Turning the corner: how the New York State Insurance Department lowered auto insurance rates, slashed loss costs for insurers and reduced fraud.

Something truly historic happened to New York auto insurance premiums in 2005: They down. While New Yorkers suffered steep price increases in gasoline, housing and dozens of other essential goods and services, New York auto rates bucked the trend. Fourteen major insurance groups (comprising 35 New York insurance companies) instituted significant rate reductions in 2005, and more are expected to follow in 2006.

The origins of the current rate reductions occurred in 2000 when the New York State Insurance Department introduced its multifaceted plan to combat auto insurance fraud, "Operation Auto Rates." Since then the department has been working--through aggressive fraud-fighting techniques, regulatory changes and numerous court battles--to achieve its goals.

Reducing Time Frames

By the late 1990s, the insurance department was convinced that a 90-day time frame for filing notice of claim, contained in Regulation 68, was far too long. The 90-day limit meant a no-fault claimant was allowed as many as 90 days to provide written notice of a claim following an accident.

The most damaging aspect of such an extended time frame was that it encouraged fraudulent claim filings by preventing insurers from vigorously pursuing suspicious claims in a timely manner. By the time a claim was received under the 90-day rule, the case was stale and witnesses' memories had clouded. Moreover, the department did not view a 30-day window as burdensome to the vast majority of New York drivers, especially since the revised regulation allowed for claim filings beyond the 30-day limit for legitimate reasons.

In addition, the department was convinced that the 180-day time frame in which doctors and other medical providers were permitted to bill no-fault insurers was excessive, leaving insurers with little time to investigate the validity of treatments, many of which were conducted months before bills were actually submitted. The revised regulation reduced to 45 days this 180-day limit.

The new time frames have undoubtedly reduced the level of abusive billing practices as well as unnecessary testing and treatments. As a result, the amount of paid no-fault losses (as well as the amount of reserves set aside for future losses) began to decline soon after the revised regulation was promulgated. By 2004, it was clear these loss reductions were real and that meaningful auto rate cutbacks were in order.

Partnering With Prosecutors

To allocate resources more efficiently, three years ago the department began assigning Frauds Bureau investigators to prosecutors' offices throughout New York state. Bureau investigators now are working side-by-side with their counterparts in county district attorney offices. In the past, some prosecutors were reluctant to spend time to prepare an insurance fraud case for prosecution. The 2002 initiative was undertaken to help prosecutors recognize the importance of insurance fraud as a crime, ensure cases receive a fair hearing and engender a spirit of inter-agency cooperation.

The Insurance Department currently has Frauds Bureau investigators assigned to 11 prosecutors' offices across the state. As a result, DAs are now far more willing to accept cases for prosecution than in past years. Moreover, once a case is accepted, staffs from both agencies work closely throughout the investigation and eventual prosecution.

Special Fraud Prosecutor

Governor George Pataki appointed the New York state attorney general as special prosecutor for auto insurance fraud in 2001. The governor's order also directed the Insurance Department to authorize the special prosecutor to undertake directly investigations and prosecutions. The department's Frauds Bureau and the attorney general's staff have developed a successful strategy for cooperation in the investigation of auto fraud cases, and the department now gets frequent requests for assistance from the attorney general's office. Joint investigations by the two agencies are commonplace.

Arbitration System Improvements

When New York's no-fault law was enacted in 1974, an arbitration system was also instituted for those seeking to challenge claims decisions by no-fault insurers. The system requires that conciliators trained in no-fault law first attempt to resolve the dispute between the insurer and the applicant. If conciliation is not possible, the case moves to arbitration. Over the years, hundreds of thousands of no-fault disputes have been settled through the arbitration and conciliation process.

In the 1990s, the department became concerned about the mounting inventory of pending cases. In 2002, the department more than doubled the number of arbitrators to 100 to help reduce the inventory of more than 100,000 cases. In addition, rules were introduced to enhance the operation of the arbitration system. New hearing schedule criteria also were implemented in which all cases associated with a single accident were linked and assigned to one arbitrator. This allows an arbitrator to recognize fraudulent trends, such as abusive claims and billing practices and/or unnecessary medical treatments.

