Highway Robbery (On Car Insurance)

THE OPEN MIND
Host: Richard D. Heffner
Guests: Robert Klein, John Nangle, James J. Sheeran
Title: Highway Robbery (On Car Insurance)
VTR: 6/19/77

I’m Richard Heffner, your host on THE OPEN MIND. And I’d like to think that today’s subject affects you vitally if you own a car, drive a car, or even are distantly related to someone who does. It has to do with the extraordinary escalation in the costs of automobile insurance and the possibility that your own policy may be cancelled or not renewed, and that you will find yourself begging to be covered at any cost. Not a pleasant prospect for you nor for me, not for government agencies that supervise our auto insurance system, nor indeed even for the companies that write insurance and that must make their rates reflect the realities of years of inflation, the escalating costs of everything.

Today I’ve brought together with us for the discussion of automobile insurance three gentlemen who are quite familiar with the problems that relate to that field in New York, New Jersey, the metropolitan area, and all over the country. I’d like to introduce first Commissioner James J. Sheeran, the New Jersey Commissioner of Education. I’d like to introduce second, John Nangle, Washington Counsel for the National Association of Independent Insurers. And third, Mr. Robert Klein, a Senior Editor of Money magazine.

Gentlemen, I’d like to begin the program if I may by quoting from a fascinating document that I’ve just recently received. It’s dated May 22, 1977. It’s signed by Mr. Sheeran, the New Jersey Insurance Commissioner, and by the Acting Federal Insurance Administrator. And it says, if I may read in part, “We find that millions of Americans are suffering from an insurance system characterized by excessive premiums, arbitrary cancellations, and refusals to insure, and unfairly discriminatory rating practices. Insurance companies have long tried to convince the people of each state that the problems exist in their state alone. We think it is time to set the record straight. These are not problems unique to one or two states. They are country-wide problems and they exist in virtually every state. Each of our states has been threatened with mass withdrawal by the insurance industry when unjustified rate increases have been denied. We are tired of seeing our citizens forced to live under these threats”. And I think that I’d like to do, having read that section of this manifesto called “Time to Set the Record Straight”, I think I’d ask first Mr. Nangle to comment on it and then open the discussion to you two gentlemen. Mr. Nangle?

NANGLE: Dick, I’m not non-controversial, I’m not the beginning. The commissioners’ manifesto as you call it involves three states. Three states where the insurance climate is very poor indeed from many factors. Notably hostile and irresponsible regulatory climate. Other factors of course, the particular no-fault law in a state that may need changing. The reinsurance facility in North Carolina is an example of a horror that the companies have been trying to educate the public about and they’re finding out in real life what it’s all about down North Carolina. It’s not true. And I take this manifesto to task. It isn’t true that only, that three commissioners will speak for the other 50 and say that the insurance problems are as broad in the other states as they are in these states. There are problems with insurance to a degree here or there in other states, that’s true. But we have three horrible examples in these states, Massachusetts, New Jersey, and North Carolina.

HEFFNER: I’ve got to add the commissioner from Pennsylvania and the federal insurance administrator.

NANGLE: Yes. Well, if you want me to follow up on that, Dick, I was surprised, frankly, that the commissioner from Pennsylvania led his name to that statement. He was not a part of that statement as I understand, but he lent his name to it. At least he had a staff man at this conference. I would assume that he believes this. I don’t think that the insurance problems of Pennsylvania, although they’re serious to Pennsylvanians, is not something that can’t be solved. And I was surprised that Commissioner Shepherd lent his name to that document. The insurance, federal insurance administrator had no business at this meeting. I don’t, he’s an administrator of the Federal Law and Reinsurance Program, the Federal Flood Insurance Program, and the Federal Crime Insurance Program. Frankly I’m at a loss to decide my mind why he was there.

HEFFNER: All right. Let’s talk about the merits of the situation. Commissioner Sheeran, you were there. Tell us not just about the meeting but let’s go into this question. I’m a consumer. I suspect that each of the four of us at this table is a consumer of automobile insurance. I think that great many people watching us today, a great many of them are. Commissioner, what’s your comment?

SHEERAN: Well, Dick, you know, when you introduced me I know you made an error unconsciously. You called me the Commissioner of Education in New Jersey.

HEFFNER: Did I? How did you like that?

SHEERAN: And I’ll accept that if this document is used as an educational tool. That’s really what it is. It’s our intention as commissioners to advise the public of what we consider to be some of the hidden, deep problems involving insurance and their lives. Actually, you know that in most cases automobile insurance is mandated. If people don’t have it they’re going to find themselves in jail. As a matter of fact, in New Jersey we recently had a young person who was convicted of, to a short term in jail because he had no insurance certificate. Well, we talk about unfair rating practices and discrimination and so on. It’s got to be recognized that we make distinctions between people not because of their driving records, but because of something they’ve done themselves, but because of their age, their sex, their place of living, and so on. For example, you could take a drunken, convicted drunken driver in almost every state in the nation who is somewhere between the age of 30 and 64 and I would daresay that that person pays a better, lesser premium than a young driver with a perfect driving record never having had an accident and never having been involved in a traffic violation, a moving violation. That to us is some of the area of discrimination we ought to talk about. There is no question that the people in our cities, major cities are discriminated against by way of rates. A perfectly fine driver, no convictions, no automobile accidents against his record, pays much more than many drivers who live in the urban or the suburban or rural areas who have had one or more accidents. Then of course we have what they call a secondary market, which in our state happens to be the assigned risk. People are put into the assigned risk not because they’re bad drivers; simply because someone out there in the insurance industry makes a determination that they will not insure that person. You can have two people who are like risks driving the same automobile, living in the same neighborhood, doing the same work, and one can be insured in the standard market and one in the assigned risk.

