Sure, it's already the second week of February, but it's never too late to wish Decs&Excs readers a Happy New Year with our first post of 2006 -- and an interesting year it looks to be for followers of California insurance issues, beginning with a resurgence of interest in insurance rate regulation under Proposition 103 and looking ahead to the selection of a new Insurance Commissioner in November's election. There will be more to say on the race for Commissioner shortly, but we'll begin our year with an update on our old friend, Prop 103.
By way of background: Proposition 103 was a ballot initiative passed by the voters of California in November, 1988. It was one of five competing initiatives on the ballot -- two sponsored by the insurance industry, two sponsored by consumer advocates and a fifth sponsored by a single insurance company -- proposing to change the way insurance business was done in the state, with a particular focus on containing the cost of automobile insurance. Insurers' proposals focused on shifting California to a "no-fault" system of auto-related compensation while the consumer advocates' proposals emphasized rate controls and mandatory rate reductions. When the dust settled on election night, one of the consumerists' initiatives -- Proposition 103 -- had emerged the victor.
A principal feature of Prop 103 was imposition of a mandatory rollback of auto insurance rates: insurers were required to reduce their rates to what they had been on November 8, 1987, and then to cut those rates by 20%. The California Supreme Court promptly declared that portion of the initiative to be unconstitutional, on the ground that it violated due process requirements by depriving insurers of the opportunity, permitted to every other business enterprise, to at least attempt to obtain a reasonable return on investment.
Most of the other provisions of the initiative survived judicial scrutiny, including three provisions that continue to affect California property and casualty insurance today. Those provisions
- Shifted the state from an "open rating" system, in which insurance rates were set in the open market, to a "prior approval" system, under which a particular insurance rate can only be charged if it is first reviewed and approved by the Department of Insurance;
- Provided that automobile insurance rates should be set based primarily on three factors: the insured's driving record, the number of miles the insured drove annually, and the insured's years of experience; and
- Changed the office of Insurance Commissioner from an appointed post, selected by the Governor, to an elected position.
John Garamendi became California's first elected Insurance Commissioner in 1990. When he leaves that post at the end of this year, he will have filled it for 8 out of the 16 years that it has been an elective position. Throughout that time, he has declared his ambition to make the Department of Insurance "the nation's premier consumer protection agency." A few days before Christmas 2005, he announced the introduction of new regulations to eliminate insurers' reliance on location -- so-called "ZIP Code rating" -- in setting automobile insurance rates. Here is a report on the new regulations from Insurance Journal:
California Insurance Commissioner John Garamendi has announced that he will introduce new regulations next week that require insurers to base auto rates primarily on a driver's record and not on ZIP code.
According to the commissioner, he wants to fulfill the intent of voter-enacted Proposition 103 and to establish fairness and equity in automobile insurance rating system that has engendered controversy since the proposition took effect in 1988.
'When Proposition 103 was approved, it dealt with the basic fairness of how automobile insurance rates are set in California,' Garamendi said. The proposition created three mandatory factors on which auto rates had to be set: driving record; how many miles driven; and how long the person has been driving.
However, shortly [sic] after the proposition passed, a new insurance commissioner, Chuck Quackenbush, allowed 16 optional factors to also be used when setting auto rates. [Quackenbush was elected in 1994, and the changes were made in 1996 -- gmw.] Whether or not it was the intent, those optional factors were allowed to have more weight than the mandatory factors, Garamendi said. That lead to 'irrational rates in all areas across the state,' he said.
The Commissioner oversaw a "workshop" on his proposed regulations on January 12, and formal hearings are scheduled to take place in San Francisco on February 24. An array of material related to the proposals is available on the Department's web site, including the proposed text [PDF] of the regulation. The rule most resembles something out of a high school Algebra text, but its intended effect is simple: the three mandatory rating factors from the original Proposition must be applied in decreasing order of importance, and they may not be outweighed by any of the "optional" rating factors, such as the location at which the insured vehicle is principally garaged.
