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Testimony of the New York State Insurance Department before the New York State Assembly Insurance Committee

Presented by Gregory V. Serio, First Deputy Superintendent

Thursday, May 18, 2000
New York City

Mr. Chairman, members of the committee, my name is Gregory V. Serio, first deputy superintendent of the New York State Insurance Department. I am pleased to appear before you on behalf of Superintendent Neil Levin to discuss automobile insurance issues and, hopefully, dispel some widely held but inaccurate perceptions of New York’s automobile insurance marketplace.

The Committee, in its hearing notice for these proceedings, observed that "the high cost of auto insurance is one of the most pernicious financial burdens borne by middle class and working families in New York State." In an environment of annual rate increases, with a double-digit uninsured motorist population, with an assigned risk population of a million or more drivers, and with the weakest benefit structure in the nation, the Committee would indeed be correct as describing the automobile insurance burden as "pernicious"—that is, deleterious or harmful to the motoring public in consideration of all factors. To be sure, to describe the automobile insurance costs as pernicious is to be charitable under these conditions: outrageous, irresponsible and abhorrent would be more appropriate adjectives used by those trying to balance auto insurance bills with other household and business expenses.

And that is exactly the situation in which average New Yorkers found themselves in 1994. "Pernicious", to be sure, and altogether dysfunctional was the state of affairs in the marketplace for the full first half of the past decade. The market conditions just described are an accurate depiction of the automobile insurance crisis that gripped New York from the late eighties through the mid-1990s. As the 1990s began, rates for automobile insurance, already among the highest in the nation, jumped 7.7%. In 1991, consumers were hit with an average 9% rate increase. For 1992, another increase of 3.9% was tacked on to the rate. A 4.7% increase greeted drivers in 1993 and, for the fifth consecutive year, in 1994, rates went up another 3.5%.

All told, between 1990 and 1994, automobile insurance rates increased by nearly 32%.

Rate was only part of the story. Uninsured motorists swelled to well over 10% of all drivers in certain parts of the state in the early 1990s (with a statewide average of 8%). The assigned risk plan--which serves to not only stigmatize drivers but also preys upon the auto insurance rates of all drivers through the subsidies that flow to the assigned risk pool—achieved its highest population in both real terms and as a percentage of all private passenger motor vehicles in 1992 when one-in-six (17.1%) cars were relegated to the AIP. And drivers were motoring around with the false sense of security that the anachronistic 10/20 policy would be adequate to meet their needs in the event of an accident and injury. 1950’s standards for 1990’s needs was the rule of law in New York.

Since 1995, the New York automobile insurance marketplace has undergone a transformation that has made the 1990s read like a statistical "tale of two cities." Much of the attention in automobile insurance circles, however, has focused on New Jersey and Texas and other states passing significant tort reform and medical protocol legislation that would come to serve as the foundation for substantial change in the rate and premium structures within those jurisdictions. The rehabilitation of the New York marketplace, though achieved with less fanfare and controversy, has nevertheless been just as meaningful and important as those in our sister states.

For the first time in thirty years, minimum standards for financial responsibility, the so-called minimum limits, were increased to modern day levels of 25/50/10 from the paltry 10/20/5. Catching up on forty years of inflation and other costs through these enhanced coverages raised the average cost of an automobile insurance policy $36 in 1996.

Since that time, the average expenditures for automobile insurance the amount actually paid by consumers has remained virtually constant. In 1996, 1997, and 1998, the average expenditure for private passenger insurance changed by less than $1, and was virtually the same for 1998 as it was for 1996. In fact, for 1997, New York was one of only six states where insurance expenditures actually decreased. Stabilization in the average auto insurance expenditure is expected to have continued through 1999.

Corresponding to the zero-growth trend in the average expenditure for automobile insurance is New York’s improved ranking for average annual change in automobile expenditures as compared against all other states. Whereas New York was once a steady presence in the top twenty states with the highest annual increases in automobile insurance expenditures, the state was ranked 47th in growth of automobile insurance expenditures in 1997…one category in which we are proud to be a cellar-dweller. Over the five year period ending in 1998, New York averaged 28th in growth of automobile insurance costs.

The Insurance Information Institute, in a recent report by its chief economist, Dr. Robert Hartwig, found that the reduction in expenditure for automobile insurance does not reflect the actual extent of the decrease in automobile insurance rates, a distinction worth noting in New York’s case. "Auto insurance expenditure, which measures what the average consumer actually spends for insurance on each vehicle, continues to fall at a slower pace than auto insurance rates," which, according to Dr. Hartwig, fell by 3.2% (U.S. average) in 1999, compared to a reduction of 1.0% (U.S. average) for auto expenditures in that same year. Similar relationships between rates and expenditures were also seen in 1998 and 1997.