HEFFNER: Why?

SHEERAN: That’s one of the questions.

HEFFNER: How did that come about?

SHEERAN: Because a determination is made by the person selling the policy that they do not qualify for underwriting reasons, whatever they may be, and I’ll talk about those later, and they are then put into the assigned risk. Now, in New Jersey we don’t have what we call a two-tier rating system. In other words, we don’t charge more for someone simply because they’re chosen to go into the assigned risk. In most states, I think in almost every other state though, there is a two-tier rating system. And if you’re put into the assigned risk, even though you’ve never had an accident, you’ve never had a moving violation, you pay as high as 60 or 70 percent more for your automobile policy. And that’s unreasonable. These are the kinds of changes that we believe the people are entitled to. We think that people ought to be generally rated on their own driving record, and instead of, look at, let’s take a young person, the young person in the City of Newark, New Jersey. If they bought an insurance policy, a 19-year-old boy, driving a 1976 Nova, not a big car, no accidents whatsoever, he would be put into the assigned risk and he would pay over $1,800 for his insurance policy for standard coverage. Now, when we mandate that it seems to me that that’s a pretty serious act, and that that certainly shows that changes have to be made if we’re going to be sure that there’s a market that’s affordable to the people out there.

HEFFNER: Let me ask Dr. Klein what his preliminary comments would be. I trust I didn’t make you Senior Editor of any magazine other than Money magazine as I made the Commissioner Commissioner of Education.

KLEIN: Well, as to Money magazine – and money’s one of the key words here in this controversy – the cost of automobile insurance has gone up so tremendously that, and you didn’t mention Florida. And The Wall Street Journal reported last month that something like 20 percent of Florida motorists are driving without insurance because they can’t afford it, and driving illegally without insurance. Now, here’s the situation as it comes up to the driver, the motorist, the consumer in this marketplace. The states have passed laws, all of the states have passed laws which makes it virtually compulsory to carry automobile insurance. And in many of the no-fault states you can’t even register your car unless you have this insurance. So the consumers here are captives; they have to buy the product, there’s no choice about it. But the sellers don’t have to sell it to them. Think of another, try to think of another product or service in this country where that kind of situation prevails. Now, the situation is this: We went through a cycle. We’re going through a cycle. We go through cycles periodically in the automobile insurance market. And in the 1973 stock market crash, which was accompanied by a severe inflation, the insurance companies got into trouble. They felt their rates were too low, and they took a terrible pounding on the amount of money, no the money they had invested in stocks and bonds. And that’s a lot of money, and a lot of their income comes from the investments which they make from our money which they’re holding back to pay claims later on. They get to handle a lot of money, these insurance companies, and they do something with it. And what they do with it has a lot to do with their rates. Well, they took a pounding in the market like a lot of the rest of us did in the 1970s, the early 1970s.

And then, as they have in the past, they mounted a campaign for higher premium rates. And over the past few year they’ve got the higher premium rtes. And now we’re in a situation where the companies that are crying their eyes out are making record profits. They’ve got enough money now. And meanwhile, they’ve left a lot of wreckage behind. One way they cured this problem was to get higher rates. Another way was to clear out their underwriting, as they like to call it. That means they just up and refused to insure a lot of people they were insuring up until now. Or else they raised their rates so high that those people couldn’t any longer afford to pay the insurance. And by dint of that effort the insurance industry is now sitting pretty for the time being. They’ll have more problems in another four or five years or whenever. That’s the way this industry works, partly because it’s regulated. It’s not the insurance companies that are villains here. Maybe I’m making it sound that way. That’s not true. They have their faults, and the system under which they operate has its faults, and inflation is a terrible factor in all this. And maybe we can talk a little bit about how to get out of this bind.

HEFFNER: Well, I would think, in fact, that Mr. Nangle will want to respond to what has been said in terms of what has brought about the conditions that you and the Commissioner described to the extent that he agrees that this is in fact an accurate description of the spot we’re in at the moment. Mr. Nangle?

NANGLE: Dick, I’d like to just, you know, comment on one or two points here.

HEFFNER: Please.

NANGLE: …that I don’t agree are correct. And I would like to get into some of the problems we have. First of all, you know, make no mistake about it, the insurance industry’s best interest is served by lower insurance rates. We do not want people priced out of the market. We abhor high premiums. We want everybody to easily obtain insurance. And if we can operate in a fair and competitive market where we have a shot, at least a chance of making us a fair return on our money. With the high rates, so-called high rates in New Jersey we can’t make any money, for instance. So we don’t, that’s not our best interest.

Now, as to the great profits that we’ve been enjoying lately, Mr. Klein, we’ve just gotten the figures in for the first three months of 1977. Based on 500 companies writing in California and 100 additional of our companies, 100 of our largest companies not writing in California, our figures show that the underwriting loss – that’s on our…If you’re making tin cans, you’re selling tin cans. Our business is selling insurance. That’s our business. We have to make money on that. We lost in excess of 500 million the first three, the first quarter of 1977. We lost in our investment portfolios about 1.08 billion. Now, the investment income, investment portfolio’s important because that’s the source by which we can write additional new business to make a market, to make insurance available. Commissioner Sheeran would be very upset if we didn’t have the surpluses to back up the amount of business that our companies write in the State of New Jersey. So overall we suffered a loss in surplus of a billion plus 500 million. There was investment income that was credited against that of about a billion dollars. So we’re down to a surplus loss of 500, in excess of $500 million the first quarter. Now, I just point that out, Mr. Klein, because, you know, there is this thinking that we’re just money machines, that things get better and better.

