Regulating Car Insurers Takes Staff, Money
Anticipation of a better deal on auto insurance has been running high since the California Supreme Court last week upheld most of Proposition 103--the ballot initiative that called for a 20% reduction in insurance premiums.
But the thing to keep in mind about the court’s decision is that it was a blow for stronger regulation--and now the real work begins.
The court said that voters have a right to reduce insurance rates, as long as they don’t violate the insurers’ right to make a “fair and reasonable” profit. And then it handed responsibility for determining what is fair and reasonable to the California Department of Insurance, the state’s regulatory body that will decide if insurers must cut current premiums and will screen all new policies.
Strong regulation is needed. Californians have suffered some of the nation’s highest and fastest-rising insurance rates--14% a year--for most of this decade.
But good regulation is an exacting business, demanding skilled staff and tax expenditures. It is not free. Moreover, if regulation is done carelessly, it can make matters worse.
New York Best Model
So we would do well to know the difference between competence and incompetence. And that means looking not to California, where regulation has been weak, but to New York State’s Insurance Department.
Everybody says New York is the best. Consumer groups admire its regulation because it has held down premiums. While auto rates nationwide have risen 9% a year in the last five years, rates in New York State have risen 3.4%. Yet the insurance industry respects New York as an intelligent regulator, and calls its staff work first-rate. (Illinois and Michigan are also admired for competence, while New Jersey and Massachusetts are mired in problems.)
New Yorkers pay for competence. The State Insurance Department has an annual budget of $46.7 million and employs 790 people, including 45 actuaries, the mathematicians of insurance who calculate risks and set premiums. Not every state employs actuaries, high-priced specialists who are able to command $100,000 a year in industry. New York’s actuaries are often retirees who work for less.
“It is important to have them,” explains Wayne Carter, the New York department’s research director, “because insurers use actuarial assumptions in setting rates and you are at a disadvantage in evaluating them if you don’t have the expertise.”
New York also successfully administers a no-fault insurance law--the system in which each driver’s insurer pays his or her expenses after an accident, and lawsuits are barred except in case of serious injury. The key to no-fault is defining serious injury. Many states do it in money terms--allowing lawsuits if hospital expenses are above a certain amount. But that only sets up targets for plaintiffs and lawyers, say New York regulators, so the state defines injuries specifically, and limits lawsuits to those involving at least loss of limb or disfigurement.
Need Staff, Decisions
New Jersey and Massachusetts didn’t limit lawsuits and as a result have the highest auto rates in the nation, along with California and Alaska, a special case.
The point is that good regulation takes knowledgeable staff and hard decisions. But ominously for the high hopes of California drivers, the state’s insurance department is widely regarded as less than competent--even in the minimal regulation it has had to do until now.
Ominously, too, discussions about implementing Prop. 103 have so far centered on the political office of insurance commissioner--currently held by Roxani Gillespie. But Gillespie, or even her office, cannot ensure good regulation. Only competent staff can do that.
And California’s record is not impressive, even though it has had the resources. The insurance department’s annual budget is $35.3 million and it employs 515 people. It has 12 actuaries but no experience in rate setting, the most challenging task handed it by Prop. 103.
Insurance accounting is especially complex, and the industry is sure to hit California with a blizzard of figures. Auto policies nationwide, according to the industry, produce a profit of only 2 cents on the premium dollar, reflecting a loss of 8 cents on liability coverage but a profit on 12 cents on collision and comprehensive. And California does worse, says the industry, with 8.6 cents lost on liability and only 8 cents profit on collision.
The results look meager, unless one knows how the industry allocates expenses, and understands also that insurers make their real money by investing the premiums during the time they’re held in reserve against claims. Meanwhile, the insurance industry thinks it might even come out of Prop. 103 with higher profits.
To be sure, Prop. 103 has corrected some insurance injustices, such as the geographic anomaly cited by author Andrew Tobias in his 1982 book, “The Invisible Bankers.” Why should insurance premiums be much higher in a big city than in its suburbs, asked Tobias, even though many cars on city streets are driven in from the suburbs?
The premiums shouldn’t be higher, said Prop. 103, and replaced geography with sensible criteria, such as driving records and experience.
So the law is clear, and valid. But from here, the necessary work of regulation will take skill and money--as in tax expenditures to hire strong staff. Good regulation is not free. But then, weak regulation can be expensive too--as it has been in California where, for some reason, the largest market paid some of the highest and fastest-rising insurance costs.
