Quit California? Don’t Bet on It : Insurers Said the Same to Florida Rollback, but They Stayed

Several dozen insurance companies have threatened to withdraw from California because of the passage of Proposition 103, which rolls back all auto, homeowner and business insurance rates by 20%.

They would like Californians to believe that insurers cannot afford to do business in the state if they must reduce their rates, and that auto insurance will become unavailable unless the Legislature amends Proposition 103 or the courts nullify it.

Yet, judging by how companies acted when Florida rolled back insurance rates in the spring of 1986, there will be no shortage of insurance in post-103 California.

Immediately after the Florida rollback bill passed, several insurers did make good on their threats to leave the state. Within a few months, however, all but one were back in the market. Today, more than a year after the Florida Supreme Court substantially rejected the insurance industry’s challenge to the rollback’s constitutionality, those companies are still there--and they’re still making money.

Any insurers leaving California are even more likely to return than were those that temporarily left Florida. A large insurance market, Florida ranks fifth in the nation with 5% of all U.S. premiums. California, the nation’s largest market, accounted for $28.7 billion, or 14%, of the $199.5 billion in property/casualty-insurance premiums written nationwide in 1987. Most insurers simply will not walk away from a market of this size. Moreover, insurance executives have rated California the “most desirable” insurance market for each of the last 10 years, according to annual surveys by the Wall Street firm of Conning & Co. (Florida was 32nd before the rollback, 43rd after.) The post-Proposition 103 California insurance market should remain sufficiently desirable--that is, profitable--to enable any efficient insurance company to make money in the state.

In addition, if two or more insurance companies “boycott” the market--that is, agree to withdraw from California--under federal law they are subject to a million-dollar fine and three-year jail terms for their officers. This should prevent insurance companies from collectively making good on any threats.

Even if some insurers were to withdraw from the state, however, insurance should remain readily available under Proposition 103. Although a few dozen companies have threatened to leave, more than 600 companies currently serving the state have made no such threats. They should be quite willing to serve any market ceded by any company that withdraws.

Many of those making the threats are inefficient, high-priced companies that would not be missed even if they were to leave California. For example, Fireman’s Fund, one of the most vocal of those threatening to withdraw, is also one of the most inefficient companies in an inefficient industry: In 1987--according to Best’s, a private data-collection service for the insurance industry--Fireman’s Fund spent 51.9 cents of each auto-insurance premium dollar that it collected not to pay claims but to pay executives’ salaries, agents’ commissions and other expenses.

The average auto-insurance company spends about 35 cents on expenses while the average public utility spends only about 5 cents. If Fireman’s Fund were as efficient as a utility, it could reduce its rates by 49% and make the same profit that it is making today. If the average auto insurer were as efficient as a utility, it could lower its rates by 32% and remain as profitable. (The insurance industry’s exemption from the antitrust laws--the laws prohibiting price-fixing and other collusive and anticompetitive activities--protects inefficient insurance companies. By repealing that exemption, Proposition 103 forces insurers to compete on price and thus to reduce their costs if they want to survive.)

Proposition 103 also increases the supply of insurance by allowing banks into the insurance business. Banks are no more altruistic than insurance companies, but they are more efficient: In the three states permitting savings banks to sell life insurance, for example, they sell it for 30% less than insurance companies do. Under Proposition 103, banks may well provide some insurance that the less efficient insurers are today providing--and at a lower price.

Finally, consider the worst possible case--all insurance companies withdrawing from California. The state would then be forced to write insurance itself, which insurers claim would be disastrous. Yet many states already write workers’ compensation insurance, and they do so quite successfully. Because even the government can be more efficient than the insurance industry, exclusive state funds can charge substantially lower rates than do private insurers. Even under a state automobile-insurance fund, therefore, insurance would be readily available, and it would be less expensive than in the pre-Proposition 103 environment of no rate regulation and no antitrust enforcement.

Despite the insurance industry’s threats and rhetoric, Californians will continue to be able to obtain insurance under Proposition 103 no matter what insurance companies do. The industry’s current campaign to panic the Legislature, the courts and the public should therefore meet with no more success than did its $70-million campaign to defeat Proposition 103.