Taking a consumer-based approach to auto insurance is what allowed New Jersey to punt the perennial political football from the state arena and create a truly competitive market – something that Holly Bakke suggests Ontario could accomplish as well.
“What we learned in New Jersey was that our success was completely and, ultimately, dependent on taking a consumer-based approach,” Bakke, principal of Strategic Initiatives Management Group LLP and a past New Jersey commissioner for banking and insurance, said Thursday during Insurance Bureau of Canada’s 15th Annual Regulatory Affairs Symposium.
Bakke noted there are more similarities between the Ontario and New Jersey markets than she would have thought in terms of number of drivers, number of vehicles and even premium. But one difference in Ontario that could prove a threat to a competitive auto market – profitable for insurance companies, but that also offers consumers real and affordable product choices – is consolidation.
“You have a lot of consolidation here in Ontario, right? How many new entrants have you had to your market other than through some of the consolidations?” Bakke asked symposium attendees. “Folks, that’s not a competitive market.”
Citing a recent report from A.M. Best, she said consolidation is already taking place in the Ontario market and if this continues, some smaller insurers players could be lost.
The report noted that with auto overall, there are ongoing performance pressure events, including market and broker consolidation trends. By 2014, the top five companies in the market grew to represent more than 44% of the market, with over 66% concentrated within the top 10 insurers. “At the same time, mid to small insurers are slowly being pressured by their larger competitors, as evidenced by the shrinking market share of companies that hold the 11 to 20 positions.”
“Consumers want different types of companies that meet their needs. This consolidation, if A.M. Best is right, is not good for the overall market because, going back to my original premise, you want competition,” Bakke told attendees. “Our experience is that it benefits both consumers and companies.”
Emphasizing that the goal should be for companies to want to invest capital in the province, “one of the ways to do that is to have companies come in and decide that they are going to bring their money, they’re going to bring their product, they’re going to hire people and they’re going to invest in Ontario.”
While the real problem in New Jersey was availability, “yours (Ontario’s) right now might be considered affordability,” Bakke suggested.
“We got to the point where you couldn’t buy insurance at any price,” she said, and insurance companies were avoiding urban areas.
“Are you there? No. But are you in a place where you need to be thinking about not only affordability, but availability? Yes, I think you are,” Bakke suggested to attendees. “With the consolidations, with the threats to the smaller companies, thinking from a consumer perspective, they need choice.”
In New Jersey, Bakke reported that the auto insurance market was so regulated – with respect to, among other things, the product, rates, how companies entered the state and how companies could leave the state – that companies could not leave quickly enough, she said. Telling attendees that 26 companies left the state, “we weren’t treating them as businesses,” she pointed out.
“We knew that we had to do something so fundamentally different,” not simply focus on rates and the trial bar, Bakke said. The change had to be comprehensive so the focus was on “consumers, policyholders, insurance as businesses and a different type of regulation.”
The premise of the state’s reform package was that “a successful auto market is balanced between consumers with real and affordable product choices,” she said. “We wanted it to be fair and then people would buy into our system.”
The reform package New Jersey came up with included the following:
introducing predictability in rate process while maintaining regulatory oversight;
reducing subsidization of “bad” drivers by “good drivers”;
increasing penalties for such things as underwriting fraud and moving violations;
phasing out take-all-comers as competition replaced regulation;
adapting excess profit provisions to promote investment and employment;
creating means-tested product for consumers with limited assets (dollar-a-day policy);
reducing the number of uninsured drivers subsidization by other drivers; and
creating web-based tools to help consumers determine coverage needs.
One goal was to ensure consumers had choices and provide them with a means to determine their coverages, Bakke suggested. “You tend to talk here about your insurance product is one product. We encourage people to rethink what is offered in an auto product,” she said. “We put in choices and we gave consumers the tools to look at those choices and determine” which coverages they wanted so they had some control.
The result of the reforms was that 75% of drivers paid less and companies were profitable, she said.
“For 12 years, auto insurance has not been a political issue,” in New Jersey, Bakke reported. Consumers now have choice of product. “What do I need? How much do I want to pay? And who do I want to buy my policy from?”
Of the reform process – which took two years to complete and had bipartisan support – “we really believed if we had a competitive market that companies would develop business plans to address different types of drivers – and they did,” Bakke told attendees of the symposium. “It was very important to us that competition replaced regulation,” she emphasized.
As was also the case with South Carolina and Massachusetts – which were also looking to reform their auto insurance systems – the goal of all three programs “was if we can satisfy consumers, it’s going to take down the political noise, but it’s also going to build a competitive marketplace,” Bakke said.
All that said, she advised symposium attendees, “until you can get people much closer to seeing the same picture, change is going to be hard to accomplish.”
In New Jersey, “this was not solely a regulatory initiative; this was the companies saying we have a vested interest in creating a competitive market… and the governor saying change was going to happen,” she reported. Without those pieces, “it would have been very hard to succeed.”
More coverage of IBC’s 15th Annual Regulatory Affairs Symposium