25 Years Ago in The Actuarial Review

by Walter C. Wright

When Will This Ever Get Straightened Out?

The following is extracted from a front page news article, by Mary Lou O'Neil, that appeared in the October 1978 AR (.pdf):

New Jersey Tackles Problems of Actuarial Equity and Public Policy
Recommendations to the Legislature Include Changes in Class Relativities, Merit Surcharges, Residual Rate Levels, and Profitability

The New Jersey story started in June, when the Insurance Department and the Governor's office proposed three bills to alter the structure of the private passenger automobile insurance market. Briefly, these three bills would establish a reinsurance facility as the delivery mechanism for the residual market in private passenger automobile insurance, establish a merit rating plan using fixed dollar amounts as surcharges based on accidents and motor vehicle violations, and provide for an increase in the Insurance Department staff at the companies' expense so that the Department could adhere to time lines established by the bill for the administration of the state's prior approval rate regulatory law.

Later in June, the Assembly Banking and Insurance Committee simultaneously voted the three bills out of committee and created the New Jersey Ad Hoc Committee on auto insurance reform…The committee's charge was to recommend a viable alternative to a reinsurance facility that would solve some of New Jersey's automobile insurance problems…not least of which is a population of one million drivers in the assigned risk plan.

Simplifying this charge, the committee sought a response to the problems of availability, affordability, and profitability as each affects the various parties to the auto insurance transaction….

Affordability quickly became the focal point of discussion, pitting "actuarial equity" against "public policy." Traditional rating methods were challenged. In particular, territory and classification differentials were examined. The committee also explored the potential effects of eliminating age, sex, and marital status as rating criteria, the adoption of uniform merit rating surcharges by territory, and the use of voluntary market rates for all drivers. The committee endeavored to achieve a balance between the goals of actuarial equity and public policy so that gross market dislocations may be avoided….

Keeping these facts in the forefront, the committee took several giant steps toward greater social equity along the continuum from actuarial equity. These steps were the adoption of general market reforms: limitation of the size of maximum territory and classification relativities to the statewide average, uniform merit rating surcharges by territory, and a single rate level (ISO) for all residual market drivers….

Profitability was addressed through the recommendation of specific time lines for Insurance Department actions on rate filings, establishment of an indexing procedure for automatic adjustment of rates, and provision for automatic recoupment of any association losses through the voluntary market rates.

The Ad Hoc Committee recommendations now before the New Jersey legislature point to the changing environment, in which adherence to actuarial equity is no longer the sole basis for the pricing of insurance. It is difficult to say where this chapter will end. However, actuaries are becoming aware of the new role required by ever-increasing social demands.