State Limits Use of ISO Advisory Rate by Insurers

Insurance rating organizations such as Insurance Services Office Inc. will no longer be permitted to recommend actual rates to insurers doing business in California under a directive issued Thursday by state Insurance Commissioner Roxani Gillespie.

“We have determined that advisory rates are simply not compatible with California’s competitive rating system,” Gillespie said in announcing the change, which becomes effective Jan. 1, 1988.

Gillespie said ISO and other rating services may continue to issue estimates of loss costs for various lines of insurance, but the advisories may no longer include estimates of the expenses of administering the policies or what overall profit should be obtained from them. The companies henceforth must work out such estimates for themselves.

The directive, which has antitrust implications, does administratively some of what has been proposed in legislation authored by Assemblywoman Maxine Waters (D-Los Angeles). It is a course of action opposed by the insurance industry, partially on grounds that small companies or companies considering doing business in California for the first time will be saddled with extra costs in deciding what rates to charge.

Gillespie, however, said Thursday that “eliminating these advisory rates means that companies will no longer be able to hide behind the ISO rates. When times are tough, insurers tend to adopt the ISO advisory rate rather than use their own expense or loss experience to develop rates. The result has been some horrendous price increases to customers. We see the change to rates based on loss costs as a mechanism to strengthen competition.”

The insurance commissioner added that she had become concerned that ISO’s advisory rates did not take into account investment or interest income earned by the companies. She noted that this can be a substantial sum that many companies were making above and beyond the already profitable rates recommended by ISO.