Let’s Try Group Auto Insurance : Written Through Employer Organizations, It Could Cut Costs

The availability and cost of automobile insurance in California, particularly in Los Angeles County, has been a public issue for more than a decade.

Supervisor Kenneth Hahn and Assemblywoman Maxine Waters (D-Los Angeles) regularly complain that inner-city residents pay too much for their auto insurance--when they can get it at all. The industry answers that insurance rates accurately reflect claims experience, and that an average profit of 2.4% on insurance written in Los Angeles County is hardly extortionary.

Two studies by two California insurance commissioners, one released this month, have come down on the industry’s side: Consumers, they say, can get auto insurance at reasonable rates if only they will shop around.

Is that the final word? Hopefully not. Consumers do have a legitimate beef. But it’s not the complaint that their self-appointed advocates have been proclaiming. The problem won’t be solved by banning legitimate criteria by which insurers price their products in different communities based on their claims experience. That would mean only that people who live in communities having lower losses would end up paying a much higher cost for their automobile insurance. At bottom, Hahn and Waters want to turn auto insurance into a scheme of income redistribution.

A better answer, for which no change in the law is necessary, is to develop policies that will recognize other underwriting criteria along with geographical location, and lower the cost of automobile insurance for everyone. Automobile insurance that is underwritten through employer groups, a marketing concept that only recently gained approval in California, does just that. It leavens the effect of a person’s residence address with that of his employment, allowing him to benefit from the loss experience of his co-workers as well as his neighbors. And it lowers the cost of providing insurance by doing away with expensive and time-consuming individual sale and policy underwriting practices, and by giving the consumer an economically powerful advocate in the person of his or her employer when it comes time to negotiate terms and monitor claims.

The insurance industry has been impressively innovative in developing health-insurance products--first, group health insurance, and now health-maintenance organizations and preferred-provider organizations--to hold down the cost of medical treatment. As one result, former Health and Human Services Secretary Margaret M. Heckler was able to announce in July that health-care spending increased last year at the slowest rate in 20 years.

Yet the same imagination has not been seen in property and casualty insurance. Why not? One reason is that labor unions have not promoted group auto insurance as an employee benefit as they have done with health insurance, thus creating economic pressure for this new concept. Another reason: There is no push on the auto-insurance industry like the one that the Reagan Administration has given to the health-insurance industry to develop a better product. And a third reason is that state insurance departments, including California’s, are reluctant to take on those with a vested interest in the present system, such as some agent groups, in order to encourage companies to offer group products.

State insurance commissioners too often see their jobs solely as guaranteeing insurer solvency. That is why the commissioner appointed by Republican Gov. George Deukmejian, and his predecessor appointed during the administration of Democratic Gov. Edmund G. Brown Jr., could each examine automobile-insurance rates and conclude that they were reasonable simply because they did not result in extreme profit margins.

If, however, the insurance commissioner’s other main statutory responsibility--protecting consumers--were receiving adequate attention, the departmental reports would also be addressing issues of availability and cost regardless of the profit margins. The department would be just as diligent to see that consumers receive savings from group marketing, cost-control measures and fraud protection as it is concerned that the insurers can meet their financial obligations.

Group auto insurance would not fully resolve the rate debate, because much of the difficulty stems from having to cover damage caused by uninsured motorists. Those unaffiliated with employer groups would still be left out. In the long run this problem may have to be met with a pooling mechanism financed, perhaps, through a tax on those without their own insurance.

Nonetheless, the fact that it took 10 years for the California department to even approve the marketing of group automobile insurance is a measure of the department’s unbalanced priorities. Its latest report, with barely a mention of realistic solutions to the auto-insurance problem, continues that tradition. It’s time for the insurance commissioner to take off the green eye shade and see that encouraging product improvement is part of his job, too.