Territorial Rating Attacked : Reforms Could Put State Into Insurance Business

When the state Insurance Department released its comparative pricing survey for 18 leading auto insurance sellers in Los Angeles County last spring, the great disparities under the current territorial rating system were plain for all to see.

The survey showed that a 42-year-old married State Farm customer, for example, would be able to buy a certain policy for $632 if he lived in Whittier. But the same policy would cost him $1,068 in Santa Monica and $1,497 in South-Central Los Angeles.

A 23-year-old single woman would be able to purchase a Farmers policy for $1,057 if she lived in Pomona. But the same policy would cost her $1,525 in South Gate and $2,815 in Beverly Hills.

With lower-priced 20th Century, the man would be able to purchase a policy for $501 if he lived in Glendora. But the same policy would cost him $647 in North Hollywood and $957 in Beverly Hills.

Statewide, the variations are even greater, as became evident when the Insurance Department later released a survey for the entire state. The prices for policies in many parts of Los Angeles were more than 300% higher than in parts of Northern California.

But, as tens of thousands of motorists ignore state law and go completely uninsured, the territorial rating system is coming under increasing fire. Political pressure is building against it--particularly from legislators representing urban and minority districts--the courts are reviewing it and even certain administrative policies adopted by insurance authorities are beginning to chip away at it.

Indeed, when California last year implemented its toughest-ever mandatory auto insurance law, it may have started a sequence of events that will eventually alter the system and even bring the state government into the insurance business. Last month, for example, Assembly Speaker Willie Brown (D-San Francisco) said the Legislature might mandate a state takeover of the assigned-risk plan next year.

The mandatory insurance law is now under a state Supreme Court-ordered suspension pending resolution of a lawsuit brought by civil rights lawyers claiming that if the state is going to require people to carry auto insurance, it also must take steps to assure them fair pricing and the opportunity to buy it.

Regardless of how this question is decided--and in a previous case in Michigan, the courts did require some such steps before validating a similar law--some insurance experts think implementation of a mandatory insurance law with teeth in it will ultimately bring reform.

“Compulsory insurance is the absolute key ingredient in assuring change,” said Mike McCarthy, vice president of operations for Insurance Corp. of British Columbia, a government monopoly.

“The government says you must have it,” McCarthy explained. “The private companies say, ‘We’re not going to give it to you, and if we do then we want an arm and a leg to provide it, and not too much of it (coverage), either.’ When that happens, it’s only a matter of time before the government is forced to step in.”

Stan DiOrio, an aide to Assemblywoman Maxine Waters (D-Los Angeles) and an insurance expert, said that in California the companies “really weren’t tremendously supportive of the mandatory law, simply because they understood that once that happened you were going to . . . cause a greater public hassle over territorial rating. And that’s exactly what happened.”

Industry spokesmen and state insurance regulators say that territorial rating is necessary from a business standpoint. But they also concede that it often proves unfair to many consumers.

In the next breath, they say it is politically impossible to change it, since, they say, evening out the rates would necessitate raising the premiums for about two-thirds of the state’s insurance buyers, while lowering them for the other third. In such circumstances, the argument goes, there will be neither the votes in the Legislature nor by the electorate for an initiative to approve a change.

But with little publicity, the system is already beginning to be altered. Some of the rates have been “flattened” under the direction of the Insurance Department in the assigned risk plan for substandard drivers, affording some relief to the economically deprived neighborhoods where the rates tend to be highest. The result is that insurance in South Los Angeles frequently costs less under assigned risk than it does under regular policies, and the regular rates are subsidizing the assigned-risk rates.

Under territorial ratings, the state is divided by each of about 400 companies selling auto insurance into territories where prices are set according to the claims losses and other costs incurred by the companies.

Since, according to industry spokesmen, there tend to be more accidents, more claims, more litigation and thus higher insurance company costs in urban areas, and particularly in inner cities, the cost of equivalent coverage is frequently highest in those areas.

