Apr 28, 2011 - Page 3 bodily injury (BI) or property damage (PD) claims reported in this state per year, excessively more than the 1 or 2 claims repor...
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NEW MEXICO COURT RULINGS ON UM/UIM COVERAGE ADVERSELY AFFECT THE AUTOMOBILE INSURANCE ENVIRONMENT
Introduction A recent New Mexico Supreme Court decision 1 has adversely and dramatically altered the state’s automobile insurance landscape. In essence, policyholders involved in an accident caused by an uninsured or underinsured motorist – past or present – will now be able to receive more compensation, even if there was insufficient UM/UIM coverage or no coverage at all at the time of the accident. Allowing policyholders to be reimbursed for claims when they did not pay for related coverage may very well increase the overall UM/UIM loss experience, affecting all drivers in the state. Given that two other key factors – (1) the ability to stack UM/UIM policy limits; 2 and (2) the ability to receive UM/UIM payment without requiring physical contact with a vehicle (i.e., phantom vehicle 3 ) – have already been contributing to increased losses in New Mexico, the latest Supreme Court ruling is likely to compound the state’s grim UM/UIM situation and make it even worse. New Mexico’s UM/UIM rate is already among the highest in the nation due to very high losses resulting from excessive claims activity (New Mexico has the 7th highest UM/UIM loss per insured vehicle, which is two times the national average). 4 Furthermore, consumers here are spending a relatively large portion of their household income to pay for UM/UIM coverage – 50 to 250 percent more than their counterparts in other states. The additional costs resulting from UM/UIM stacking, the lack of physical contact with a phantom vehicle to trigger reimbursement and now the latest Supreme Court decision could harm insureds by causing their rates to increase even more. Higher rates could force many of them to drop their auto insurance altogether and further exacerbate the state’s very severe UM population. Another negative effect may be the inability of New Mexico consumers to select from a broad array of coverage options and/or limits in the future. 1
Jordan v. Allstate, Romero v. Progressive, and Lucero v. Trujillo, filed October 18, 2010; the NM Supreme Court decision states that an insured must receive premium charges for each available UM/UIM option so a “knowing and intelligent” decision can be made on the purchase or rejection of coverage. If charges are not provided and UM/UIM limits are lower than the liability limits or the coverage is rejected, the insured is entitled to higher UM/UIM coverage regardless of whether appropriate payment was made. This decision was made retroactive, applying to all previous accidents. 2 Stacking involves combining the UM/UIM policy limits if there are multiple cars insured under either one policy or different policies. The purpose is to provide greater reimbursement to the injured victim, regardless of which vehicle was involved in the accident caused by an uninsured or underinsured motorist. 3 A phantom vehicle is one that causes bodily injury, death, or property damage to an insured vehicle, but there is no physical contact. 4 National Association of Insurance Commissioners (NAIC), Auto Insurance Database Report 2007/2008, 2010 Edition; (Texas data are not available) April 28, 2011
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Highlights of Analysis Several key points focusing on New Mexico’s deeply troubled UM/UIM scenario are as follows: High UM/UIM Rate: Drivers in New Mexico currently pay one of the highest prices for UM/UIM coverage. On average, their estimated average rate ($117 a year) is 38 to 134 percent higher than the average rates found in the neighboring states of Arizona ($85), Colorado ($67) and Utah ($50), and twice as high as the US average ($56). The portion of the household income used to buy UM/UIM coverage is much greater here than elsewhere – New Mexicans simply cannot afford to spend any more due to increased costs that are out of auto insurers’ control 5 (Fig. 1). Figure 1 Estimated Annual Average UM/UIM Rate is Much Higher in New Mexico than Surrounding States and US $ 125
100
$117
($2.77)
$85
75
($1.80)
$67
50
$56
$50
($1.09)
($1.11) ($0.80)
25
0 NM
AZ
CO
UT
US
High UM/UIM Loss Cost: The primary reason for a very high UM/UIM rate in New Mexico is its very high UM/UIM loss cost, which is the combined average claim frequency and claim cost, or average loss per insured car. This state’s annual loss cost ($93 per car) is 47 to 58 percent higher than in Arizona ($63) and Colorado ($59) and nearly 2‐1/2 times higher than in Utah ($38) 6 (Fig. 2). Figure 2 N ew M exico’s U M /UIM Loss C ost is Significantly H igher than in O ther States Loss C ost = avg. loss per ins. car
100
$92.66
80 $6 3.08
$ 58.77
60 $38.06 40
20
0 NM
AZ
CO
UT
Very High UM/UIM Claim Frequency: The primary cause of New Mexico’s very high UM/UIM loss cost is the frequency in which claims are reported. For every 1,000 insured cars, there were 17 UM/UIM
5
PCI, based on data from the NAIC (2007‐2008) and U.S. Census Bureau (2008) PCI, based on data from Independent Statistical Service (2006‐2008 combined)
6
April 28, 2011
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bodily injury (BI) or property damage (PD) claims reported in this state per year, excessively more than the 1 or 2 claims reported in Arizona, Colorado and Utah apiece (Fig. 3a). Put another way, the likelihood of reporting a UM/UIM claim in New Mexico in any one year is greater than the likelihood of reporting a UM/UIM claim in the other three states combined over a four‐year period! Even without the property damage component, the injury claiming activity for UM/UIM coverage stands out in New Mexico. Drivers here are 21 percent more likely to report a UM/UIM (BI) claim than drivers in Arizona, and they are two times more likely to report a UM/UIM (BI) claim than drivers in Colorado and Utah. All in all, New Mexico’s UM/UIM (BI) claim frequency is 61 percent greater than the three states combined 7 (Fig 3b). Figure 3b Figure 3a
