On appeal from the Department of Insurance.
Petrella, R.s. Cohen and Ashbey. The opinion of the court was delivered by Cohen, R.s., J.A.D.
Allstate Insurance Company appeals two orders of the Commissioner of Insurance. The first is the order denying Allstate a role in the proceedings leading to the order setting auto insurance premiums of the Market Transition Facility ("MTF"). The second is the Commissioner's MTF rate order itself. Two other insurers, Aetna Casualty and Surety Company and Liberty Mutual Insurance Company, also appealed the Commissioner's rate order. A-4844-90T5 and A-5298-90T5. Their appeals were stayed on the Commissioner's motion, pending disposition of the present appeal. We reverse the order excluding Allstate from the rate-setting process and order the Commissioner to take immediate action to set proper MTF rates.
The dispute arises out of New Jersey's perennially troubled auto insurance market. The background was thoroughly explored in State Farm Mut. Auto. Ins. Co. v. State, 124 N.J. 32, 590 A.2d 191 (1991). See also In re Assignment of Exposures, 248 N.J. Super. 367, 591 A.2d 631 (App.Div.), certif. denied, 126 N.J. 385, 599 A.2d 162 (1991), and Allstate Ins. Co. v. Fortunato, 248 N.J. Super. 153, 590 A.2d 690 (App.Div.1991). The present case requires us to review some of the history.
In 1983, the New Jersey Automobile Full Insurance Availability Act was adopted. N.J.S.A. 17:30E-1 et seq. Its principal purpose was to assure access to automobile insurance at standard market rates to qualified persons who could not otherwise obtain insurance. N.J.S.A. 17:30E-2. The Act replaced the assigned risk plan, created by N.J.S.A. 17:29D-1, with a new residual market mechanism, which came to be called the "Joint
Underwriting Association" or "JUA," and which was to offer policies to drivers rejected by the voluntary market. In the late 1980s, despite periodic legislative efforts to provide financial relief, JUA was in deep financial trouble. Private insurers had steadily reduced their market share, and willingly covered only the best risks. JUA had to take on more and more high-risk drivers, urban drivers, young drivers and others whom the insurers, for good reason or bad, rejected. Ultimately, half of New Jersey's drivers were insured by JUA. The insurers blamed the Commissioner's refusal to permit them to charge sufficient premiums for high-risk private business. The Commissioner consistently denied rate relief. Although many of JUA's insureds were safe drivers, its population included the bulk of the State's worst risks.
JUA was required to cover risks rejected by the voluntary market, but it could charge them no more than standard market premium rates. JUA would therefore suffer losses in the absence of revenue supplements. Additional funds were expected to be raised from bad-driver and accident surcharges imposed by the Division of Motor Vehicles and JUA, and the "residual market equalization charge" ("RMEC"), which was to be laid equally on all autos insured in the voluntary and residual markets except those with principal drivers aged 65 years or older. The RMECs were required to be periodically set by the Commissioner, N.J.S.A. 17:30E-8a, at a level that would permit JUA to operate on a break-even, no profit, no loss basis. N.J.S.A. 17:30E-3 o; State Farm, supra, 124 N.J. at 41-42, 590 A.2d 191; In re Assignment of Exposures, supra, 248 N.J. Super. at 372-373, 591 A.2d 631.
A number of statutory changes took effect in 1988 in an effort to reduce the cost of auto insurance generally, and to reverse the deteriorating condition of JUA in particular. The legislative goal of providing full access to auto insurance at standard rates was modified by permitting JUA to charge bad drivers 10% annual increases for four years. N.J.S.A. 17:30E-2, -13a to -13d. There was an optional verbal threshold for
tort actions, N.J.S.A. 39:6A-8, -8.1, flex rating for insurers, N.J.S.A. 17:29A-44, an insurers' excess profits law, N.J.S.A. 17:29A-5.6 et seq., an authorization for JUA to defer payments of bodily injury losses when JUA income is insufficient to meet its obligations, N.J.S.A. 17:30E-8.1, a multi-tier rating system for the voluntary market, reflecting the worst risks, N.J.S.A. 17:29A-45, and a program for the audit of JUA's servicing carriers to find, recover, and penalize any overcharges made by them to JUA, N.J.S.A. 17:30E-17.1.
Most importantly, the 1988 changes provided for the depopulation of JUA over four years, leaving only the least desirable risks for it to cover, N.J.S.A. 17:30E-14, and those would be charged self-sustaining, unsubsidized rates. Enough JUA insureds would be periodically assigned to the voluntary market to assure that it would absorb and cover 60%, 70%, 75% and then 80% of the market during the four years of depopulation. In re Assignment of Exposures, supra, 248 N.J. Super. at 374, 591 A.2d 631. The 1988 amendments did not solve the problems.