This leads to a situation where the poor must often pay more than the rich for insurance--if they can find someone willing to sell it to them.

It follows that despite the state legal requirement that all drivers be insured, many people who cannot easily afford insurance or who simply do not want to pay the rates in the highest-priced areas are not doing so. According to the Insurance Department, there are parts of the Eastside and Southside of Los Angeles where as many as 70% of the drivers are uninsured. The statewide uninsured rate is estimated at about 15%.

Territorial ratings and the uninsured motorist phenomenon are therefore closely linked. While a disputed number of motorists did insure themselves when the new mandatory law went into effect, it has now been under suspension for nearly a year, and the number of uninsured drivers is apparently rising again. A decision in the case by the Supreme Court is expected any day.

Damaging Admissions

Even those most committed to the system are apt to make some damaging admissions about it.

George Tye, executive manager of the Assn. of California Insurance Cos., the industry’s most important lobbyists in Sacramento, declared in an interview, on the one hand, that “territorial rating is the key . . . the real predictive rating criteria” by which auto insurance must be priced.

But Tye then conceded: “A lot of the people that are being charged $2,000 are the lower economic strata. They simply can’t afford that. We realize that. It’s a problem that’s been brewing for years. We’re trying to do something about it.”

George Watts of the industry’s Western Insurance Information Service, said: “It’s become sort of a sociological problem. The area where the accidents are highest, where the losses are the most, where the companies are paying out the most dollars, are the areas where the income is the lowest, ironically.”

So, Watts said, even though San Diego County residents are hardly likely to want to pay higher rates so that inner-city Los Angeles residents can pay lower ones, he still thinks “there’s going to have to be some sort of adjustment. The people who are in that situation (the high-rate areas) have a real problem and we have to recognize it.”

Watts noted that in Hawaii the state subsidizes the cost of insurance for those on welfare.

Some Problems

There are anomalies in the way the territorial rating system works in California that seem to make it even more unjust than it need be.

For instance, insurance buyers pay according to where they live, not where they drive. So a suburban resident who drives 40 miles into Central Los Angeles to work, with all the risks that entails, pays far less than an elderly Central Los Angeles resident who keeps his car garaged most of the time, venturing forth only on short trips.

Spencer Wiley, director of the Committee Against Discrimination of Automobile Insurance, says that he is paying far more for insurance driving 1,000 miles a year in South Los Angeles than he did when he lived in Agua Dulce--halfway to Palmdale--and was commuting into Los Angeles and driving 25,000 miles a year.

The result is that some inner-city residents buy insurance from relatives’ addresses in lower-rated areas.

Wiley, for example, said that the son of a member of his organization, driving a 1984 sports car and having no moving violations or accidents on his record, saw his premiums in South Los Angeles go from $1,596 a year in 1985 to $4,032 in 1986. He said the young man had changed his address to Orange County, changed insurance carriers and, even with increased coverage, his premium fell to $978.

Doesn’t Add Up

Some of those knowledgeable about insurance make the point that buying auto coverage under the state’s mandatory law does not make good economic sense for many people.

The suspended law requires California insurance buyers to buy a liability policy to protect others, not a first-party policy to protect themselves. Some authorities say it would be a more attractive proposition to require everyone to buy first-party, “no-fault” policies that would protect themselves.

“That’s what most of us need,” said David E. Kuizenga, head of California’s assigned-risk plan. “What does a person in Watts need? He needs to be able to get to work, so he needs to get his car repaired if it’s damaged. And he needs to be able to go to a doctor or a clinic. But what does he need beyond that?”

Kuizenga’s point is that the personal economic interest in someone having a liability policy is to prevent a lawsuit in case he is involved in an accident. As for poor people, he said, “Nobody’s going to sue them. What have they got to be sued for?”

