Premium Puzzle
A 45-year-old married couple with spotless driving records can insure their 1985 Oldsmobile through Farmers Insurance Co. for $864 if they live in Newhall. The same policy would cost them $1,501 in Venice and $1,973 in Inglewood, according to a recent study by the California Department of Insurance. A 21-year-old single woman who had caused one accident in the past year would pay $2,385 in Newhall, $4,121 in Venice and $5,194 in Inglewood--and probably count herself lucky to find insurance at all; several major insurers would not do business with her.
Those disparities come about, of course, because of territorial ratings that the insurance companies use to calculate their losses and set their premiums. No other insurance-company practice infuriates customers quite as much as territorial ratings. Particularly in densely populated inner-city neighborhoods and close-in suburbs, where claims are most frequent and premiums are highest, consumers rail at the idea that their zip codes, not their own safety records, largely dictate the size of their insurance bills.
Such protests fed the widespread demand for insurance reform that spurred the five insurance initiatives on the Nov. 8 ballot. Yet none of those measures would abolish territorial ratings or tackle the prickly political problem of how insurance rates in Los Angeles and other major cities can be reduced without driving up rates elsewhere in the state. Even the best of the initiatives, Proposition 100, and the measure pushed by consumer advocate Ralph Nader, Proposition 103, would only diminish the role of zip codes in rate-making. This means that even if one of these initiatives passes and survives the inevitable court challenges, drivers in South-Central and East Los Angeles will share in the rollbacks that those measures promise but will still end up paying more for insurance than do other Californians.
Proposition 100, backed by Atty. Gen. John K. Van de Kamp, consumer organizations and the California Trial Lawyers Assn., would mandate that for anyone with three years’ experience behind the wheel, the driving record should be the key to rates “to the maximum extent practicable.” Geographical discrimination would be banned unless the insurance commissioner found “clear and convincing evidence” that territorial ratings were “a valid predictor of losses.” Proposition 103 takes the same tack; it would require that rates be based on drivers’ records, their annual mileage and their years of experience but would allow the insurance commissioner to take other factors, including the place of residence, into account if justified.
The insurance commissioner, in fact, already has upheld the validity of territorial rating. A July, 1987, study of Los Angeles County concluded that “insurance rates charged by the major automobile insurers are in general supported by their aggregate loss experience data”--in other words, that insurers are justified in charging more to inner-city residents because claims are more frequent and pay-outs are greater there than elsewhere. One can quibble with the study’s methodology--individual insurers did not have to justify their own rates--but it seems indisputable that territorial ratings are not simply plucked from the air.
This is not to say, however, that such practices are sacred. A driver’s race, too, may be a valid statistical predictor of insurance losses, yet the state does not tolerate such discrimination; because so many neighborhoods are segregated by race, territorial ratings may amount to race-based discrimination under a more benign name. More than once the Legislature has considered abolishing territorial ratings, largely because of their effect on the inner cities, but has always run into the same overwhelming obstacle: As the insurance department has found, eliminating zip codes would cut premiums by about 36% for one-third of Californians while raising them an average of 22%for the other two-thirds. Even a rural legislator sympathetic to inner-city drivers would find that prospect politically unpalatable.
Short of abolition, however, there are ways to overhaul territorial ratings to narrow the gap between Newhall and Inglewood. Territories could be vastly expanded so that, say, all of Los Angeles County could be classified as one territory and distinctions within the county could be based completely on drivers’ records. This would recognize that most county residents traverse several zip codes even on short driving trips and contribute to the congestion that raises the risk of an accident. Methods might also be found to subsidize insurance for inner-city residents, who often cannot find or afford insurance even if they are willing to comply with the mandatory insurance law; the state assigned-risk pool accommodates 17% of Los Angeles drivers, but even its rates are pegged too high for many of the working poor. In some neighborhoods, 70% of the drivers are uninsured.
Modifications in territorial ratings will be possible if Proposition 100 or 103 passes; the insurance companies will be forced to open their books and justify their rating practices. But, before there can be any relief from the harshness of territorial ratings, the Legislature must be both innovative enough and courageous enough to fashion some new approach to this old problem. If innovation and courage were not so scarce in Sacramento, we would be more sanguine about the chances that inner-city residents would someday be able to afford the insurance that the Legislature already has said they must buy.
