase). In conclusion, policymakers should look to programs implemented in states that have proven effective in reducing insurance claims frequency and size. Examples include Pennsylvania s success in controlling health care costs, New York s success in combating fraud and California s success in reducing uninsured motorists through no pay/no play. For urban auto rates, these programs should also target highway safety and theft prevention efforts. 18 Erie Insurance Company, Auto Insurance Success Stories, presented at the Casualty Actuarial Society Casualty Loss Reserve Seminar, September 12-14, 2005

The (PCI) is a trade association consisting of more than 1,000 insurers of all sizes and types, and representing nearly 40 percent of the total property/casualty insurance business and half of the total personal auto business in the nation. In Maryland, PCI members represent 53 percent of the personal auto market.