Now, if I may, before I forget, some of the points that Commissioner Sheeran made…I think Mr. Sheeran would agree that if our business is so good, and if these risks…by the way, I don’t understand what he manes by good risk. There’s a term of what we call a “clean risk”. That is a risk that isn’t obviously a bad risk. One that an underwriter decides he can’t make money on, the insurance industry cannot, it wouldn’t be fair to the rest of the policy-holders in that company for him to write that class of business. And we’ve been proven right more times than not. Now if this business is so good and we’re making so much money on this business, why are we about to write at all? Why don’t we turn down this good business? We’re businessmen. We’re profit-motivated. We want good business. We want to operate in a regulatory climate that isn’t politically motivated, or where we can attempt to compete in the marketplace with other companies for the lowest possible rate. And in so saying I know there are other in the laundry list of things that we are doing that are bad. I’d like to answer them as they come up. But…

HEFFNER: Why don’t we focus on these two questions that seem to be separate though intertwined in terms of what the insurance companies are willing to do? One, the question of good times, the money machine. Mr. Klein, you, I wonder if you wanted to pick that up. Is it true in fact, that we’re talking about insurance companies in good times now, or is it true, as Mr. Nangle says, that we’re in a period when at least a certain number of companies have lost in the first quarter a half a billion dollars, and therefore, I presume you’re saying, need higher rates?

KLEIN: There are two sides to insurance companies’ bookkeeping. The side that they report to the regulators, and the side that they report to Wall Street. I have in front of me the side that they report to Wall Street. It’s a computer run from the Argus Research Company, one of the respected research firms in Wall Street. It was made as of late last month. I can single out one company on their list which is almost solely an automobile insurance company, the Safeco Corporation of Seattle. Their profits in 1975 were $2.27 a share. In 1976 they were $5.36 a share, almost double. And they’re projected, as of May, Mr. Nangle, by Argus Research, at $6.40 a share, a full $1.04 more than last year. Now, estimates in Wall Street may be wrong, but as far as the investor community is concerned right now you look like a pretty good thing.

NANGLE: Safeco looks like a pretty good thing.

KLEIN: Well, Safeco is only one of the companies listed here. And I singled it out because it’s almost a pure insurance company. The other companies listed, such as the Chubb Corporation, INA, and St. Paul’s, have done commensurately well and are projected as doing commensurately well.

NANGLE: Mr. Klein, I don’t want to interrupt, but those figures do our projections on an overall brook of business including commercial risks. We’re not supposed to be discussing commercial risks today. And all other risks in that preliminary company.

KLEIN: That’s why I chose Safeco. I believe that’s an example of a company that’s mainly in the automobile industry.

NANGLE: Safeco is in a very fine market area. You won’t find them too heavy out in this part of the country. But they are smart operators. What particular companies experience, and I can’t deny it because I have no ammunition to deny it, all I know is the figures that I have. And we have a compilation composite figure.

KLEIN: Well, I haven’t any breakdown on this. But the Allstate Insurance Company, which is one of your association members and is an all-lines insurance company selling almost entirely to the consumer and is the second-largest automobile insurance company in the United States. Allstate contributed 51 percent of Sears Roebuck’s total profits in the first quarter of 1977. It’s a big business, and it’s in general a prospering business. And I’m not denying that there are problems with it. And I’m not saying that you’re making excessive profits. What I am saying is that you’re making hay while the sun shines because in a few more years you’re going to go through another cycle and another, where you’re going to have to go pleading for more rate increases. So that’s my answer to the dollars and cents problem. The real problem here isn’t how much you charge, the real problem is that you can’t get the insurances as motorists, and something has to be done about that.

HEFFNER: I’m sorry. You just said the real problem is…

KLEIN: The real problem is that the people who need insurance aren’t able to get it from private industry. And so they’re having to go to assigned risk pools. And in many cases, because they can’t afford otherwise, they’re going without it, taking not only a risk of losing their license but of getting wiped out financially if they’re in an accident.

SHEERAN: The assigned risk pool is, of course, is a private industry, is subsidized by the companies which, in turn require their policy holders, the normal, standard, good policy holders that they’ve written in the normal, voluntary market, to subsidize the horrible experience in this so-called clean risk, assigned risk plant.

HEFFNER: Well, you say, you just talked about the good risks and the bad risks. And I’d like the Commissioner to talk about that.

