Bill Calls for a State-Run Firm to Sell Car Insurance

A bill to create a state-operated auto insurance company, the first such proposal ever to go before the California Legislature, was announced Tuesday by Los Angeles Assemblyman Richard Polanco.

Polanco chose a street corner at the Los Angeles-Alhambra city line--where under the current territorial rating system, residents living across the street from each other can have auto insurance rates that vary by as much as 100%--to unveil his proposal. The Democratic legislator said its aim is to reduce territorial rate differentials and make auto insurance affordable for nearly everyone.

The first reaction from legislative leaders and state Insurance Commissioner Roxani Gillespie, who was speaking on behalf of the governor’s office, was that the bill will get at least a serious hearing. Gillespie said she has already advised Gov. George Deukmejian that Polanco’s idea may have merit, as long as the company he proposes is guaranteed to be self-supporting.

Under Polanco’s plan, the state company would sell only the minimal liability coverage--providing payments of up to $15,000 to a single person, $30,000 to multiple persons and $5,000 for property damage--that all California motorists are legally required to buy under the state’s mandatory insurance laws.

Everything else--such as collision and comprehensive coverage--would be left to the private companies. And anyone desiring to buy liability coverage from a private company instead of the state company could do so.

The new state company would set its rates on a much different basis than the private companies. Instead of a large number of different territories, allowing for far different rates within the same city or even neighborhood, the plan’s directors would set one rate for each county, depending on insurance claims records, as well as a statewide rate. A person below the poverty line would be allowed to purchase the policy at the statewide rate if his county’s rate is higher.

Under the bill, start-up costs for the new system, which would go into effect in 1989, would be met by a one-time levy of $2 on all vehicle registrations in 1988. The company would not be permitted to cancel the insurance of anyone buying such a policy, although surcharges could be imposed on drivers who receive citations or cause accidents.

Polanco, saying he expects “an uphill fight” to get his measure approved, said that if the legislative effort is unsuccessful he will try to qualify the proposal as an initiative in 1988.

He said he thinks much of the Legislature’s Democratic leadership will go along with it, but he believes that Deukmejian might veto it. He expressed fear that Deukmejian, who he noted has accepted hundreds of thousands of dollars of insurance industry campaign contributions, may be too much “under the thumb” of the industry to support the idea.

Gillespie said she discussed the bill with Polanco before he announced it. “I have no idea whether the insurance companies are going to like it,” she said. “But we will take a look at it.”

She said that at Deukmejian’s request she has already prepared a memo comparing such a plan to the state’s workers compensation insurance fund, noting that that fund is financially viable, and saying there is nothing inherently wrong in extending the concept to auto insurance.

The new chairman of the Assembly Insurance Committee, Patrick Johnston (D-Stockton), said Polanco’s proposal “merits serious consideration and certainly he will get that from the hearing process.” But he also noted, “Most major changes in state statutes have a period of gestation,” a polite way of expressing skepticism that it would win approval on its first outing.

The chairman of the Senate Insurance Committee, Alan Robbins (D-Van Nuys), commented, “If he gets it out of the Assembly, we’ll take it seriously.”

He added: “The problem of soaring auto insurance costs, particularly in the urban areas, must be addressed. I think it’s one of the top three legislative priorities of the year.”

Officers in the lobbying firm that represents most of the state’s auto insurers could not be reached for comment. A secretary in their office said they were in a meeting in San Francisco.

Possible Weakness

Robbins touched on one of the Polanco bill’s possible weaknesses when, noting that buying from it would be voluntary, he remarked, “If State Farm, Farmers and Allstate insure the good risks and the people who are the bad drivers buy their insurance through this state company, then the state company is going to have a phenomenal loss ratio.”

Four Canadian provinces that have created public insurance systems have made them compulsory, having found that in order to offer low rates they had to include everyone, the good risks as well as the bad.

Estimates in California are that between 15% and 20% of the state’s drivers are not carrying the required liability insurance now. That percentage mounts to 70% in some neighborhoods of South-Central and East Los Angeles.