INSURANCE

DEPARTMENT OF BANKING AND INSURANCE

DIVISION OF INSURANCE

Insurers Required to Provide Automobile Insurance Coverage to Eligible Persons

Proposed Amendments: N.J.A.C. 11:1-10.8 and 28.10, and 11:3-40.3

Authorized By: Donald Bryan, Acting Commissioner for Insurance, Department of Banking and Insurance

Authority: N.J.S.A. 17:1-8.1; 17:1-15e and 17:33B-15.

Calendar Reference: See Summary below for explanation of exceptions to calendar requirement.

Proposal Number: PRN 2001-418

Submit comments by January 4, 2002 to:

Karen Garfing, Assistant Commissioner
Regulatory Affairs
Department of Banking and Insurance
P.O. Box 325
Trenton, NJ 08625-0325

The agency proposal follows:

Summary

N.J.S.A. 17:33B-15 requires private passenger automobile insurers to provide coverage to all "eligible persons," as defined in N.J.S.A. 17:33B-13 and the Departmentís administrative rules at N.J.A.C. 11:3-34. The Department adopted N.J.A.C. 11:3-40 to identify more specifically identify those insurers required to provide coverage to all eligible persons in accordance with the Act.

The current provisions of N.J.A.C. 11:3-40.3 may be perceived as a barrier to new companies entering the marketplace. The Department recognizes that new market entrants often require a period of time to establish and refine marketing, underwriting and claims systems in order to compete successfully. The current rule provides an exemption from the eligible person rules only so long as the new entrant has less than 1,000 in-force automobile exposures. This threshold does not provide sufficient flexibility to assure that new companies may get a good start in the market. One thousand exposures represents a very limited market penetration in New Jersey, where the total number of insured automobiles is approaching five million. Moreover, the threshold is defined only as the number of automobiles insured; prudent planning for entering a market may require a time-based standard, that is, a period of months regardless of the number of vehicles insured. A defined time period, rather than the uncertainty of number of vehicles insured, permits better planning and thus better ensures that the new company gets a good start so to maintain its future viability.

In making this proposal, the Department notes that new insurers entering the market are required to submit a five-year business plan that describes how they will establish themselves in the market and contains expected financial and business benchmarks. The Departmentís review of this business plan will provide the necessary facts to make the decision about how long the exemption is required, if it is required at all.

Therefore, this proposal revises the Departmentís rules in order to provide to provide the Commissioner with more flexibility about when insurers entering the automobile insurance market will be subject to the Actís requirement to insure all eligible persons.

The Departmentís rules governing formation and admission requirements for insurers, N.J.A.C. 11:1-10.8 and 28.10, give the Commissioner the ability to limit the premium written by newly formed or admitted companies writing auto insurance only where exceeding the limitation would put the company in unsafe or unsound financial condition. The proposed amendments to these rules provide that for auto insurers entering the market, a limitation on premium volume may be based on any relevant factors; however, it may not exceed two years. The proposed amendments also state that the limitation may be expressed in terms of a time period or number of exposures. For example, the exemption from eligible person requirements could run until the insurer exceeds 5,000 in-force exposures but not more than two years. The Department believes that this change should encourage regional insurers to expand into New Jersey, thereby enhancing the availability of coverage at competitive prices.

In addition, the Department is amending N.J.A.C.11:3-40.3(b)3. Several small companies that had less than 1,000 exposures in force between 1983 and 1988 were exempted from the requirements to write drivers out of the New Jersey Automobile Full Insurance Underwriting Association (known as the "JUA"). These companies were also exempted from the requirement to insure all eligible persons. In addition, this rule set the 1,000 in-force exposure threshold for new companies.

As described above, the Department is amending N.J.A.C. 11:1-10.8 and 28.10, which are referenced in N.J.A.C.11:3 40.3(b)7, to be the basis for exemptions from eligible person requirements for newly formed and admitted companies.

Additionally, the exemption for those companies that had less than 1,000 exposures in force between 1983 and 1988 is being eliminated. The proposed amendments establish a new threshold of 5,000 in-force exposures for both existing and new companies entering the market. This proposed amount would have no impact on existing insurers since there are no companies that were exempt based on having less than 1,000 exposures in 1983 and 1988 that now have more than 5,000 in-force exposures.