Watching the issue from afar, RiskProf Martin Grace professes perplexity over the Commissioner's aversion to ZIP codes:
Some of the arguments in favor of Prop 103 are strange. For example, consumer advocates all seem to be upset by industry efforts to assign people to risk categories in a way that more accurately reflects their risk. This is what insurers do. Low risks get low prices and high risk get higher prices. One bugaboo in California is the use of zip codes which Prop 103 implies cannot be a rating factor. The Proposition basically requires rates to be made based on the driver’s record, the number of miles driven annually, and the driver’s experience. Thus, the environment (zip code or neighborhood) in which one drives is immaterial. Many see this as a way to prevent red lining, but it is possible that certain neighborhoods have higher risks of property damage or crime. Shouldn’t an insurer be able to take this into account? What if the population density of the zip code was associated with a higher probability of a traffic accident? Shouldn’t the insurer be able to take this into account? What about the people in low risk zip codes? The state, by prohibiting discrimination based on zip codes, is taxing people who live in rural areas to subsidize those who live in urban areas. This doesn’t make sense, but there is strong aversion to zip codes by consumer advocates.
Partly in response to the Commissioner's latest moves, George Joseph, founder of Mercury Insurance, submitted drafts of a new initiative measure that he hoped to qualify for the November 2006 ballot. Those proposals would have countered the Commissioner and locked in the ability of insurers to use location as a primary rating factor. It would also have permitted discounting of premium for the benefit of those who maintain uninterrupted auto insurance over a long period of time, even if the coverage has been maintained through different companies. (Another of Proposition 103's changes was imposition of a blanket ban on discounting or rebating on insurance premiums.)
Response to Joseph's proposals was predictable: howls of outrage and promises of counter-initiatives. (See also Sacramento attorney Jonathan Stein's comments.) Whether because they were not spoiling for another fight with Harvey Rosenfield and his minions or for reasons of their own, many insurers kept conspicuously mum about the Joseph initiatives and on January 28 Mr. Joseph let it be known that he dropping his initiative efforts for the time being in the face of a dearth of industry-wide support.
Yesterday's Los Angeles Times business section featured a front page profile of Mr. Joseph, in terms that a RiskProf would likely endorse, and highlights an intriguing wager the insurance man is prepared to offer:
In World War II, he navigated a B-17 bomber through 50 combat missions. After the war, he earned a degree in mathematics and physics from Harvard. And the company he launched in 1962, Mercury General Corp., pioneered the use of ZIP Codes and other data in fine-tuning auto insurance rates.
So when California Insurance Commissioner John Garamendi recently announced plans to overhaul the way car insurance is priced — making motorists' driving records the No. 1 factor — it was almost as if he had proposed making two plus two equal five, at least to Joseph's way of thinking.
Insurance rates should be based on the statistical chances of a customer's filing a claim, the 84-year-old Joseph believes. Armed with years of empirical evidence, Mercury and most of the state's other insurers have concluded that the best way to calculate those odds is to look at where a driver lives — specifically, his or her ZIP Code.
* * *
[Having withdrawn his ballot initiative,] Joseph remains coy about his next move, declining to commit to challenging Garamendi's effort at upcoming hearings or in court.
But he clearly has not been deterred from his views.
He said private polling showed strong support for continuous-coverage discounts, even when voters were told that the insurance industry was backing them. And he said the consumer benefits of Proposition 103 have been overblown.
Rosenfield and others credit the law with saving California drivers more than $23 billion, but Joseph said insurance rates are down since the late 1980s because of safer vehicles, anti-theft devices and a state court ruling that cut down on accident-related suits.
Beaming as he pointed to a thick spreadsheet, Joseph noted that in 1988, 50% of Mercury's property claims in California also involved bodily injury claims. In 2004, he said, that number had fallen to 36%.
'I will bet $1 million that you can't prove to a qualified actuary that Prop. 103 has saved people anything like $23 billion,' he said. 'If Garamendi believes it's true, if Harvey believes it's true, that offer is open.'
Any takers?
I found this blog as I was researching California's Prop. 103. This was after searching the website of AAA ( So. Calif. Auto Club).
As I searched through their pricing schemes I noticed that they offer a number of discounts.
It appears there is up to a 14% discount on the cost of auto insurance for a select few professionals; lawyers, doctors and teachers.
How was this provision addressed in the ballot measure at the time of Prop. 103's passage?
Posted by: Earle Robitaille | February 22, 2006 at 01:00 PM