SHEERAN: Well, I’d like to talk about that because I believe as a regulator it’s our responsibility to really speak in the public interest. There is no doubt in my mind if the insurance industry could identify people who are the horrible drivers and identified each and every one they’d have the most profitable business going because no one would really need insurance. The whole idea of the insurance system is a spreading of that risk. But that’s not the real issue here. People are chosen to be placed in the assigned risk for what, they are described as underwriting reasons, criteria. I won’t tell you that there are companies that consider you to be an underwriting risk if you’re a construction worker, if you’re in the military, if you’re a retired person, if you’re a waiter or a waitress. As a matter of fact, the other day I was at a meeting, there were a lot of us at the meeting, insurance executives and others, and I must say I think the soberest person in there was the bartender. But I’m not…

HEFFNER: What’s to be revealed in the next edition…

SHEERAN: (Laughter) But the point that I’m making is that in the assigned risk pool, in the secondary market, they are not bad drivers. Each and every person in there are not bad drivers. People are put in there for lot of reasons. And I dare say that you go down to center city New York, center city and big city, and you’ll find the great majority of the people are finding themselves in the assigned risk. Not because of their driving record, but because of where they live. Now, I think that deteriorates the quality of city life, it’s harmful to everyone, and I don’t think it’s necessary. You know, there were some comments made here before I’d just like to get into. One was questioning whether Commissioner Shepherd really participated in this so-called manifesto. Not only did he participate, but none of us would have signed that with him had he not authorized the specific document that’s before you. Bill Shepherd felt as strongly about that document as anyone who happened to be there personally. He had problems in getting to the meeting. But in addition to that I think it’s important to note that Bob Hunter, who is a federal administrator, is an actuary, he sees the entire picture, he’s one of the authors of what I consider one of the finest documents put out in insurance, that’s the issue of full availability of insurance with deals with what we call a reinsurance facility, which is a mechanism for providing insurance for people who the industry really doesn’t wish to insure. And it gives those people an opportunity to be treated fairly. It simply means that an insurance company, as indicated before by Bob, that they can’t just turn down someone. If they advertise and they say they’ve got a product for sale, they must sell it to the individual. They’ll not deny their right to underwrite that after they sell the policy to a person, but they simply pool the risk portion of their dollar. And every company would service the people who are involved. That’s the system they have in North Carolina. And I happen to believe that Commissioner John Ingram in North Carolina is really the target of a tremendous effort by the companies to destroy a system which is probably one of the finest insurance delivery systems in the country. It gives fair and equal treatment to everyone.

HEFFNER: Well, Commissioner, I know now, I’ve been trying to puzzle out why I made that mistake and introduced you as the Commissioner of Education. I know now. Because with two sons in college I know that the only thing that’s gone up as much in cost as insurance is education. And I’m not just joking about that. Aren’t we dealing here with an industry that itself is faced with such incredibly escalating costs that of necessity the rates that it is charging must reflect those costs? And I make the comparison with education. One could say about the costs of sending a kid to a private college that those costs have escalated so. Aren’t we dealing here now with insurance companies that, as Mr. Nangle said, are not trying to get rid of people, presumably – although, Mr. Nangle, I must feel sometimes that my agent is trying desperately hard to get rid of me – but who are looking for business. They’re businessmen that must stay in business. But is it possible that we’re dealing here with such a rapidly escalating cost factor that the demands that are made upon you or the requests that are made upon you for rate increases are measurements of the inflation that we have been experiencing, measurements of the nature of the automotive industry, measurements of the nature of contemporary life rather than some evil intention on the part of the insurance companies?

SHEERAN: I don’t categorize it as an evil intention. I believe that we’re structured here in this country pretty much with a bottom line when you get into corporate life. And sometimes, you know, we lose sight of the individual problems that we’re dealing with. But we mentioned before the matter of people who can’t afford it anymore. In California, where companies can charge anything they want, they have a free market, they can raise it. You mentioned losing money in California. They’ve got three million drivers who are uninsured. Now, to give you an example…

HEFFNER: Three million drivers?

SHEERAN: Three million drivers uninsured. That’s an intolerable situation as far as government’s concerned. And more particularly on those who can’t afford insurance. It’s shifting the market. Where we’ve burdened – and I say we because I’m part of the regulatory process here – the people who can least afford insurance are the ones who are the most burdened. And I set that on the table as a challenge. And anyone can show me that that’s not true. The young people, the people who live in the cities, people in particular industries who can’t get it and go into the assigned risk and go on. So when we do that we shift the burden, once those people refuse to insure and become illegal drivers, back onto those who can afford it, and through the uninsured motorist coverage, they’ve got to pick up the slack to insure themselves against an economic loss. Now, I believe that I’m correct in this, in California their uninsured motorist premium is something like $57 or $58. In New Jersey it’s $2 because we still do have most of our people driving with insurance. And we in our state have a prior approval of insurance. They cannot charge until we approve that. In California, where they run loose with charges, people can’t afford it and therefore they’re not paying for their insurance, and on the other end it’s being picked up so…

HEFFNER: Mr. Nangle looks as though he has something to say about that.

SHEERAN: (Laughter) Chomping at the bit, as we say.

NANGLE: Well, first of all, Dick, insurance, and I’m going, you know, I hope you don’t mind, but I have to take these one at a time in my mind because I’m kind of getting it both ways here. Insurance costs have not gone up as much as education. I too have had…I’ve got one in college now. I had two and then three at one time. So I know about that. Actually, insurance costs have not gone up as fast as the consumer price index in the past five years. Would it interest you to know the insurance costs have gone up about 44+ percent whereas crash parts – Now, after all, what are we paying for? As Mr. Klein pointed out, we’re paying for hospital costs. We’re paying for physicians’ costs, we’re paying for auto crash parts, for, you know, things of that nature. Hospital costs have gone up 80 percent in the last five years. Physicians or medical costs have gone up 45 percent; insurance has gone up 44+. Whereas crash parts up 111 – Now, to get into Mr. Sheeran’s point here, and I’d like to just, give me an uptake on that if you will, Jim…

HEFFNER: About California…

KLEIN: Well, California. I did not say that California companies operating in California had lost this money. This is a report that the California Insurance Department requires every quarter of country-wide business. I don’t think, and contrary to your manifesto, Mr. Sheeran, I don’t think there are any insurance, there are insurance problems in California. I’m sure there are some localized problems out there. The assigned risk plan out there is simply about two percent of the population. Now, whether three million people is two percent of the largest populated state in the union, I don’t know.