The Department is also proposing to delete N.J.A.C.11:3-40.3(e) as it now appears that all private passenger insurers have implemented systems in conformance with this rule. N.J.A.C. 11:3-40.3(f) will be recodified as (e) with no change in text. In addition, the Department is correcting a typographical error in N.J.A.C. 11:3-40.3(b)4.

This rule proposal provides for a comment period of 60 days, and, therefore, pursuant to N.J.A.C. 1:30-3.3(a)5, is not subject to the provisions of N.J.A.C. 1:30-3.1 and 3.2 governing rulemaking calendars.

Social Impact

The proposed amendments may have a positive impact on consumers seeking to obtain coverage in the voluntary automobile insurance marketplace. The Department anticipates that these amendments eliminate perceived barriers to market entry and

may encourage new insurers to do business in this State. They are consistent with the goal of ensuring that new market entrants establish a firm position in the market before full participation.

Economic Impact

The Department believes that there will be little if any negative economic impact caused by the proposed amendments. Insurers that had fewer than 1,000 exposures between 1983 and 1988 will now be subject to eligible person requirements if they exceed 5,000 in-force exposures. However, no company that is affected has more than 4,000 in-force exposures. On the other hand, the additional flexibility that the proposed amendments give the Commissioner may encourage auto insurers to enter New Jersey, thus having a positive economic impact on the State.

The Department does not anticipate any new expenses since it is already involved in the same activities described in these amendments and will not undertake any new responsibilities.

Federal Standards Statement

A Federal standards analysis is required when any State agency proposes to adopt, readopt or amend State regulations that exceed any Federal standards or requirements, and must include in the rulemaking document a comparison of Federal law.

The Department notes that the subject of these amendments deal with private passenger automobile insurance coverage in New Jersey, which is exclusively subject to the laws of this State and does not impact on any Federal standards or requirements. Thus, the Department concludes that no formal Federal standards analysis is required.

Jobs Impact

The Department anticipates that jobs may be generated as a consequence of the proposed amendments. The implementation of these provisions may encourage new insurers to do business in New Jersey. In such circumstances, said companies may employ persons in the administration, marketing and operations in New Jersey. However, the Department is not in possession of any workforce development studies, but welcomes input on this subject from all knowledgeable commenters.

Agriculture Industry Impact

The Department does not anticipate any impact on the agriculture industry from the proposed amendments.

Regulatory Flexibility Analysis

The proposed amendments will apply to "small businesses" as that term is defined in the Regulatory Flexibility Act, N.J.S.A. 52:14B-16 et seq. These "small businesses" include insurers authorized to write private passenger automobile insurance and/or motor bus medical expense coverage. Less than 10 of the more than 200 automobile insurers in New Jersey qualify as "small businesses."

Most insurers are already subject to the eligible person requirements and the proposed amendments do not affect those insurers. The proposed amendments may lengthen up to two years the time that new insurers entering the market become subject to eligible person requirements, but as they would have been subject to the requirements anyway, the proposed amendments do not impose any additional compliance, recordkeeping or reporting requirements.

The proposed amendments eliminate an exemption from eligible person requirements that applied to insurers that had less than 1,000 in-force exposures between 1983 and 1988. However, this exemption from the eligible person requirements is proposed to be modified to last only until the insurer has 5,000 in-force exposures. The amendment will still exempt very small insurers from eligible person requirements without defining it based on participation in the market almost 20 years ago. An insurer that has more than 5,000 exposures in force is a sufficient participant in the market to be subject to the eligible person requirements. Therefore, the Department believes that the proposed amendments minimize the impact on small business.

An insurer that becomes subject to the eligible person requirements will have to have the capability to issue policies for all eligible persons who apply for coverage. Compliance with eligible person requirements may require additional personnel in the insurerís underwriting and policy issuance departments. It is not possible to estimate the cost of compliance because it would depend on how each individual insurer had set up its business.

Full text of the proposal follows (additions indicated in boldface thus; deletions indicated in brackets [thus]):

CHAPTER 1.

ADMINISTRATION

SUBCHAPTER 10. ADMISSION REQUIREMENTS FOR FOREIGN AND ALIEN PROPERTY AND CASUALTY INSURERS

11:1-10.8 Requirements upon admission

(a) - (d) (No change.)

