Insurance rate cuts? Here’s the lowdown

The automobile insurance industry and California Insurance Commissioner John Garamendi have entered a significant legal battle over how to be fair to you.

At issue is how to set insurance rates in a reasonable and nondiscriminatory way, a matter so technically complex that it defies imagination, but not politics.

In California, an almost incomprehensible mix of factors is used to set rates, which are supposed to reflect an insurer’s risk.

Some of these factors seem bizarre: whether you smoke, the kinds of grades teenagers get, whether you are married, the size of your car’s engine and, of course, your gender. Then there are group discounts for people such as teachers and engineers, who are viewed as more desirable customers than politicians or journalists. Insurers use more than a dozen of these markers.

But these are secondary factors that usually don’t count very much.

What counts more are three mandatory factors: your driving record, how many miles you drive each year and your years of driving experience. Good drivers, not too young or old and with small commutes, get a break.

But what counts even more — the real ace of spades — is where you live. City drivers pay more than people in rural areas; those in dense urban neighborhoods pay more than those in the suburbs. Sometimes, people on one side of a street have significantly higher rates than those on the other.

“It is redlining,” Garamendi said, referring to a practice that has often targeted minorities for higher rates.

Under a major policy change that Garamendi is implementing, auto insurers will have to substantially deemphasize ZIP Codes and make a person’s driving record, years of experience and annual mileage the most important factors in setting rates.

It holds the promise for lower rates for dwellers in Los Angeles and much of Orange County, as well as San Francisco. But it would penalize drivers in rural communities like Bishop, which currently has some of the lowest rates in the state.

Insurers say these ZIP Code rating schedules accurately predict claims, because people in urban areas drive on roads that are more crowded and dangerous, they are more likely to be involved in staged accidents and are at greater risk of having their car stolen or vandalized. Insurers say it hits all motorists equally, putting residents of Inglewood and Beverly Hills in the same boat, as well as many drivers in more ethnically mixed communities.

“We don’t know if a policyholder is black, Asian American or Latino,” said Pete Moraga, a spokesman for Allstate Insurance. “We don’t ask.”

Allstate is one of the insurers behind a suit to block the reforms. Why?

“It is a matter of fairness to our policyholders,” Moraga said. “There are high concentrations of minorities in some rural areas. Are we now going to be forced to raise their rates?”

Garamendi said the insurance industry’s ZIP Code system defies logic — what is a high-risk ZIP Code to one company is low-risk to another.

But companies seldom do things the same way. That’s why Toyotas are different from Hondas. Individual insurers say they are the ones bearing the risk, not Garamendi.

Sometimes, ZIP Code ratings specifically burden minority neighborhoods, says Doug Heller, executive director of the Foundation for Taxpayer and Consumer Rights, a Santa Monica group that pushed hardest for the new policy.

“As you drive north on Vermont, as soon as you cross El Segundo Boulevard, your insurance rates go up $500 a year for basic insurance,” Heller said, referring to south Los Angeles.

One downside of the new policy is that premiums will go up more if a driver gets a ticket, regardless of whether they get into accidents. The same goes for younger drivers and motorists with long commutes. You can bet the new policy will create a whole new class of angry consumers.

Just how much the world will change if Garamendi withstands the legal challenges is not clear.

The Automobile Club of Southern California broke ranks with the industry and adopted Garamendi’s formula for setting rates.

A spreadsheet supplied by the insurer shows a married couple with a 5-year-old Camry and a 3-year-old Odyssey, driving 15,000 miles per year on each vehicle, would pay $2,358 living in Inglewood, a reduction of 16% from before. The same family in Woodland Hills would pay $2,323, a reduction of 4%. Such a family in Anaheim would pay $1,743, a reduction of 3.6%; in Escondido, $1,616, a drop of less than 1%.

What this seems to show is that ZIP Codes still matter, but perhaps less than before. While residents of Inglewood would get a $500-per-year break and be on a par with Woodland Hills, residents of Anaheim, also racially and ethnically diverse (one-third white, two-thirds minority) have premiums that are substantially less than either place.

The insurer did not supply a spreadsheet for communities where rates would go up. But more than 10% of its customers will be hit with rate increases. Spokesman Jeff Spring said rates on average would go up about 4% in Bishop, for example.

One bright spot is the potential for lower overall average rates. In the last two years, the percentage of premiums paid out for claims in the state has fallen.

Indeed, the Auto Club’s decision to follow Garamendi’s policy was eased by the fact that the insurer also had a $133-million across-the-board rate cut for its 1 million policyholders in the state. Location-related cuts for some didn’t need to be offset by increases for others.

“We are in an era of price reductions,” Garamendi said.