Dr. Hartwig observed: "The small decline in auto insurance expenditure is attributable to record new car sales. New cars are more expensive than old ones and so is the insurance. Moreover, new cars have loans or are leased and require full comprehensive and collision coverage. These coverages may have been dropped on older vehicles." Ford Motor Company, at its recent meeting of shareholders, acknowledged the risks that its large SUV-type vehicles pose to smaller vehicles, thus increasing insurance exposures for the large and small vehicle owner alike.

Dr. Hartwig’s analysis explains the New York expenditure vs. rate scenario. Premiums in New York have decreased in the past several years at a pace faster than the decreases for average expenditures. Average premiums declined from $1,118.19 in 1997 to $1,112.40 in 1998, which is also less than the $1,113.21 in average premium that was charged in 1996, the year that minimum limits were increased.

A comment about rankings: much political hay has been made over the position of New York as number three on the NAIC’s ranking of average automobile premiums. While this has been too tempting a political morsel for many to pass up, it does not really tell the modern story of auto insurance in New York. After all, the ranking is a vestige of history that no one can undo, the legacy of premium increases of 30% in the years leading up to 1995. Since then, however, New York’s rank in auto insurance premiums has been 37th in terms of average increases, reflecting an average 8.07% increase in premiums, largely attributable to the rates approved in 1994 and those approved to compensate for the increase in no-fault benefits. From 1997 to 1998, New York’s ranking was 42nd.

Political rhetoric about the economy frequently argues about those who were left out of recoveries and returns to economic prosperity. In the automobile insurance area, no one has been left out. Since 1995, when the assigned risk population comprised more than 15% of the private passenger vehicle universe, the number of assigned risk drivers has plummeted. The number of cars insured through the NYAIP is the lowest in a generation. Today, less than 6% of all cars are in the assigned risk pool, a drop of more than 50% in the NYAIP’s book of business. And the depopulation continues. Ask any servicing carrier or store front broker, and they will tell you how radical a change there has been in the marketplace, so much so that many are hoping for a repopulation.

The accomplishments in the automobile market over the past five years—abundant availability in the voluntary market and actual price competition in a quasi-deregulated environment—did not occur by happenstance. Governor Pataki, together with the Legislature, passed measures such as multi-tiering (Ch.9, Laws of 1995) and automobile flex rating (Ch.113, L.1995; Ch.134, L.1998), not once but twice. The Governor also led the charge in updating the benefits structure with passage of minimum limits legislation in 1995. And the Department, not standing idly by, as the Committee’s hearing notice might suggest, scored a courageous victory with the promulgation of amendments to Regulation 68. It is disheartening to have the Committee baselessly claim that "the Department [has not] come forth with significant legislative proposals or regulatory reforms to bring meaningful relief to New York motorists" when the Department risked both legal and political retribution to do what is right in reforming the rules by which medical providers and attorneys operate under our state’s no-fault law.

Indeed, the unwarranted broadside of the Committee is not only unsettling, it is also inexplicable given that many of the reforms contained in Regulation 68 were proposals made by the chair in numerous legislative offerings over the past several years. For example, the shortening of periods for medical reporting by providers upon initiation of treatments, from a full six months to a more reasonable forty five days in Regulation 68, was central to A. 2577 (1999) by Mr. Grannis. (The bill was successfully reported from the Committee in 1999 but was not offered up for consideration by the full Assembly.) Furthermore, a legislative proposal was submitted by the Administration to the Legislature last year, providing for a revamped no-fault managed care program based upon the successful PPO concept now in use in workers compensation. Unfortunately, only the Senate introduced this measure.

Regulation 68 is, in and of itself, a tour de force in the fight for control of automobile insurance costs. Its provisions to establish reasonable time frames for the submissions of medical bills (45 days instead of 180 days), proof of work loss (90 days now whereas one did not exist previously), and notice of a claim to a carrier (30 days now instead of 90 days), its provisions limiting assignments of medical benefits to providers, and its provisions requiring explanations of no-fault benefits hits both at the seemingly unchecked growth in no-fault medical costs and at the high incidence of no-fault fraud.

The Department has also worked tirelessly alongside the Department of Motor Vehicles in implementing the Insurance Information and Enforcement System. This initiative, sponsored by Assemblyman Lafayette and Senator Velella, will enhance the real time quality of information relating to uninsured drivers. The departments, in conjunction with the legislative sponsors, just recently beat back an effort by insurers to gut the system of critical information without which this project and its underlying objectives would have been hopelessly frustrated. In fact, tomorrow in Albany, the Superintendent together with the commissioner of motor vehicles, will convene a meeting of the IIES working group to discuss the process for bringing IIES on-line, giving New York the state-of-the-art insurance data program that it has worked so hard to build, and giving all other states the standard by which they will be measured.