SHEERAN: I talked to that…Excuse me.

NANGLE: That’s quite all right. I just point out that the competitive rating law in California works, and it works well. The Department of Justice has come out with a 400-page report on pricing of insurance, and they have said, and they pointed out in New Jersey – pardon me, Mr. Sheeran – as an example of prior approval that just does not work well.

HEFFNER: Would it be unfair – let me just say this – would it be unfair, Mr. Nangle, to make the point that in California I had a 20-year-old son who was insured and when the bill came I couldn’t believe what it was, and then I was told it was for six months, not a year? Now, I suppose it works, and it may work to the profit of the companies in California. But again, what about the person who is seeking insurance? How can he do it?

NANGLE: There is no question about the fact, and we have actuarial studies that prove this, and the data has proven that certain classes, not classes that are unfairly discriminating, but discriminating classes. There’s a raft of data that shows that certain groups of risks have a higher degree of exposure to loss. Unfortunately it’s the younger men, the unmarried younger men, the newer drivers. It may interest you to know that the girls in that age bracket are coming up to that standard now too. Maybe we’ll be paying more for our daughters, or whatever. But this is an unfortunate thing. As I say, I have children too. I live in Maryland, and I was shocked at my premium. That’s a sleepy, southern state. We have our problems.

HEFFNER: I didn’t mean to take us away from the subject by referring to my problems of my sons, but I’d like to get back to this question that was raised before, and I think it began with something Mr. Klein said, and then I picked it up, and I commented on it in my introductory remarks. You say that the cost of insurance has not kept up with the consumer price index over the past five years. And I would like to ask these two gentlemen, State Regulator, Commissioner of Insurance in the State of New Jersey, the person who is the Editor of Money magazine and who has made a long study and continues to study the details of the financial background of our problem. Is that the case? Are we talking about an industry that has stayed behind in terms of costs, or one that’s plummeted ahead?

KLEIN: I’m not in any position to dispute John’s figures, but those are aggregate figures. And aggregates cover a lot of specifics. In some areas the insurance rates have tripled and quadrupled. In other areas they haven’t gone up at all, or they’ve gone up nominally. And I think, may I comment a little bit on this price structure? Because I think in order to understand this discussion you have to know a little bit about the way insurance has been exempt from the federal antitrust laws, and it’s been left to the states to regulate the price or not regulate the price and enforce antitrust laws on the insurance companies. Under this regulatory system the insurers, many of them have done just exactly what anybody with a smart business head will do. They have sought to insure the best risks and to avoid through overly high premiums the poorest risks. This is what they call creaming the market. And some of the best insurance companies and some of the worst insurance companies do it. They price their insurance so high in cities that they don’t get much business there. They price their insurance low in the suburbs and in semi-rural areas and places where people don’t have so many accidents and where people live as stable families and are therefore desirable risks. They price their insurance there at an interesting low price and write a lot of business there. And this is fundamentally the root of the problem. It’s not a problem if you happen to be lucky enough to live in the country club section. One commissioner of insurance in Pennsylvania about seven years ago likened a privileged group of insurance customers to members of a country club.

But if this is to be the case, Mr. Sheeran was coming up to this point, so maybe I should bring out my thoughts on it. It seems to me that insurance companies ought to be allowed to compete on price. They shouldn’t be regulated on price. They should be free to charge whatever they want, and they should be exposed to federal antitrust laws. And they should have to set their prices in a way that the public could understand them and in a way that isn’t discriminatory. If there is data, if there are data to prove that people in certain cities and of certain ages and of certain levels of education and in certain occupations, and the categories go on and on, who are poorer risk than others, that ought to be pretty well demonstrable by the claims experiences of the insurance companies, all of them put together. If we put all the claims experiences of all the car insurance companies together, we can draw a map of the United States and a demographic profile of drivers, and let them all charge the same surcharge, the same additional extra price for the same bad risks, and let them give the same discount to the same good risks. Let them all play by the same scorecard, and then let them compete on a basic price. And we’ll all be able to understand what they’re charging, and we’ll all be able to buy the cheapest insurance. And if something is inequitable it’ll be inequitable across the board and we’ll be able to see it. The way things operate now, there is too much helter-skelter freelancing in the insurance business.

HEFFNER: Commissioner, I have the feeling that that isn’t a solution that would please you.

