Democratic candidate Jim McGreevey’s victory over Bret Schundler in the gubernatorial election may have spelled good news for a lot of people, but was it a victory for auto insurance carriers?
The state’s largest auto insurance writer, State Farm Indemnity Company, hopes it was. Before the election, the company had begun a plan to stop writing auto insurance business in the state, citing continual losses and large burdens posed by the existing auto insurance regulatory system.
However, in the coming months, State Farm, as well as at least three other auto insurance carriers who have already expressed interest in leaving the Garden State as well, may change their minds if the new governor changes the business climate for writing automobile insurance.
Thomas J. Flynn owns and operates his State Farm office on Boulevard East in West New York, on the Weehawken/West New York border. Although the company does not employ him, Flynn writes its policies and estimates that 70 percent of his business is done writing auto insurance policies. Flynn also said that he has approximately 2,000 customers within Hudson County, with the bulk of his business coming from Weehawken and West New York automobile owners.
"[State Farm’s plan to leave] will effectively put us out of business if it comes to pass," Flynn said. "I only write State Farm, so without State Farm, I have no business. At this point, it doesn’t make sense to worry about it, so it’s not a nightmare just yet. But we’re being made aware that this could actually happen, so we have to be on the lookout."
Last June, State Farm notified the New Jersey Department of Banking and Insurance that it intends to withdraw from this state, and expects to file a formal withdrawal plan shortly.
New Jersey residents who have automobile policies with State Farm were informed that they would feel no immediate impact on their insurance coverage. Policyholders were notified of the company’s decision to withdraw and that they will receive a one-year advance notice that their policies will not be renewed after the withdrawal plan has been approved by the Department of Banking and Insurance.
State Farm President Brian Boyden announced in a statement that the company "is deeply disappointed that we have to take this step and are greatly concerned about the impact it will have on our policyholders, agents and employees. However, the politicized auto insurance regulatory process in New Jersey leaves the Indemnity Company no choice but to withdraw from the state."
Added Boyden, "State Farm has worked diligently and persistently for the past year and a half to address the company’s financial concerns, but the state has been slow in responding and has not allowed us to take the steps necessary to permit the company to operate on a sound business footing. Withdrawing allows us to take responsible steps to protect our policyholders while we can still meet our obligations to them."
The State Farm Indemnity Company, a subsidiary of State Farm Mutual Automobile Insurance Company, writes only automobile insurance, and does so only in New Jersey.
Insuring more than 800,000 vehicles, the indemnity company began operations in 1992 as a way of providing automobile insurance in New Jersey’s unique market.
Since changing legislation forced a drop in auto insurance rates in 1998 by an average of 15 percent, State Farm claims that it has sought to work with the state of New Jersey to develop an auto insurance system that truly serves New Jersey’s consumers.
Unfortunately, the state has not addressed fundamental cost issues that have resulted in New Jersey residents paying the highest auto insurance premiums in the United States, the company says. Even when seemingly positive steps are undertaken, delays or other administrative impediments diminish or eliminate any benefits of the changes.
The indemnity company claims that it incurs losses and expenses of $1.11 for every dollar of premium received in New Jersey, even after investment income is considered. The company has lost almost a quarter of a billion dollars since September 1999, cutting the company’s net worth almost in half.
Details of the withdrawal have been subject to approval by the New Jersey Insurance Department.
Although other State Farm companies intend to continue providing other kinds of insurance in New Jersey, such as homeowners and life insurance, the insurance commissioner may order all State Farm companies to stop writing all business in the state as a condition of allowing its indemnity company to leave.
In his statement, Boyden said, "State Farm Fire and Casualty Company is the largest insurer of homes in New Jersey, covering more than 450,000 homes and businesses in the state. Financially, it is very strong, and there would simply be no reason for the state to ask people to lose coverage on their homes and businesses, in addition to their auto insurance."
Flynn understands State Farm’s position, but it still is not reassuring news to his customers or his business future.
"I don’t think there are any other insurance companies that are knocking on doors, wanting to do business in New Jersey," Flynn said. "Especially in Hudson County or any urban area. It’s very tough. I’m trying to be accessible to my customers, but without State Farm, where do people go? Where do I go?
Flynn added, "We’re dealing with a heavily regulated market right now and right now, we can’t make changes on how we do business. We can’t raise or lower rates. From a personal level, my office is in an area that is the most densely populated, with more wealthy cars, so the claim costs are higher. Plus, there are so many people driving through New Jersey and in the area. With the congestion and everything, I don’t think rates can ever be cheap."
Flynn can only speculate what McGreevey’s victory will mean for the auto insurance industry in the state.
"I know State Farm doesn’t want to leave New Jersey, but the reality is, from a business standpoint, they can’t keep losing money either," Flynn said. "How can the state allow State Farm to pull out? At some point, the new administration is going to have to do something. At this point, we have to sit it out and wait to see what happens."