(e) As a condition of approving the application for admission, the Commissioner may limit the applicant's authority to write business, including a limitation on the amount of premium volume the applicant may write, for a period not to exceed five years, consistent with the applicant's corporate business plan of operation submitted pursuant to N.J.A.C. 11:1-10.6(a)16 and other applicable laws. In determining whether to limit the applicant's authority, the Commissioner shall consider all relevant factors, including, but not limited to:

1. The amount of capital and surplus of the applicant;

2. The resources available to service the business to be transacted; and

3. The applicant's proposed marketing methods and resources.

(f) In the case of private passenger automobile insurance, any limitation imposed pursuant to (e) above shall [be based solely on a determination that exceeding such limitation would result in the insurer being or becoming in an unsafe or unsound financial condition, as determined consistent with the criteria set forth in N.J.S.A. 17:33B-19 and 17:33B-20]. not extend more than two years from the date the insurer commences business in this State. Any such limitation shall consider all relevant factors and may be expressed in terms of:

1. A specified period of time (example - one year);

2. Number of exposures (example - until the insurerís inforce business exceeds 5,000 written exposures but not more than two years); or,

3. Other appropriate benchmark contained in the applicant's corporate business plan of operation.

(g) (No change.)

SUBCHAPTER 28. FORMATION OF A DOMESTIC PROPERTY AND CASUALTY INSURANCE CORPORATION (STOCK OR MUTUAL) OR RECIPROCAL INSURANCE EXCHANGE

11:1-28.10 Certificate of authority

(a) - (e) (No change.)

(f) As a condition of approving the application for certificate of authority, the Commissioner may limit the applicant's authority to write business, including a limitation on the amount of premium volume the applicant may write, for a period not to exceed five years, consistent with the applicant's feasibility study submitted pursuant to N.J.A.C. 11:1-28.5 and other applicable laws. In determining whether to limit the applicant's authority, the Commissioner shall consider all relevant factors, including, but not limited to:

1. The amount of capital and surplus of the applicant;

2. The resources available to service the business to be transacted; and

3. The applicant's proposed marketing methods and resources.

(g) In the case of private passenger automobile insurance, any limitation imposed pursuant to (f) above shall [be based solely on a determination that exceeding such limitation would result in the insurer being or becoming in an unsafe or unsound financial condition, as determined consistent with the criteria set forth in N.J.S.A. 17:33B-19 and 17:33B-20]. not extend more than two years from the date the insurer commences business in this State. Any such limitation shall consider all relevant factors and may be expressed in terms of:

1. A specified period of time (example - one year);

2. number of exposures (example - until the insurerís inforce business exceeds 5,000 written exposures but not more than two years); or,

3. Other appropriate benchmark contained in the applicant's corporate business plan of operation.

(h) (No change.)

CHAPTER 3. AUTOMOBILE INSURANCE

SUBCHAPTER 40. INSURERS REQUIRED TO PROVIDE AUTOMOBILE INSURANCE COVERAGE TO ELIGIBLE PERSONS

11:3-40.3 Insurers required to provide automobile insurance coverage to eligible persons

(a) (No change.)

(b) The requirements set forth in (a) above shall not apply to the following:

1. - 2. - (No change.)

3. Insurers with less than [1,000] 5,000 automobile inforce exposures [as of December 31, 1983 and as of September 30, 1988. Insurers newly authorized to transact private passenger automobile insurance after September 30, 1988 shall be exempt from this subchapter until such time as the insurer has 1,000 or more automobile inforce exposures];

4. Insurers transacting automobile insurance business in New Jersey [subjet] subject to a plan of orderly, withdrawal approved in accordance with N.J.A.C. 11:2-29, but only to the extent provided by the terms of the approved plan of orderly withdrawal;

5. - 7. (No change.)

(c) - (d) (No change.)

[(e) Insurers that are required to insure eligible persons, but that do not have a current personal lines automobile insurance rating system on file with the Department, shall file such a system with the Department in accordance with N.J.S.A. 17:29A-1 et seq. within 90 days of the effective date of this rule.]

[(f)] (e) (No change in text.)