Change Doubted

The assigned-risk official was dubious that the mandatory insurance law authored by state Sen. Alan Robbins (D-Van Nuys) had really succeeded--before the state Supreme Court suspended it--in enticing very many previously uninsured motorists into buying insurance, at least for very long.

One insurance company, 20th Century, he said, told him that 85% of those buying insurance for the first time soon dropped it.

Industry spokesmen also estimate that the effect of the mandatory law was limited. John McCann, California spokesman for the Insurance Information Institute, said a good guess would be that before the court suspension, the number of uninsured motorists decreased from about 2.5 million to about 1.9 million.

Many signing up for insurance for the first time were refused coverage and forced to buy through the assigned-risk plan.

And many companies apparently are not interested in new clients in poor neighborhoods.

Few Insurance Offices

The result is that in these areas, such as minority communities on Los Angeles’ Eastside and Southside, it is hard to find insurance sales offices, even if one wants a policy and can afford it.

“The companies have found that the loss experience is so high in those areas that it’s not profitable, and the companies are in business to make a profit,” explained Watts of Western Insurance Information. “It’s not profitable to locate facilities there.”

Don Stewart, executive director of the American Agents Alliance, a group of insurance sellers, said of South Los Angeles:

“They’ve got a 60% to 80% uninsured factor in this area, so there’s lots of potential business there. But the companies can’t write it and make a profit on it, even at the terrible rates they’re charging. . . . So they pulled away from it, and they’re all gone except for the Auto Club. Farmers is not there. State Farm is not there. Allstate is not there. . . . You’ve got to go find them outside.”

An out-of-state insurance executive, Tom Holmes, head of British Columbia Insurance Corp., recalled a visit several years ago to a large insurance company office in Century City where he observed company employees throwing away applications for insurance from certain Los Angeles ZIP codes--a practice known as redlining.

Highly Dubious

Told that officials of the California Department of Insurance recently said they could find no instances of redlining, Holmes said he wondered “what they’ve been smoking.”

The territorial rating system may sound ripe for change. But changing it is something else again. When state Sen. Bill Greene (D-Los Angeles) took a bill to abolish territorial ratings earlier this year before Robbins’ insurance committee, Robbins voted for it out of sympathy, he said, but the other senators present said there was no way they could face their constituents if they supported it. The bill was killed in committee.

Sen. Wadie P. Deddeh (D-Chula Vista) was among those accepting the insurance industry’s argument that about two-thirds of the insurance buyers in California would end up paying more if territorial ratings were eliminated. He said he would not vote against the interests of insured San Diego residents.

Some assert that any bill requiring individual insurance companies to charge the same rates everywhere would prove unworkable anyway.

“As soon as we went down and raised the rates in San Diego,” said Stewart of the Agents Alliance, “the companies would realize they could insure this guy down in San Diego, knowing that he would pay them 1 1/2 times as much premium as they needed to cover him, and they’ve got this guy down in Watts who’s only going to pay them three-quarters as much as it takes to cover him. What would they do?”

Going for the Money

The company, he predicted, would stop selling in Watts altogether and would concentrate its selling in San Diego and other profitable areas.

John Rolph of Rand Corp., an expert in insurance regulation, said the experience in other states has been that “if you use your rate-setting authority fairly stringently . . . if you mandate the prices for some categories of drivers to be low enough that they’re not very attractive for the insurers, then the insurers one way or another avoid writing a lot of business in those categories.”

Yet even while maintaining that nothing can be done to effectively alter the territorial rating system, McCann of the Insurance Information Institute conceded, “It’s too expensive for people to operate an automobile in an inner city and actually pay for the insurance.”

That is the quandary: The insurance industry insists, and most politicians in Sacramento agree, that territorial ratings can’t be changed under the present free marketplace system. Yet, as Everett Brookhart, consumer affairs chief of the Insurance Department, recently said, the territorial rating system is proving unworkable in many areas and it is fueling the uninsured motorist problem, and a search for alternatives is needed.