SHEERAN: Well, Bob’s not, you know, off the mark on that in my judgment. In certain ways I think that if you’re going to, you know, let the insurance companies go out in the market and do whatever they want on price, you can’t let them also get together and make those decisions and give the people no protection through the federal antitrust laws and so on. But I think more important than that is that you cannot permit the companies to have a two-tier rating system in which they compete for only a certain segment of the market and then take the other people who are not bad risk and who have not shown themselves to be bad risks, throw them into that secondary market and charge them a much higher price. For example, I believe in California I think the secondary market, or the people who are in the assigned risk, or in the secondary market, which I’d like to talk about for a moment, carry about 70 percent more than the people who are placed in the standard market. And they could be like risks, like experience, like cars and so on. In the California case, it was mentioned before that only two percent of the people are in the assigned risk. That doesn’t tell the story. The fact is that in California the companies have secondary market. That is, companies are permitted to charge higher levels for different people. And a company could…you could have pup companies, the same company owning three insurance companies with three different rates. And then they throw the rate that they want to what the individual that they talk to. They can throw the high rate, the middle rate, or the low rate at you. And that’s the way it is. So you can’t just look at the assigned risk. In New Jersey you can because we don’t permit a two-tier rating system. It’s totally unfair to people.

HEFFNER: Well I find it, Commissioner, before you said in this country we go a lot by the bottom line. And I just wondered why the subject hasn’t come up today as to the requirement that we make insurance into something more akin to a public utility if we are being concerned here with the insured rather than with the insurance companies. We’ve made the statement insurance companies are in business, they’re in business to make profit. That is the American way. But there are certain areas, too, in this country, where we say we’re dealing with a public concern in which profit can’t be, the bottom line can’t be the major consideration. Have you been concerned with making automobile insurance into something akin to a public utility, Commissioner?

SHEERAN: Well, we prefer, and I know the governor of my state feels they prefer to stay with the private segment of industry. But one of the things in this, again the manifesto signed by several commissioners is that we think it is time that the threats to withdraw, the threats not to renew, the threats on people’s insurance, which is a vital item to them, has to come out of the system, and they can no longer continue to have to sit under that threat. If in fact the private sector cannot make insurance available at affordable rates then I do think the government has to take some specific action in that direction. We had some statements before talking about our companies underwriting profit. That’s a word of art. The profits are not the bottom line of an insurance company. When you talk about underwriting profit, the industry would like to get for every dollar of premium that it writes, five percent of that as a profit. Now, that’s sort of like the, I guess, the grocery chains do. They say, “We only make a half a cent on every dollar we sell”. But what’s their investment? How much are they making out of their investment? They’re talking about five percent on your money which you pay in advance long before you get the product. So when you’re talking about bottom line, and we talked about two sets of books in this document, there is the of books that we get as regulators, and there is the set of books that’s used to determine what the stockholders will see by way of bottom-line profit.

NANGLE: Which is 19 percent of equity at the moment in the casualty property industry as a whole, compared with 15 percent for all U.S. industry.

HEFFNER: Mr. Klein, do you react as poorly to the notion of restricting profits perhaps or making into a public utility the…

KLEIN: I’m against making it into a public utility.

HEFFNER: Why?

KLEIN: I think that the insurance companies should have to do business with everybody. Anybody who’s licensed by a state to drive a car and who owns a car should be entitled to buy insurance in what you call the voluntary market.

HEFFNER: And you think that the poorer risk category should be charged higher premium rates?

KLEIN: Sure. Of course. It’s too bad that we can’t judge people as individuals, but obviously that would be enormously expensive. So the rather broad acts of actuarial science is employed, and it hurts a lot of people who are innocent.

HEFFNER: But to what end? Safety on the highway?

KLEIN: No, no. Only to the end that the rest of us can pay a somewhat lower rate for insurance.

HEFFNER: But like the Commissioner, I guess I always felt that insurance was designed to kind of spread the risk around, and this seems to be concentrating it on those, what you two gentlemen call the poor risks. Understandable, but doesn’t it belie the very thought of what insurance is all about?

KLEIN: There’s a case that could be made for charging everybody the same rate for insurance. But I have a feeling that a large number of people in the United States would object strenuously to that.

SHEERAN: Bob, can I just talk about…

KLEIN: Yes.

SHEERAN: When we talk about the classification system, 217 classifications of people who pay different rates for various reasons and so on, we really are talking about young people basically. Most of those classifications deal with young men, young women, and so on. Now, it’s quite true that that same body of young people get to be older than 25. And if you did have such a system they’re not going to stop driving to beat the system. They’re going to continue to buy insurance over the years. And why burden all those young people the very time when they can least afford it? Not only do you burden them, you burden their families. The kids are in college and so on. And I just read the Stanford study which the industry says is the key, you know, to prove that the classification system is vital and ought to remain. And they end up saying that it shouldn’t be expanded. But in there it’s very clear that the industry study indicates that 40 percent of the young drivers are the best drivers on the road. Now, those 40 percent of the best drivers on the road are paying unburdenable, or intolerable premiums, and probably are illegal to a large degree.

NANGLE: Mr. Sheeran, I believe that figure you’re searching for is that 20 percent of the drivers are underage drivers, but they have 40 percent of the accidents. Now that tells you something. Fairness tells the rest of our policy holders that they shouldn’t have to pay for a class of risk. Now, I haven nothing against the young drivers, but there may be other classifications. People want to be rated according to their driving record. And we do, contrary to your manifesto, write our business and rate our business according to the driving record of each, of the individual insured. But then…

HEFFNER: Of individual insured?

NANGLE: Well, according to their driving record as part of their rating systems.

HEFFNER: But let’s take a young person, even a young woman, as you suggested, the young women are catching up in terms of the rates.

NANGLE: And in the past plan, Dick, a young woman with an accident will be rated higher than a young woman without an accident.

HEFFNER: Right. And a young woman without an accident? How will her rate compare to an older woman without an accident?

