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Reforming New Jersey's Automobile Insurance System: Five Years Later

Auto reform anniversary report shows auto premiums drop of three straight years.

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Insurance is strange. It's a product that most consumers buy, but few want to use. And many people find insurance confusing. It's unlike any other consumer product on the market. You can't see it, touch it, smell it, hear it or taste it. But without it, the world would be a much different place.

Just think about it. Would you casually drive to the grocery store knowing that everything you ever worked for could be at risk if you were involved in an accident? How much would you be willing to spend on a home without insurance to cover it? Who would dare start a new business without the safety net of insurance? Insurance allows people to take risks, make investments, protect their hard-earned assets and provides peace of mind.

Insurance and other risk management techniques have been around in some form for thousands of years. Insurance has its roots in ancient China. Shipping merchants in 2500 B.C. were the first to introduce a concept vital to the role and purpose of insurance -- spreading the risk of loss from the individual to a group of individuals. Before sailing through dangerous waters, merchants gathered and divided their goods so that each boat carried some of the contents of the others. That way no one merchant shouldered the risk alone, protecting themselves from a potential total loss of goods.

Today's insurance business still bases its practices on this simple concept of spreading risk.

Through a wide array of products and services, insurance companies provide citizens and businesses with the economic security necessary to survive the unpredictable and sometimes devastating events of modern everyday life.

The Insurance Institute of America defines insurance as three things. First, insurance is a transfer technique whereby the insured transfers the risk of financial loss to another party, the insurance company or insurer. Second, it is a contract between the policyholder and the insurer that states what financial consequences of loss are transferred and expresses the insurer's promise to pay for those consequences. Third, insurance is a business and, as such, needs to be conducted in a way that earns a reasonable profit for its owners.

The money a policyholder pays an insurer is small compared to the potential for loss. If a family's house were to burn down, they probably could not afford to replace it without insurance. The insurance system enables someone to transfer the financial consequences of this loss to an insurance company.

The insurance company, in turn, pays for covered losses and distributes the costs among all of its policyholders. In that way, your fellow policyholders share the cost of your loss, as you share in theirs.

Private companies and state and federal governments provide insurance.

There are three major types of private property/casualty insurers: mutual, stock and reciprocal exchanges. The primary difference among these types of insurers is in who owns them.

A stock company is a corporation owned by individuals or stockholders who contribute capital in the hope of earning a profit through the sale of insurance. The stockholders direct the company's operations and share in any profits earned.

A mutual insurance company is a corporation owned by its policyholders, who may receive dividends if the firm is profitable.

A reciprocal insurance exchange is similar to a mutual company in that the policyholders are both the insurers and the insured. The exchange is a collection of individuals, firms and/or corporations that exchange insurance coverage on one another. Each member pays for a portion of the coverage on every other member.

One of the most critical decisions any consumer must make when purchasing a product or service is how they will purchase the product. When buying insurance, consumers have several choices. They can work with an independent agent, an exclusive agent, an insurance broker or deal directly with a company.

An independent insurance agent is a self-employed businessperson who typically represents a number of different insurance companies through contractual relationships and is paid on a commission basis.

An exclusive agent represents only one insurance company and may be a salaried employee or work on a commission basis.

An insurance broker is an intermediary between a customer and an insurance company. A broker typically searches the market for coverage appropriate to their clients' needs.

While purchasing insurance through an independent or exclusive agent are the most popular methods of buying insurance, consumers also have the option of direct purchase. A number of companies sell their insurance products directly to customers through the use of a toll-free telephone service or the Internet.