Today, the arbitration and conciliation process is far more streamlined and efficient. The number of pending cases in the arbitration system dropped 85% to 16,987 as of October 2005, from 116,172 in March 2002. Concurrently, annual conciliations as a percentage of closed cases have risen significantly since 2002. Applicants are now quickly getting their "day in court," and as a result, insurer legal costs as well as the sizable interest costs associated with delayed payments are down.

Depopulating the Assigned Risk Plan

The assigned risk plan is New York state's insurer of last resort. Under the plan, each auto insurer is required to write assigned risk policies in proportion to its private-passenger market share. In the early 1990s, more than 17% of all drivers obtained their auto insurance through the assigned risk plan.

The New York State Insurance Department directed and encouraged the assigned risk plan Governing Committee over the years to implement various programs designed to depopulate the plan, such as the Territorial Take-Out Program. The takeout program encouraged certain insurers to reduce their allotment of assigned risk drivers in proportion to the number of assigned risk drivers they agreed to write voluntarily (in other words, "take out" of the assigned risk plan) in high-risk territories. The percentage of New York state drivers in the assigned risk plan declined to 2.5% in 2000 but began rising again in subsequent years.

In 2002, the department worked with the assigned risk plan Governing Committee to expand the Territorial Take-Out Program so that insurers would have more incentive to write assigned risk drivers in the voluntary market. The revised rules, implemented in September 2002, allow insurers to reduce their allotments of assigned risk drivers if they "take out" assigned risk drivers anywhere in the state, not just in high-risk territories. The premium rate these insurers typically charge take-out policyholders is a percentage of the assigned risk premium--90%.

Take-out auto insurers responded aggressively to the expansion of the take-out program by insuring more New Yorkers at rates below those charged by the assigned risk plan. As a result, the percentage of New York drivers in the assigned risk plan began to decline once again in 2004 to what the department believes will be a historically low level.

Health-Care Provider Fraud

The department included in its anti-fraud revisions to Regulation 68 a provision prohibiting no-fault reimbursements to any health-care provider that fails to meet "any applicable New York State or local licensing requirement." Subsequently, a major auto insurer sought to withhold no-fault claim payments to a medical service corporation that was owned by nonphysicians. In New York state, nonphysicians are prohibited from owning such corporations. The medical service corporation sued the insurer, claiming the care provided to the injured parties was appropriate and the denials unlawful. The insurance department submitted an amicus brief in support of the position that an insurer is permitted to withhold payment to a fraudulently incorporated medical service corporation.

In March 2005, a New York Court of Appeals ruled that an insurer is permitted to withhold payment to a medical service corporation that fraudulently incorporates, even if such treatment is performed by a licensed health-care provider. The ruling should dissuade medical service corporations from fraudulently establishing their businesses in New York, while saving New York insurers and policyholders millions of dollars.

Costs Down

The New York State Insurance Department had been concerned about the fact that, under the department's Regulation 83, medical providers were permitted to bill no-fault insurers for durable medical equipment, such as wheelchairs and neck braces, at a rate not exceeding 150% of a provider's costs for such equipment. The system was highly inefficient since it was based on underlying wholesale costs for a wide variety of medical equipment and open to broad interpretation.

To help establish uniform pricing, the department issued revisions to Regulation 83 that require medical providers to bill insurers for durable medical equipment at rates that conform to the New York state Medicaid fee schedule. The change, which went into effect in late 2004, should bring uniform pricing and certainty into the process and greatly reduce billing disputes between insurers and providers.

Meetings With Insurers

Although the department was confident that the legal and structural changes outlined above would lead to lower loss costs, an Insurer typically implements rate reductions only after such changes can be justified by its loss data.

