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State Farm Indemnity Co. is prohibited from leaving New Jersey's auto insurance market for the next three years, according to a market-stabilization order signed by Department of Banking and Insurance Commissioner Holly Bakke.
State Farm requested permission to withdraw from the state's auto insurance market last year, saying that it was losing money. The company's request raised concerns about the stability of the entire state auto insurance market. As the top auto insurer, State Farm has about 730,000 auto insurance policies. Those would all have to be absorbed by remaining insurers, something many thought might put even more companies out of business, leaving consumers stranded with no insurance.
| State Farm can nonrenew up to 4,000 customers per month over the next two years. |
Under the order, State Farm will be allowed to divest itself of about 13 percent, or about 96,000 policies, of its existing business over the next two years. The policies must be selected at random, and there is a monthly limit of 4,000 nonrenewals. Customers must also be given 60-day notice to find other auto insurance.
State Farm Indemnity President Brian Boyden says the company will not contest the order and has agreed to review in 2005 its decision to withdraw "once the needed reforms are enacted and implemented." The order cannot prevent the company from deciding to leave in the future, but Bakke and New Jersey Gov. James McGreevey are hopeful that by the time the market order ends, the state will have made enough changes in auto insurance regulation to entice State Farm to stay.
"We have come a long way from where we stood a year ago, when the leaders of state government were either unwilling or incapable of comprehending the crisis that they themselves precipitated by pushing our largest auto insurer to leave the state," says Bakke. "The damage that was done cannot be repaired overnight, but we are getting there."
Not everyone sees a solution in sight yet. John Friedman, chairman of the Coalition for Auto Insurance Competition, a group of businesses, associations, and consumers working for better auto insurance regulations, says the state must begin to address the issue of competition or State Farm isn't going to stay.
"Having to operate under the state's restrictive and difficult regulatory regime where insurers are told what products to sell, to whom they must sell, and how much to charge, companies lack an incentive to remain and invest in New Jersey," says Friedman. The coalition advocates permitting insurers to use industry-accepted standard underwriting methods already used in nearly every other state, and adjusting the low ceiling on company profits to permit a reasonable rate of return.
If State Farm decides it will pull out of the New Jersey market in 2005, it will still have to exit the state in an orderly fashion, says Bakke. The withdrawal will have to be spaced out over two or three years.
"Our goal is to see State Farm Indemnity emerge in the coming years as a symbol of an increasingly competitive marketplace that operates in the best interest of New Jersey consumers," says McGreevey.
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