Orange County Commentary : Opinion : Car Insurance Rate Plan Is Unfair

If current efforts by certain groups and politicians in Los Angeles County are successful, Orange County motorists will experience a sharp increase in automobile insurance rates. The issue focuses on the concept of territorial rating, that is, basing auto insurance rates on the loss experience in specific geographical areas.

Historically, motorists who live, work and drive in central-city areas such as Los Angeles have had considerably more claims and appreciably higher costs per claim than residents of less dense population areas. Therefore, insurance companies charge higher rates to central-city residents. The principle is known as cost-based pricing.

Now, there is a movement under in Los Angeles to eliminate geographic territories and consider the entire state as one area for rating purposes. This means that motorists in areas outside of Los Angeles would pay more for their auto insurance than the loss experience would call for in order to subsidize Los Angeles motorists, who would then be paying less than they should, based on insurance company pay-outs.

Efforts in this direction range from proposed legislation and formation of a coalition of Los Angeles area groups to a threat of developing a ballot initiative for the elimination of territorial rating of auto insurance in California.

If successful, this action would result in an auto insurance rate increase for about two-thirds of California motorists and a rate decrease for about one-third of California’s driving population. Orange County residents would be among those whose rates would increase along with San Diego and Santa Barbara drivers. Los Angeles and San Francisco residents would be the primary recipients of rate decreases.

In the rate-setting process there is an abundance of evidence supporting the idea of including the location where a car is garaged along with the driving records of those using the car, the way the car will be used (business, to and from work) and other pertinent factors such as hospital, medical and auto repair costs and the exposure to theft. Such costs tend to be higher in central-city areas than in places such as Orange County.

The insurance industry recognizes that auto insurance costs are high. It is also recognized that in some urban areas, lower-income residents cannot afford auto insurance. However, charging some motorists more in order to subsidize the urban driver is, in effect, a form of taxation. Taxation or income redistribution is not the function of insurance companies. Additionally, because the low-risk driver would be ignorant of what his proper premium should be, such a subsidy would border on consumer fraud or embezzlement.

From an insurance company’s standpoint, it would be much simpler to charge everybody the same rate. However, such classifications, developed over the years, do accurately predict the losses that various groups are likely to experience. Fairness and statistical data dictate that a single male driver who uses his car in business and lives in central Los Angeles presents a much greater risk to the insurance company than a mature housewife who drives for pleasure only and lives in Mission Viejo and should pay a higher premium.

Critics often say that suburban drivers cause accidents in the central city, resulting in higher rates there. Actually, insurance costs follow the car home to its garage. Thus the theft in Los Angeles of a car from Santa Ana affects rates in Santa Ana not Los Angeles. The cost of a Los Angeles accident caused by an Anaheim driver is charged back to Anaheim.

The insurance industry recognizes that the present system of setting rates is not perfect. Inequities are bound to occur. However, eliminating geographical territories and thereby overcharging some groups to subsidize other groups who would be undercharged is not the answer. Auto insurance rates should be based on the financial risk the insured presents to the company. In central-city areas that risk is considerably greater than in areas such as Orange County.

Critics of territorial rating also argue that where a person lives has nothing to do with what he should pay for auto insurance. The fact is that as a member of a given community a person assumes the rights, privileges and obligations of that community. If theft, vandalism, traffic accidents and hospital costs are higher there than elsewhere, that person shares in those costs through higher auto insurance rates.

Efforts by Los Angeles politicians and vocal groups to eliminate rating territories in California have been going on for seven or eight years. Fortunately, so far, the facts rather than emotions have prevailed.

As these efforts to subsidize auto insurance rates for high-loss areas continue into 1985, Orange County residents would do well to make known their displeasure with any such inequitable proposal.

George Watts is president of the Western Insurance Information Service.