Over the past few years, New York City has experienced historic reductions in crime. One important category that has helped lead this reduction is auto theft.
In 1990, 146,925 autos were reported stolen in New York City. In 1995, that number was down to 71,543 -- a reduction of 51 percent. In each borough of New York, the drop in auto theft from 1990 to 1995 has been dramatic [see table 1]....
That is the number of additional cars that would have been stolen in New York City in 1991 through 1995, had the number of auto thefts remained constant at the 1990 level.
Thanks to these reductions, there has been a 37 percent decline in theft of property from inside automobiles and of vehicle accessories since 1990. [See table 2]
City responsible for Statewide Reduction in Auto Theft
Because there are more cars in New York than any other city in the state, the auto theft rate in our five boroughs greatly affects the state-wide auto theft rate.
For example, in 1990, New York City accounted for nearly 90 percent of all the cars stolen in the entire State of New York. In 1995, however, New York City's share of stolen cars dropped to 75 percent.
While New York City was reducing auto theft, most other major cities in New York experienced increases. In fact, without New York City's success, car theft in New York State between 1991 and 1995 would have actually increased. [See figure 1]
The basic tenet of an insurance company is simple: it spreads the risk among policy holders. Insurance companies set premiums based on a risk assessment, which is determined by the amount of claims the company has to pay.
When the risk factor decreases, as it has for auto insurance in New York City, the benefit should be spread among the policy holders. But this is not happening in New York City.
Insurance companies are paying out considerably less for claims, but are not reducing premiums accordingly. Since risk is now down 50 percent for auto theft, premiums should also be down.
But New Yorkers are not seeing the benefit of the reduction in auto theft... Why? Because auto insurance is becoming more profitable for insurance companies.
As Auto Thefts Fall, Premiums Rise
The number of claims paid by insurance companies in New York State have dropped dramatically. In the year ending in the fourth quarter of 1990, insurance companies paid 413,727 claims. In the year ending in the third quarter of 1995, insurance companies paid 299,690 claims.
This is a substantial difference... A 27.5 Percent drop in claims.
Yet as they handle fewer claims, insurance companies are charging consumers more for comprehensive auto insurance. Between 1990 and 1994, the average premium for comprehensive auto insurance in New York State rose from $153.52 To $187.36, an increase of 22 percent. [Pg. 7 of Consumer Affairs report]
This occurred while New York City's historic drops in auto theft was driving the state's reduction in auto theft.
Profit Margin of Insurance Companies
Instead of passing along the savings from the fewer claims to policy holders, insurance companies are retaining the profits.
In 1990, insurance companies in New York State realized an 8.1 Percent after-tax profit on premiums for physical damage auto insurance, which made it the ninth most profitable of all lines of insurance.
In 1994, these companies realized a 12 percent after-tax profit on their auto physical damage premiums, and the return was even higher in the intervening years. By 1994, physical damage auto insurance had become the fourth most profitable insurance line, after medical malpractice, inland marine and fire insurance.
Insurance Companies' Defense
The insurance industry's defense is that the cost per claim is more expensive because of increased medical and legal (liability) costs. Even assuming each claim is more expensive, this does not off-set the dramatic decreases in auto-theft.
Finally, industry executives say that anyone who contends that a 50 percent drop in auto theft rates should result in a 50 percent reduction in auto insurance rates does not understand how insurance premiums are set.
How Premiums Are Set
The way insurance companies set premiums is such a multi-layered, complex process that hardly anyone can understand it. In fact, the Consumer Affairs report described the process as "actuarial voodoo."
One case which the consumer affairs department studied closely was the "Allstate Insurance Company" [See table 5]. Despite "Allstate's" lowering of its comprehensive rates over the past years, most recently a four percent decrease in November, it has not done so on a level anywhere near the dramatic 22.74 Percent drop in claims it experienced the preceding year. (See table 5)
Outdated Data-Processing Methods
A major problem insurance companies have when setting rates is a lack of accurate, up-to-date information. They should look to the N.Y.P.D.
The N.Y.P.D. has revolutionized the way crime statistics are used to deploy resources. "Compstat" has received national and international recognition for the advanced methods of pin-pointing areas of crime activity.
But insurance companies continue to use out-dated methods of gathering their information. Like the N.Y.P.D., auto insurance companies should use the most sophisticated technology available to obtain accurate and timely information about auto theft.
The insurance carriers should work with the N.Y.P.D. to compile zip-code level data on automobile theft. With more precise information, insurance companies can better track losses, assess risk more fairly and set premiums more accurately in each neighborhood.
The need for reliable and up-to-date information has never been greater because the current "flex-rating" scheme allows insurers to implement rate changes of up to seven percent without prior approval by the State Insurance Department.
The New York City Task Force On Insurance Rates
That's why I formed "The Task force on Insurance Rates," with subpoena power. The Task Force, which is headed by Consumer Affairs Commissioner Jose Maldonado, includes Police Commissioner Howard Safir, Corporation Counsel Paul Crotty, Mark Geistfeld, a professor at N.Y.U. School of Law, attorney Eugene Anderson, Barbara Opotowsky, president of the "Better Business Bureau of New York," and Stuart Rosenthal, general counsel for the "Greater New York Automobile Dealers Association."
The Task Force will examine more closely the way insurance companies assess risks and set premiums for New Yorkers. It will also question whether the State Insurance Department is performing its regulatory mission in a satisfactory manner.
Why Albany Must Handle This Issue
This is an issue that ultimately must be settled at the state level. In New York State, we have an "excess-profits law," which limits the profit an insurance company can earn. The higher rates of return the insurance companies have been earning on auto insurance should be closely scrutinized by the State Insurance Department.
And it should more closely oversee the premiums policy holders pay to insurance companies to ensure they are fair for the coverage provided. The State Insurance Department has the power and the mandate to perform these functions. Any rate increase should be examined closely and strict justification should be required before approving rate increases based on anything other than loss experience.
New Yorkers have always paid some of the highest rates of comprehensive auto insurance in the country. But with the historic drops in auto theft this city has experienced over the last few years, New Yorkers should no longer have to pay such high premiums.
The New York State Insurance Department can work with the insurance carriers to develop more sophisticated methods of gathering information so the rates New Yorkers pay reflect the actual risk. And the way insurance rates are set should be simplified so policy holders can better understand why they are paying the amount of their premiums.