State Farm Sets Higher Rates for New Policies : Offers Car Insurance Through Subsidiary That Charges 20% More Than Its Primary Division

State Farm Insurance, the biggest seller of automobile policies in California with 15% of the market, announced Monday an action that would slap 20% higher rates on anyone in the state seeking new auto coverage from the company.

The step drew immediate criticism from consumer groups, and the state insurance commissioner said she would challenge it.

In the latest post-Proposition 103 maneuver, State Farm said its principal auto insurance division--State Farm Mutual--will quit writing new car policies in California. But more expensive coverage will be available to anyone who would have qualified at the lower rates.

The Bloomington, Ill.-based insurance giant said it would do this by shifting its auto policy underwriting to its State Farm Fire & Casualty affiliate, in itself a major California auto insurer that normally charges sharply higher rates.

Present policy holders will not be affected, State Farm said. However, it could affect thousands who may seek new policies. State Farm Mutual sells nearly 10,000 new policies a week; it has written about 352,000 new policies in the state in the first nine months of the year.

State officials, calling State Farm’s action discriminatory against those seeking new coverage, said they will move to block it. Insurance Commissioner Roxani Gillespie said she will notify State Farm of her objections by letter and, if necessary, order them to halt the practice.

“That’s pretty reprehensible,” Gillespie said. “Frankly, I’m very surprised at a company this size doing something like this. They’re the only ones.”

She said the move would violate current law because new customers would be subject to substantially higher rates than existing ones, even if qualifications are identical. The grounds for her opposition have “nothing whatsoever” to do with the provisions of Proposition 103 and are based on prior law, Gillespie said.

Proposition 103, which orders the industry to roll back rates to levels 20% below those of November, 1987, was approved by California voters last Tuesday but its implementation has been put on hold by the state Supreme Court in response to legal challenges filed by insurers.

Company officials had no immediate comment on Gillespie’s position. C.A. (Pete) Ingham, vice president and general counsel of State Farm, said: “I don’t see any legal problems with it.” The new arrangement takes effect immediately.

One leading industry critic called State Farm’s action a “subterfuge.”

“It’s a rate increase,” said J. Robert Hunter, president of the National Insurance Consumer Organization in Alexandria, Va. If a 20% rollback ultimately takes effect, Hunter noted, the new customers in State Farm Fire & Casualty will end up paying about the same as if they had bought policies from State Farm Mutual before Proposition 103. “When the 20% rollback takes effect, they’ll be back where they started. It’s illegal.”

State Farm objected to the characterization of its move as a rate increase because it does not apply to any of its current 3 million auto policies in California. Ingham also said State Farm probably would have acted even without passage of Proposition 103.

Reiterating the industry’s position that there can be no insurance reform without attacking the costs of doing business here, Ingham said Monday’s move was more a response to the failure of Proposition 104, the industry-backed ballot initiative, than to the passage of 103.

“We would have had to do something, but we were hoping for the cost-containment benefits of 104,” Ingham said. He said that State Farm will lose $400 million on its auto underwriting business in California this year and that those losses could double in 1989 if Proposition 103 takes full effect.

Those figures reflect premiums earned and claims paid but do not include income earned by investing insurance premiums. Insurers have not disclosed their investment income. While critics say the investment income makes the auto insurance business profitable, State Farm said in its state Supreme Court filing that “no rational method of allocating investment income to California would offset the underwriting losses incurred in California. . . .”

As of Oct. 22, State Farm had given $5.2 million to support the industry’s initiatives on the ballot, making it by far the largest contributor as of that date.

Harvey Rosenfield, chairman of the Proposition 103 campaign, said of State Farm’s announcement: “The news there is that they’re staying. But they’re manipulating their (new) customers by referring them to a new company that will charge higher rates, thus allowing them to evade the rollback.”

California accounts for 17% of State Farm’s auto insurance business nationwide. The company collected $1.5 billion in auto premiums in the state last year.

State Farm’s 2,000 agents in California write policies for both subsidiaries, so applicants for new coverage would be routinely handled by the Fire & Casualty unit. Ingham said he expects a big increase in business for the smaller subsidiary, but that the company has no idea how much. He said applicants will have to meet the same standards as those for coverage by State Farm Mutual but must pay 20% higher rates.

Although some smaller players in California’s auto insurance market have suspended writing new policies in the wake of Proposition 103, Gillespie said State Farm is the only major insurer here to take such a step. Two--Allstate and Mercury--initially suspended sales of new policies but then resumed sales after the stay by the Supreme Court.

Allstate and several other major California insurers contacted Monday said State Farm’s action does not change their strategies. They said they continue to write policies as before.

Gillespie said her office will release an auto insurance “availability list” today which will disclose that “very few” companies have stopped writing coverage in the state.

Several other big insurers have subsidiaries, such as State Farm Fire & Casualty, which offer auto insurance at higher rates and could shift coverage to them as State Farm has done. These subsidiaries normally serve those who represent higher risks because of their driving records or the type of car they drive.

While there were no immediate signs that the State Farm strategy would spread, other industry actions can be expected in the absence of Supreme Court action, one analyst said. “The companies are going to do what they have to do to be profitable, and there will be all sorts of machinations until the Supreme Court acts,” said Gerald S. Haims, who follows the insurance industry for Seidler Amdec Securities in Los Angeles.

Gillespie said she has administrative authority to order the company to cease and desist after an investigation. State Farm’s Ingham said the firm’s new handling of auto coverage in the state will remain in effect indefinitely unless state officials block it.

“We think there’s going to be some solution,” Ingham said. “But the solution has to have something to do with the underlying costs” facing the industry.

However, critics said the company’s move will only cause deeper problems for the industry.

“If the insurers continue to frustrate the will of the people, they will jeopardize themselves,” said Bill Zimmerman, chief political consultant for the Proposition 103 campaign. “Already, there are stirrings for action in the Legislature. The longer they frustrate the people on 103, the more they dissipate their strength.”

In a move with no direct parallels to California but reflecting the same deep divisions between the insurance industry and consumers, Allstate said Monday that it would stop doing business in Massachusetts due to losses under the state’s tough insurance laws.

The company said it will not renew its operating license when it expires in June. Allstate becomes the third major auto insurer to abandon Massachusetts, citing the state’s regulatory climate. The other two are Firemen’s Fund and Kemper Group Insurance Cos.

In Massachusetts, state law requires that all companies wishing to sell any form of insurance in the state participate in an open “high-risk” auto insurance pool.

In addition, state law forbids open competition for automobile insurance. Instead, the state insurance commissioner annually calculates a single statewide rate for each category of compulsory and optional insurance.

Massachusetts accounts for about $199 million of Allstate’s premiums annually, or about 2% of the company’s business nationwide.