Favorable fast-track loss data for a large segment of the industry began to materialize in mid-2004. As of June 2004, New York's average no-fault loss had dropped to $6,229 from $8,489 per claim as of year-end 2002, a particularly noteworthy achievement in the face of escalating medical care costs.

Despite such a dramatic improvement in loss experience, however, most New York automobile insurance consumers were still not seeing significant premium relief by mid-2004. Since the department was convinced that the loss experience for most individual insurers reflected industrywide trends, it surveyed major New York auto insurers in 2004 to determine the extent to which each company's results mirrored industry trends.

Following a review of survey responses, the department believed it found reasonable cause to address the rate reduction issue. Then-Superintendent Gregory Serio directed New York's major auto Insurers to meet with the department to review their rate structures.

The department's senior management team then conducted a series of meetings, beginning in the fall of 2004 and continuing through 2005. During these meetings, each company's loss experience was evaluated. For most insurers the department urged--in the strongest terms possible-rate rollbacks for New York consumers.

To date, some of the state's largest auto insurers have implemented significant rate decreases, including Allstate, State Farm, Geico, Progressive, Nationwide, MetLife and Chubb. The insurance department estimates the combined savings for New Yorkers from all rate decreases since late 2004 at roughly $400 million.

Auto insurance premiums for most New Yorkers are declining. Could they go lower? Absolutely. Now that insurers, consumers and the New York State Legislature have seen the impact on auto rates of the anti-fraud initiatives, the department is optimistic that even greater savings can be achieved.

Key Points

* The New York State Insurance Department lowered auto insurance rates through aggressive fraud-fighting techniques, regulatory changes and numerous court battles.

* Fourteen major insurance groups (comprising 35 New York insurance companies) instituted significant rate reductions in 2005.

* The department reduced the number of pending cases in the no-fault arbitration system and the number of drivers in its assigned risk pool.

Looking Ahead: Pending N.Y. Legislation

Now that auto rates are lower for many New Yorkers, the New York State Insurance Department is working to maintain the momentum in several ways.

First, the department urges the Legislature to pass two measures that would strengthen the penalties associated with insurance fraud in New York state.

The first bill would increase to felony status the penalty for so-called "runners" who direct victims of car accidents to unethical health-care providers and attorneys. The second would raise the penalty for staging an automobile accident. This bill, called "Alice's Law," is named for the late Alice Ross, a Queens, N.Y., grandmother who died in 2003 as a result of a staged auto accident.

Another area being examined involves New York's Photo Inspection Law. When a resident buys a used car and seeks theft coverage in New York, the vehicle must be photographed from all sides to prove it actually exists. New York was the first state to implement a photo inspection system to prevent car owners from insuring 'phantom" vehicles and then filing phony theft claims or claims seeking compensation for pre-existing damage. New York's Photo Inspection Law, enacted in 1977, had an immediate impact on fraudulent claims and was emulated by many states throughout the country.

Citing high costs and inefficiencies, some insurers are seeking to rescind New York's Photo Inspection Law. The New York State Insurance Department strongly believes such action would send the wrong message just at a time when its fraud-fighting efforts are yielding tangible results. The insurance department is currently looking at ways to address insurer concerns and improve the efficiencies of its photo inspection system.

Contributor Howard Mills is the superintendent of insurance for New York state.

Auto Insurance Rate
Reductions Announced
In 2005 in New York State

                          Avg. Rate
                          Reduction
                          (%)

Geico                      6.0
State Farm                 5.0
Allstate                   3.0-5.0
Progressive                5.1
Travelers                  5.5
Nationwide                 5.2
MetLife                    5.7
New York Central Mutual    5.1
USAA                       7.6
Liberty Mutual             3.0
Arnica Mutual             10.0
GMAC                       6.0
AIG                        4.0
Chubb                      4.8

Note: Insurers are listed on a group basis (more than one individual
insurer may comprise a group). Source: New York State Insurance Dept.