Reining in medical costs in automobile insurance, though, is job one for public policymakers and insurers. The changes to Regulation 68 and the no-fault managed care initiative (S. 5584) attack the core of the upward pressure on rates: the double-digit increase in PIP/no-fault costs per year. New Jersey clearly understood this as the problem in the main when it passed medical protocols that control the disbursement of medical services in automobile-related injury cases. This measure has been described as the "cornerstone" of the New Jersey reform effort. Before Regulation 68’s amendments, the only thing New York managed to do was to allow this state’s noble experiment in no-fault managed care to sunset, instead of fixing it and renewing it so that New Yorkers could gain some of the rate advantage now being enjoyed by New Jersey.

The threat to automobile insurance premiums from escalating medical costs cannot be overstated. Some medical providers, together with certain members of the plaintiffs’ bar, have found great favor in the pursuit of exaggerated claims and unnecessary treatments. While the number of automobile accidents goes down, the number of no-fault claims increases and the severity factor balloons. The cost of the average no-fault claim has risen a dramatic 140% from 1985 through 1997, a full 25 percent higher than the medical services consumers price index for the northeast over the same period, and no doubt drives the motor vehicle insurance component of the CPI to its 111%.

In a closer composite analysis, the CPI for the five years ending in 1998 was just shy of 10%; the auto insurance CPI was 13% and the medical CPI was just below 15% for that same period.

According to Conning and Company, "the personal injury protection (PIP) coverage offered in no-fault states show a very high rate of severity growth in recent quarters. This coverage has a heavy medical component and severity has risen 9.4% and 7.5% in the second and third quarters, respectively." And with the introduction of post-traumatic stress disorder concepts to the automobile accident realm, this number is certain to grow exponentially.

The situation is particularly grim in the assigned risk market. PIP frequency has increased significantly and loss ratios for no-fault coverage continue to deteriorate.

The importance of controls in medical costs fits hand-in-glove with the overarching concern over the continued pressure put on automobile insurance rates by liability expenses. While New York drivers continue to enjoy decreases in comprehensive coverage rates, ever-increasing liability costs eviscerate any benefit that may come from the stability on the comprehensive portion of premiums. Again, the number of accidents are declining, yet the number of actions are increasing. Indeed, in an era of fewer civil actions generally, automobile insurance litigation defies the trend by actually increasing in frequency.

As we look beyond our borders for guidance on controlling automobile insurance costs, we see demonstrative action taken in curbing civil litigation as the centerpiece of bringing rationality back to automobile insurance rates. In Texas, which the Committee has cited as a positive example for its refunding of premium dollars to drivers over the past several years, the critical element to that successful program was not the creation of an insurance advocate office, but rather the underlying tort reform that was passed in 1995. For New York, which already has the Department’s Consumer Services Bureau, the state Consumer Protection Board and a host of other consumer advocacy organizations, it is not the bureaucracy that is essential to driving costs down; rather, real changes in the law, as in Texas, are critical to making the structural modifications necessary to reduce real cost from the system.

In California, the voters spoke on the high cost of automobile insurance with the passage of Proposition 213. "No pay, no play" places personal responsibility upon those who do not maintain proper insurance coverages. Result: $327 million in savings have been returned to California insureds.

And in Hawaii, which posted the largest decrease in automobile insurance costs in 1998 (-12.5%), again the helping hand came in the form of tort reform and significant decreases in benefits. Limits on chiropractic visits, elimination of wage loss and replacement services benefits, elimination of automatic death and funeral benefits (now available at extra charge), and a reduction in minimum PIP coverages, from $20,000 to $10,000, allowed Hawaii to grant an average decrease of 12.5% for 1998.

The courage exhibited in New Jersey, Texas, California and elsewhere in challenging the status quo and entrenched special interests has been matched by the promulgation of amendments to Regulation 68.

Offering a wider variety of deductibles, punishing those who fail to carry insurance by depriving them from seeking suit against those who do carry coverage, allowing for directed repair (which the courts have just accomplished) and inspection of repair work, re-enacting no-fault managed care, and perhaps even instituting a method of auto-choice, as has been discussed in Congress, are also initiatives that could truly contain costs and legitimately reduce automobile insurance premiums, and are being discussed in statehouses across the country. The Rand Institute estimates that auto choice, with no other enactments, could save New York drivers more than 20% on their annual rates; one company puts its impact at closer to 40% for New York State. The most significant savings would accrue to drivers who live within the five boroughs.

To deliver the rate reductions that were achieved in New Jersey and Texas, and to build on the record of automobile insurance reform established by this Administration and Department since 1995, these measures, some already pending in the Legislature, should be given fair consideration.

Storm clouds are gathering over the property and casualty insurance market now, and the long-anticipated turning of the insurance cycle is underway. There is already pressure to increase rates, pressure not just from medical costs and liability expenses, but from increases in the price of reinsurance and the fallout from sustained price competition that has resulted in zero-growth in automobile insurance rates. Any action to be taken must be structural in nature, attacking the actual cost of insurance and not merely exerting pressure to keep rates artificially low.

Thank you for affording me the opportunity to address this panel today, and I would be happy to answer any questions that the members may have for me.