Government’s Role

Usually, these alternatives involve a role for government, either through intervention in the private marketing system or in the government’s directly assuming some insurance company functions.

In the last year the Insurance Department has been quietly taking a few steps to ameliorate the effects of territorial ratings on the high-priced areas, flatten the rates slightly and, without any public announcement, pass some of the costs on to the drivers now paying lower premiums.

Essentially, this has been accomplished by holding down the assigned-risk rates--the only rates over which the Insurance Department has control.

When assigned-risk companies asked, for example, for a 60% rate increase to meet their projected costs in insuring these drivers, then-Insurance Commissioner Bruce Bunner refused to give it to them. He ordered a 2% reduction in the basic rate along with an increase in the surcharge on drivers with moving violations or accidents--overall about a 10% increase.

Bunner explained in an interview that through some adjustments, he had acted to reduce the assigned-risk rates by about 25% in the highest territorially rated areas in Central Los Angeles and Oakland.

The result was that in some cases, people started paying less for insurance under assigned risk than they would have to pay companies for regularly purchased insurance. And, state officials believe, the regular policies were commensurately increased in price by the companies.

Adjust the Charges

Another way in which Insurance Department aides say they have flattened rates is to order an adjustment of charges for administrative costs. Brookhart explained that in the past a set percentage on each auto policy was assessed for administrative costs. This meant that those paying $2,000 for insurance were paying four times more for the companies’ administrative costs than those paying $500.

Brookhart said the department concluded that administrative costs were essentially the same for all policies. By ordering a readjustment, there was a slight flattening of rates.

These are small steps, however, compared to what Bunner suggested might be advisable before his resignation in June.

While he said it is true that in a large part of the Los Angeles area “the costs are there” to support high charges for insurance, there may be a way to provide a no-fault, first-party alternative to present policies that would lower the cost of insurance for people in the highest-rated areas without forcing those in lower-rated areas to pay more.

Removing the Frills

“What we should be doing in L.A. County . . . is developing a consumer policy with no frills, to take care of the basic mandatory requirements,” Bunner said.

He said that while he would prefer that the private companies themselves compete in offering such a no-frills, no-fault policy, he could also conceive of the state’s having a role if the companies refused to provide it to everyone.

There might, he said, be a “state compensation fund” and “to the extent (the companies) don’t pick it up, then it would be mandatory the state fund pick it up.”

In raising the possibility of state insurance, however, Bunner was clearly broaching the eventual possibility of very broad reform. His successor, Roxani Gillespie, has so far taken a more conservative approach, indicating that she will follow the lead of the governor’s office in such matters.

Others suggest even more exotic remedies. Los Angeles attorney Douglas Hallett, for example, suggests that one way to guarantee that everyone carries a minimum amount of insurance is to charge for it through the gas tax.

And consumer advocate Steven Miller suggests “some sort of pooling of dollars that would come from an auto registration surcharge or an extra fee on drivers licenses that would go into an uninsured motorist pool--so that if you are insured and you are involved in a loss caused by someone without insurance, you collect from this pool.”

Rand Corp.’s Rolph said that at the very least, “I would expect that what will happen is we will get more and more rate regulation, we will have a larger and larger growth of the assigned-risk pool, the assigned-risk pool will, in one way or another, be subsidized more and more by the other standard risks.”

In short, Rolph said, “I would expect there to be more and more state regulation of the way the insurance companies set their rates. I would expect that that regulation will take the form of attempting to flatten rates.”

The state Insurance Department estimated the percentage of motorists in early 1985 who failed to carry the required liability insurance of at least $15,000/$30,000 individual/multi-party coverage. The law was changed in mid-1985 and then was suspended, pending a review of its constitutionality. Nevertheless, the department believes the map reflects current rates of uninsured motorists. Statewide, it is estimated that about 15% of California’s drivers--about 2.5 million--are uninsured. But in some parts of Los Angeles, the uninsured rate is close to 70%.