No Successful Models to Study : Impact of Insurance Measures Debated

Unlike no-fault insurance, which is proposed by Proposition 104 and is operating in 24 states, experts say there are no accurate models to help California voters judge the likely outcome of Propositions 100 and 103.

The two November ballot initiatives, which seek to cut premiums by more heavily regulating the insurance industry, have provisions borrowed from a number of states. But no single state has a system that mirrors the kind envisioned by sponsors of the California measures.

The insurance industry, which vigorously opposes both Propositions 100 and 103, contends that the type of regulation they embody would prompt some insurers to stop writing policies in California, cause others to become insolvent and ultimately drive premiums sky-high. The industry cites the experiences of several heavily regulated states as proof that the initiatives would hurt consumers.

Awaiting the Election

Reflecting those fears, one large insurance company--Mercury Casualty--already has ordered its agents to stop writing new policies in California after the election and another has indicated it is considering similar action.

Initiative supporters, such as Consumers Union, say these are scare tactics and maintain there is little evidence that either measure would adversely affect the availability or price of insurance. “They are both based on established rate-making systems,” said Harry Snyder, the consumer group’s West Coast director.

A major federal study released two years ago bolstered that view when it concluded that insurers generally do not abandon states with strong regulation. The General Accounting Office study also found that premiums in these states are as much as 14% lower than in those, like California, which have little authority to regulate.

More Drivers Covered

The study did agree with insurers that more drivers are able to obtain coverage on the open market in states with limited or no regulation. But even in highly regulated states where many drivers are forced into state-run auto insurance plans, it found that buying insurance “is generally less costly.”

Those who are skeptical of the results note that the GAO carefully avoided making any recommendations. Jeffrey O’Connell, a University of Virginia law professor and noted insurance expert, said he believes that is because there is not enough evidence to conclusively determine who is right.

“I find the whole regulatory thing a morass, such a vast quagmire that I’ve thrown my hands up,” he said. “Some studies say regulation is terrible, but that tends to be from the conservative elements. Ones that show (regulation) works tend to be from the left. It’s stupefying, there are so many variables.”

‘Good-Driver’ Initiative

Proposition 100, which is backed by California’s trial lawyers and Atty. Gen. John K. Van de Kamp, proposes to reduce rates 20% for “good drivers” unless there is “clear and convincing evidence” that the rollbacks would leave insurers with inadequate earnings. It also would replace California’s minimal regulation with a requirement for state approval of rate increases above 7.5%, repeal the industry’s exemption from state antitrust laws and require rates to be based primarily on a driver’s record.

Proposition 103, which would impose much more stringent regulation on insurers, would reduce rates by 20% on every auto, homeowner and commercial or municipal liability policy. The state insurance commissioner could waive the rollbacks for companies able to show they would experience serious financial hardship as a result.

The measure also would require prior approval by the state insurance commissioner before premiums could be raised, and would require that the commissioner, now appointed by the governor, be elected after 1990. It also would repeal the industry’s antitrust exemption, set up a consumer watchdog agency and make it much more difficult for insurers to base their rates on where a motorist lives. Its chief sponsor is consumer advocate Ralph Nader.

Elected Elsewhere

Supporters of the measures say at least two states already have elected commissioners, 19 require prior approval of rates and three have state-sanctioned consumer advocates. No state has completely repealed the industry’s exemptions from antitrust laws.

“I’d say with some degree of confidence that a large portion of Proposition 100 is based on some understanding of the national experience,” said Gene Erbin, a lawyer and legislative aide who helped draft the initiative. “But cumulatively it is unique . . . trend-setting.”

Harvey Rosenfield, who directs the campaign for Proposition 103, said of his initiative: “No state in the nation has the comprehensive reforms that 103 has. It is the ‘Greatest Hits’ of insurance reform from many states.”

In reply, insurance industry officials are airing commercials comparing Proposition 103 to a much derided insurance system in New Jersey. And they have sought to draw parallels between both measures and a troubled insurance system in Massachusetts.

Highest Rates in U.S.

New Jersey’s auto insurance premiums are the highest in the nation despite a requirement that the state approve all rate increases. In Massachusetts, where the state actually sets insurance rates, nearly 60% of drivers are in assigned risk and at least five insurance companies have either cut back or abandoned business in the state.

There are some similarities between the two initiatives and the way these states regulate insurers. But both New Jersey and Massachusetts are no-fault states and most experts agree that their problems stem mainly from poorly constructed no-fault laws.

“Massachusetts and New Jersey have problems because their tort systems were replaced by no-fault systems that are out of balance,” said Nettie Hoge, an attorney for Consumers Union, which favors no-fault but opposes Proposition 104, the no-fault measure on the November ballot. “The problem here is not regulation but a bad no-fault system.”

Territorial System

Another question surrounding both initiatives concerns the likely impact of provisions that would alter the territorial ratings system under which drivers in California and most other states pay more if they live in certain areas--generally the most heavily urbanized and crime-prone districts.

Proposition 100 would bar territorial ratings unless the insurance commissioner finds that they are a “valid predictor of losses.” Proposition 103 requires that where a driver lives be given less weight in determining premiums, but allows territorial ratings if the insurance commissioner can be convinced that there is a “substantial relationship” between the territories and “risk of loss.”

Success in Michigan

Michigan is one of the few states that tried to significantly alter its territorial system by limiting to 45% the difference between the highest and lowest rates that insurers can charge. As insurance companies lowered rates to compete for business in the suburbs, they were forced to cut premiums in the inner city.

Insurance Department officials said the concept worked well, keeping rates lower in the urban centers without forcing premiums up in the suburbs. But insurers never liked the system and the state was forced to abandon it after they launched a campaign to convince suburbanites that they were, indeed, subsidizing motorists in central Detroit. “It became politically vulnerable,” said Jean Carlson, Michigan’s deputy insurance commissioner.

In California, the industry has already begun a similar campaign, telling voters in commercials aired mainly in Northern California that if either of the measures pass, rates in most counties will go up so that drivers in Los Angeles can pay less.