NANGLE: It depends on the company. You know, the truth of the matter is insurance is a very competitive thing. And you’ve got at least 500 companies for instance in New Jersey. And you wouldn’t want a utility. You still have a competitive atmosphere out there. You should shop around for insurance. One company that may charge will make the distinction; another company may not. And you should shop around for insurance ‘til you find out what the rate for a particular person in a particular area…

SHEERAN: It’s pretty hard though, to shop for insurance when you’re not even sure that he’s going to sell it to you.

NANGLE: Well, we have a very bad situation in certain areas, yes.

HEFFNER: Well, what about that, that not even being able to get it at all?

NANGLE: That’s not true, of course.

HEFFNER: Perhaps at any decent rate?

NANGLE: Well, you know, we have to…What is a decent rate? Now, if the public understands that the legislatures will not pass laws that impose sanctions on drivers that are going to kill and maim, if judges won’t – and this is the first case I’ve ever heard of somebody going to jail for not having insurance – but before every licensing law it’s, you know, the premium says it’s a privilege to drive. And from then on the ball game’s over, it’s a right to drive. Now, the insurance industry has been given the responsibility of policing this right. In other words, we’re still going to have them kill and maim, but we’re going to have to come up and pay for all of the killing and maiming.

HEFFNER: Mr. Nangle, that’s just why I asked Mr. Klein whether what he was talking about, the bottom line of what he was talking about, the safety, was it the well-being of the public in terms of saving our lives? And the answer really was, well, no. We’re talking about a financial entity. We’re talking about a money entity. I’m sure what you’re saying is correct. Why don’t the insurance companies, then, mount the kind of campaign that would throw back upon government agencies that are responsible for safety the burden that they should be taking? Take off the road the bad risks.

SHEERAN: Right. We have supported the NHT, the National Highway Traffic Safety Bureau in many of its efforts. We spend millions with an insurance institute for Highway Safety. We’ve proven the case for seatbelts and airbags. The DLT has lagged in the past in the implementation of airbags, which would save untold lives and lord knows how many injuries. And crashworthiness of cars. We’re almost, you know, paranoid about his in Washington. And General Motors and Ford and American Motors, you know, have fought us on that.

NANGLE: That’s true. That’s very true.

SHEERAN: The insurance industry is cognizant of these problems and is trying to do things in this.

KLEIN: In this, in Florida the problem seems to be a little exploitation of no-fault insurance. No-fault insurance pays everybody’s hospital and medical bills and a portion of their lost wages when they’re hurt in a car crash, no matter who caused the accident. In Florida, an ambulance-chasing racket has sprung up, particularly in the Dade County and Miami area. And lawyers and doctors apparently have gotten into cahoots. The lawyers find the victims and the doctors pad their medical bills until they get above a certain amount of money. And in Florida, what is that, $500?

SHEERAN: Yes, well the threshold is $1,000.

KLEIN: A thousand dollars.

SHEERAN: The doctors own the hospitals in Dade County.

KLEIN: Yes.

SHEERAN: …so they’re keeping people in the hospitals.

KLEIN: By priming there, falsely priming medical bills up to $1,000 they make it possible to sue in court for much larger losses, called pain and suffering.

HEFFNER: Then we’re paying insurance rates that reflect our problems in other areas? We’re paying insurance rates that make up for what our legislators and what our government officials generally, I gather from what Mr. Nangle is saying ,aren’t doing, so the insurance companies take on that burden which they spread among the rest of us.

NANGLE: That’s a part of the problem, yes, sir.

SHEERAN: I think there’s no question that the driving habits of so-called bad drivers, provable bad drivers who have a bad record, should be controlled through the motor vehicle departments and not through insurance pricing. I also believe, as I said before, that people ought to be rated on their own driving record. And I think when people are charged with moving violations which they consciously control that it is proper to charge them more because of that conduct which can obviously be traced to accidents or severity of accidents. But I think the abuses that you see in the system are rare. The medical profession, crash parts, repairers…And it rubs off to the consumer who feels that he has to also get involved in the game. And I’ve suggested to many people that when they know of those kinds of fraud, as many times referred to, they ought to bring it to the attention of our Attorney General, and we ought to move affirmatively to cure some of those problems, or perhaps we can get rid of it.

KLEIN: Crash parts. Let me just add something here. The insurance companies are forced to be irrational in settling insurance claims. I’ll give you my own experience. I had a couple of fender-benders in the last couple of years. And one of them, I had put in a claim for $30, and the insurance company sent a man over, photographed my car, and them finally paid the claim. And a more recent instance, I had a, I went to the cheapest repairman in Scarsdale, New York, and he is cheap. And that…

HEFFNER: Inexpensive. (Laughter)

KLEIN: Inexpensive. Cheapest. And he gave me an estimate. I took it to Allstate claim service. And they knocked him down. They had a man, and my wife spent a half a day, their claim adjuster spent time, and they knocked it down, knocked the poor guy’s price down a little more. All this to save three or four bucks. And that’s, I don’t mind that. But when it comes to big money, the insurance companies can’t do anything to defend themselves and our premiums. When someone comes in and threatens to sue them for $500,000 or — that’s too much – threatens to sue them for $15,000, it’s often cheaper for them to settle for five than to take the case into court because of legal fees and all the administrative costs of following through the claim. So if you’re going to rob the insurance companies you just have to rob them good. Now, something has to be done about that. I wish I knew what. But that’s costing us motorists a lot of money.