On March 12, 1990, the Fair Automobile Insurance Reform Act of 1990 ("FAIR Act") became effective. L. 1990, c. 8. It imposed surtaxes and assessments on the private insurers and fees to be collected from doctors, lawyers and auto body shops. The proceeds were intended to pay JUA's accumulated debt of more than $3.3 billion over a period of time. See State Farm, supra, 124 N.J. at 42, 590 A.2d 191; Allstate, supra, 248 N.J. Super. 153, 590 A.2d 690 (App.Div.1991).
The FAIR Act also abandoned JUA as a residual market mechanism, and created MTF. MTF was to gradually take on the risks whose JUA policies expired after September 30, 1990, and was to issue its own policies for two years, until October 1, 1992. During that time, the MTF population would be reduced, if necessary by periodic assignments of risks to insurers who did not voluntarily take on their share, to 32%, 29%, 20% and, finally 10% of the market. The 10% residuum of rejected risks
would be relegated to the old assigned risk plan. N.J.S.A. 17:33B-11c(5); 17:29D-1.
MTF's initial premiums were to be based on JUA's insufficient September 30, 1990 rates. However, its short revenues, unlike JUA's, would not be supplemented with RMECs, surcharges, assessments and professional fees. (RMECs and policy constants had grown to about a third of all JUA revenues.) MTF's profits and losses would be apportioned among the auto insurers. N.J.S.A. 17:33B-11d. In re Assignment of Exposures, supra, 248 N.J. Super. at 375, 591 A.2d 631.
When private insurers took on JUA/MTF risks as part of the depopulation program, they could charge them their ordinary premium rates, or, if they chose to do so, they could charge MTF rates. N.J.S.A. 17:33B-12. MTF rates were higher then those of many insurers, including Allstate. In May 1991, when the Commissioner was considering MTF's rates, we heard insurers' objections to the Commissioner's January 1991 depopulation order on the ground that their premiums were too low for the new business. In re Assignment of Exposures, supra, 248 N.J. Super. 367, 591 A.2d 631. We concluded that the insurers' opportunity to use MTF rates for depopulation business meant that they were not being forced to take on hundreds of thousands of new, higher risks at voluntary market rates.*fn1 We said:
Current MTF rates are higher than the current voluntary market rates of Aetna and Allstate, and, we assume, also of Colonial Penn. In addition, MTF rates will be supplemented for substandard drivers who are still eligible for assignment. The supplement may not be as great as the insurers think will be necessary, but that is very difficult to evaluate now. Moreover, MTF has already applied to the Commissioner for a 28% rate hike, approval of which would further increase premium levels. Not enough, say the insurers, pointing out that MTF has announced that its rates need a 60% increase to permit MTF to break even; insurers are entitled to earn a profit, and MTF's break-even
rates are therefore inadequate by definition. [248 N.J. Super. at 389, 591 A.2d 631].
The insurers will be able to charge the
recently enhanced MTF rates to their assigned exposures. That creates a better situation than was predicted for the insurers at the time of their briefs and oral arguments. Whether it is better enough would no doubt be the subject of some disagreement. We are in no position, however, to predict whether that untested new business taken on by the insurers from MTF at untested new MTF premium rates will result in future losses so clear and significant that the insurers are entitled to protection in advance. [248 N.J. Super. at 390, 591 A.2d 631].
MTF began issuing policies and charging premiums on October 1, 1990. The FAIR Act required it initially to use JUA rates, with a few exceptions and variations. N.J.S.A. 17:33B-11c(2). The Commissioner had the authority, however, to raise rates. N.J.S.A. 17:33B-11c(3). It must have been apparent to the Commissioner, as the operator of MTF, that the JUA rates were too low. They were so low in the late 1980s that even cash-flow accounting, RMECs, bad-driver increases and other revenue enhancers did not prevent dramatic yearly deficits. The anticipated greater accountability and efficiency of MTF, limitation of generous policy benefits, and other cost containment measures could be expected to accomplish just so much. The loss of RMECs would be a tremendous loss of revenue, and there were no means provided in the FAIR Act to subsidize residual market premium rates.
In November 1990, MTF received the reports of two actuarial consulting firms which had been retained to study the appropriate level of MTF rates. One firm, Milliman & Robertson, Inc. ("Milliman") had been retained by the Department of Insurance itself, through MTF. The other, William M. Mercer, Inc. ("Mercer") had been brought in by the insurance industry through the MTF Advisory Board's Actuarial Committee. (The Advisory Board is a statutory body without operational ...