Newark Insurance Co. is the third insurer to run aground in New Jersey, announcing on June 21, 2001, that it will no longer write new policies in the state and is looking to sell its current book of New Jersey business.

The New Jersey Department of Insurance (DOI) granted an emergency order relieving Newark Insurance of its obligation to "take all comers" under New Jersey law. New Jersey auto insurers can receive permission to stop selling new policies only if they can demonstrate severe financial distress.

"On our New Jersey auto business, we were losing $15 million to $20 million a year," says John Reiersen, vice chairman of Newark Insurance's parent company, Robert Plan Corp. "What spurred Newark Insurance's problem was the inability to get rate increases from the Department of Insurance," Reiersen says.

Newark Insurance covers between 60,000 and 70,000 automobiles in New Jersey, according to Reiersen, and is looking to sell its auto insurance business to another insurer. Reiersen says a deal may be in the works, but declines to comment further. In the meantime, the company will continue to pay claims and serve its existing policyholders.

Newark Insurance's home insurance business will not be affected by its losses in auto insurance, and the company will continue to sell auto insurance in the other states where it does business, including Delaware, Florida, New York, Pennsylvania, and West Virginia.

The DOI rejected Newark Insurance's January 2001 request for a 35 percent rate increase because the filing was "incomplete," Reiersen says. If the insurer cannot sell its current New Jersey business, it will refile for the rate increase and continue to do business in the state.

"New Jersey has done a lot of good things in auto insurance reform, but they also mandated a 15 percent rollback in rates, which we had to give before all of the reforms were enacted," Reiersen says.

A rocky road for New Jersey drivers

Newark Insurance's announcement comes after two major auto insurers, State Farm Indemnity Co. and AIG subsidiary American International Insurance Co. of New Jersey, announced plans to withdraw from the New Jersey auto insurance market altogether. They each cited their financial losses and subsequent need for rate increases. American International's rate increase was denied by the DOI. The DOI took no position on State Farm's increase, instead requesting a court hearing before issuing a decision.

New Jersey's auto insurance mess, insurers charge, stems from 1998 auto insurance reforms that were designed to combat insurance fraud and cut down on medical claims cost for insurers. Among the major reforms: A law that makes it more difficult to sue for pain-and-suffering after an accident, and treatment guidelines for soft-tissue, neck, and back injuries covered by Personal Injury Protection insurance.

But as part of those cost-saving reforms, insurers were required to cut auto insurance rates by 15 percent for all policyholders — which they now seek to recoup through increases that have consistently been denied by the DOI.

Insurers also allege that the reforms are incomplete. DOI spokesperson Bill Heine acknowledges that two major pieces of the reform package have not been implemented: A new cost schedule for medical fees, meant to save money for insurers, has yet to take effect; and the state is redrawing the boundaries of its rating territories, which are geographic areas whose risk and loss characteristics insurers must consider when setting rates.

"It's a gradual process," Heine says of the auto insurance reforms. "These are the reforms that should allow insurers to realize cost savings, and as of right now, it's true that they haven't been implemented."

Both American International and State Farm had appeals pending with the New Jersey Office of Administrative Law (OAL) when they announced their intention to leave the state. State Farm has said nothing could convince it to remain in New Jersey, while American International told its employees that a rate increase could mean the company will change its plans to leave the state. American International has not released an official statement on its withdrawal.

More turmoil could be on the way

Seven other auto insurance companies have filed for rate increases. Five of those requests have already been denied by the DOI and have appeals pending in the OAL, with decisions due in July 2001. Three requests, two for increases and one for a decrease, are currently awaiting a decision by the DOI.

"We've taken a look at most of these requests and determined that no rate increase is necessary," says Heine. If rate changes are denied by the DOI, insurers can appeal that decision with the state's Office of Administrative Law.

Leaving the state is clearly an option for the auto insurers whose rate increases were denied, but no others will speculate on the likelihood that they would do so.

"Right now, we've been meeting with New Jersey officials and we're committed to finding solutions," says Glenn Greenberg of Liberty Mutual, whose two New Jersey subsidiaries were denied 20 percent and 25 percent rate hikes. No. 4 in the market, Liberty Mutual has 325,000 auto insurance customers in New Jersey. "Rates are inadequate, and right now, we're in a market where financial loss is guaranteed," Greenberg says. Liberty Mutual won't speculate on its next move. A hearing on its rate hike appeal is scheduled for September 2001.

"We have filed for a rate increase in the Garden State, and we continue to serve our customers," says Mike Catchel of Colonial Penn Insurance Co., a General Electric Financial Assurance subsidiary that filed for a 37.6 percent rate increase, which the DOI denied. "Like all good businesses, we seek to remain profitable, and we seek this rate increase to operate profitably," Catchel says. "Markets change, and we reserve the right to change along with this market." Colonial Penn is the tenth-largest insurer in New Jersey by market share.

Allstate New Jersey Insurance Co., the state's No. 3 insurer, "remains committed to the New Jersey auto insurance customer and marketplace," according to spokesperson James Griffin. "Allstate believes it has developed a successful business strategy that is good for the company and the consumer. We've concentrated on positioning our company with an accurate risk-pricing structure and have taken advantage of all available reforms." Allstate has not filed for a rate increase in New Jersey.