Even UM/UIM (BI) Claims Reporting Alone is Problematic in New Mexico
New Mexico’s UM/UIM Claims Reporting is the Primary Cause of the Problem
NM Relative to 3 States
# Claims per 1,000 Insured Cars
20
17.1
61% higher
1.6
15
2
1.2 10
0.8 5
2.8
2.4
1.9
0
0 NM
0.4
AZ
CO
UT
NM
AZ, CO & UT
UM/UIM Stacking Increases Losses: States that allow stacking of UM/UIM limits of liability accomplish this by combining the limits of the number of vehicles insured to yield the maximum coverage available. Stacking results in a UM/UIM (BI) loss cost that is roughly two times more than the UM/UIM (BI) loss cost where stacking is not allowed ($54.46 – permit stacking vs. $27.72 – no stacking). This is due to a much higher injury claim frequency combined with a much higher injury claim severity in states that allow this practice 8 (Fig. 4). Figure 4 States that Permit UM/UIM Stacking Have Significantly Higher Losses $ UM/UIM (BI) Loss Cost per Insured Vehicle
60
$54.46
50
96.5% more
40
$27.72
30 20 10 0 Stacking
Non-Stacking
7
Ibid. PCI, based on NAIC data (2007)
8
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Lack of Requirement of Physical Contact with Vehicle Increases Losses: Currently, most states require physical contact with another vehicle or corroborative evidence that another vehicle was responsible for the accident before UM/UIM coverage applies. On average, states without such a requirement have a UM/UIM loss cost that is significantly greater than states that require contact with, or evidence of, the at‐fault vehicle 9 ($52.33 – no requirement vs. $36.49 – requirement) (Fig. 5). Specifically, those who do not need to show proof that another vehicle was responsible for an accident have more than 40 percent higher UM/UIM losses.
Figure 5 Physical Contact with Vehicle Required to Help Contain UM/UIM Costs $ UM/UIM Loss Cost
$52.33
60 50
43.4% higher
$36.49
40 30 20 10 0 Contact Not Required
Contact Required
Retroactive Court Decision Could Lead to More Claims and Very Expensive Lawsuits: The fact that the Supreme Court decision was made retroactive could result in a flood of UM/UIM claims and potential lawsuits filed by individuals alleging insufficient compensation paid from a previous accident caused by an uninsured or underinsured motorist. The portion of premiums used for defense costs is already relatively high here – New Mexico (3.15%) vs. Arizona (2.38%); Colorado (2.84%); and Utah (2.04%) – and could increase even more now. New Mexico could see a dramatic rise in claims involving attorneys, especially for UM/UIM (BI) claims where the average cost of represented claims is three times higher than the average cost of non‐represented claims 10 (Fig. 6).
Figure 6 New Mexico UM/UIM (BI) Claims: on Average, Attorney-Represented Claims Cost Three Times as Much as Non-Represented Claims $
30,000
$24,356
20,000
$8,158 10,000
0 Represented
Non-Represented
9
PCI, based on NAIC data (2005‐2007 combined) NAIC Annual Statement 2009 data and Insurance Research Council, 2007 auto injury closed claims database
10
April 28, 2011
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Very High UM Population: If New Mexicans have to pay higher prices due to greater costs that were unanticipated as a result of the Supreme Court decision, many of them may drop their insurance entirely. This state led the nation in terms of uninsured drivers in 2005‐2008 and is now 2nd highest with a UM population of 26 percent (almost twice the US average of 14 percent) 11 (Fig. 7). Greater exposure to uninsured motorists typically means higher UM rates for everyone.
Figure 7 New Mexico UM Population is 2nd Highest in Nation: Much Higher than Colorado, Arizona, and Utah % 30 26% 25 20 15% 15
14%
12% 8%
10 5 0 NM
AZ
CO
UT
US
Conclusion New Mexico has one of the highest UM/UIM losses in the nation due in part to the ability to stack policy limits when there are multiple cars insured under one or more policies. The fact that physical contact with a phantom vehicle is not needed to set off the UM/UIM coverage is also another contributor to this state’s high losses. To make matters worse, the recent Supreme Court decision allows higher amounts of UM/UIM coverage even if policyholders did not pay for it. Higher reimbursements for injuries and vehicle damage without adequate payment for related coverage spell disaster – this could result in an even more troubling UM/UIM scenario characterized by higher losses, higher prices and less availability of coverage. During this time of economic uncertainty, keeping costs and rates down and ensuring greater choices for the majority of New Mexico’s consumers must be of primary consideration. The Independent Insurance Agents of New Mexico (IIANM), chartered in 1934, is one of the oldest trade associations in the state. Approximately 175 agencies, branches, and subsidiaries – operated by over 2,000 agents, brokers, and their employees – make IIANM the largest insurance trade association in New Mexico. The New Mexico Insurance Council (NMIC) is a coalition of property and casualty insurers and agents serving consumers in New Mexico. It is affiliated with the Rocky Mountain Insurance Information Association (www.rmiia.org), a non‐profit trade association that provides insurance information and education in the Rocky Mountain Region. The Property Casualty Insurers Association of America (PCI) is a trade association of more than 1,000 insurers of all sizes and types, representing 37.4 percent of the total general business and 43.1 percent of the personal auto business in the nation. PCI members represent 35.7 percent of the personal auto business in New Mexico.
11
Insurance Research Council, Uninsured Motorists, 2011 Edition (2009 data) April 28, 2011