NANGLE: Well, on the matter of crash parts, we’ve talked about how they’re going up. I’ve written to our congressman, to every commissioner in the country, asking him, or asking the commissioner to be in touch with their congressman to ask for a meaningful investigation into that monopoly. There’s no question. We buy an automobile and there’s a competitive market out there. The day you own the automobile you can only go to the manufacturer to get your crash parts, and that manufacturer has an absolute monopoly. The big three, as they’re known in the automobile business, have really in my judgment ripped off the people with those costs. And it’s got to be changed upstream. We can’t do that at a state level. They’ve got, I think it’s the FCC, FTC that’s investigating the crash part matter, looking at General Motors. That’s been going on, and it’s the second time around for them. The last time they came up with a decision on the matter it wasn’t really adhered to, and so they’re hearing the matter again. But I don’t think they’re focusing on the real problems. They’re looking at the marketing system. The fact that if it goes to one of their dealers he pays 20 percent or he gets 20 percent, I think, on the cost as it goes on to the independent, which goes on to the consumer.

KLEIN: Nobody else can sell crash parts.

NANGLE: Right.

KLEIN: …made by General Motors or Ford but General Motors of Ford dealers.

NANGLE: Right. But that only takes care of the marketing of it. But I think you have to look at the dies, the fact that the companies control the manufacture of that. And somehow you’ve got to get some competition into that part of the system.

HEFFNER: It sounds as though we should have had joined with us today the commissioner of motor vehicles and the commissioner of consumer protection, because we’re going beyond, and obviously quite appropriate, in trying to understand why insurance costs, rates have escalated. We’re not going afield; we’re going beyond the matter of pointing the finger at the insurers themselves. But I would still…

NANGLE: We’ve got to have one famous first. The first time in a long time that I’ve agreed with Jim Sheeran on a point.

GROUP: (Laughter)

HEFFNER: We’ll note that.

NANGLE: I wanted him to know that, and I figured I’d just…

HEFFNER: Well, that infamous manifesto that we began with, however…

SHEERAN: Absolutely, Sir.

HEFFNER: One of the things the four state commissioners referred to such abuses as excessive rates and then went to arbitrary cancellations and refusals to insure. Now, we’ve touched on that. We’ve touched on the unfairly discriminatory rating practices, if that indeed is what they are. What’s this arbitrary cancellations? I gather more and more Americans are being faced with cancellation of insurance policies they’ve long had and long considered traditional and refusal to renew. Now, where are we in that regard? What’s your reaction to that?

NANGLE: The answer I would have to give to that, of course the word “arbitrary” is one that would be subject to some review and discussion before we got into this subject of cancellations. The companies have the right to cancel business after it’s been put on that proves in the underwriter’s mind that it wouldn’t be fair to the rest of the policyholders to keep that particular risk on because of its greater potential for exposure to loss. Now, the cancellation problem is one that gets a lot of media. It’s a media event.

HEFFNER: It’s a very personal event when it happens, let me tell you.

NANGLE: Absolutely. And when you write the commissioner, Mr. Sheeran, and say that you’ve been cancelled, if you talk about being cancelled by the insurance company you find no enemies, because you think that everybody’s been cancelled. Really it’s a very few, very low percentage of people. And these are the people that go into the assigned risk place, the one that we mentioned before. They are voluntarily written in the assigned risk plan. Every company that’s writing business in the sate takes a share of the losses on that risk. Now, these risks are not, you know, we can call them good risks or clean risks or whatever attitude you want to get. The fact of the matter is the assigned risk plan’s experience is terrible, absolutely terrible. I think they filed for a 78 percent rate increase, and we don’t’ like to do that. That’s a shocking rate increase, but that’s what the actuarial figures show. So “arbitrary” is not a good word.

KLEIN: Fourteen percent of Americans who were surveyed by the Department of Transportation in, I think it was 1970, reported having had their insurance cancelled or having been refused renewal.

NANGLE: Fourteen percent.

KLEIN: And in addition to that 14 percent there are all their friends who hear about it. This thing hits a large number of Americans.

NANGLE: That’s correct.

HEFFNER: And you’re not suggesting that the larger the number the merrier the feelings…

NANGLE: The merrier? (Laughter) Merrier the company? (Laughter)

HEFFNER: Yeah. Company. This…

KLEIN: Our figures show about two to three percent of the people have problems. Not that they’re cancelled, but problems with their insurance. Nobody’s happy with paying anything for a piece of paper, and that’s all we hand you every year. If we cut your premium in half and we asked you the question, “Are you happy about your insurance premium?” you would say, “No, this piece of paper shouldn’t be worth even this”. But…

HEFFNER: Mr. Nangle, I’ll take that.

GROUP: (Laughter)

HEFFNER: You cut my insurance premium in half and I’ll smile with delight, and I think that’s the happy note…

NANGLE: As Washington counsel, all I can do is represent you in that idea.

HEFFNER: Okay. But that’s the happy note on which we have to end this program on a very, very serious question. And I do want to thank you for joining me today, first, Commissioner Sheeran, Commissioner of Insurance in the State of New Jersey, Mr. John Nangle, Washington Counsel for the National Association of Independent Insurers, Robert Klein, Senior Editor of Money magazine.

And thanks, too, to you in the audience. I hope that you’ll join us again on THE OPEN MIND. Meanwhile, as an old friend used to say, “Good night, and good luck”.