Prop. 103 Can Be a Boon for Insurers and Insured

Out of the turbulent and confusing debate in California over the past 18 months on rising insurance rates, one thing has become clear: The public is demanding change. There can be no more “business as usual”--not for legislators, not for attorneys and certainly not for insurance companies.

As the dust of battle settles after passage of Proposition 103, and the cries of victory--from all sides--subside, some key questions remain. Have we gotten to the root of the problem? Will the cost of insurance in California actually stabilize with no further action?

Let me focus on a few things recent rhetoric would suggest no chief executive of the largest California-based auto and homeowners insurance group would say:

-- The California Supreme Court decision on Proposition 103 is a fair one. The court upheld most of Proposition 103, thus implementing a variety of new regulatory measures that the insurance industry traditionally opposes. But the court also ruled, as one might expect in this country, that insurers, like any other industry, have the right to make a fair profit.

A fair rate of return assures that insurance will remain widely available. New, more stringent regulations are subject to the fair-rate-of return standard, ensuring that these regulations will be responsive to the needs of both consumers and insurers. This, in turn, assures that rates will remain competitive, which is the goal of both insurance companies and the insurance-buying public.

-- The interests of consumers and insurance companies are the same. Consumers want the best possible coverage at the lowest possible cost, and this is what insurance companies want to provide. That is how our competitive marketplace works.

Think about it. Do insurance companies actually want to raise prices? Do insurers believe that this makes customers happy? Hardly. As with any business, the less satisfied the buyer, the less favorable the market is for the seller.

At Farmers, we’ve held the average statewide increase in our auto insurance rates to 3.9% in the last two years. But we are faced with continuing increases in medical costs, lawsuits, auto repair, theft and fraud, as well as operating expenses. As these costs increase, so will rates.

This is why our industry over the years has been in the forefront of efforts to improve highway safety, to build safer cars, to get drunk drivers off the road and to hold down the costs of auto repair and fraud, among other things.

-- Proposition 103, as interpreted by the court, may be good for insurance companies as well as for consumers. There is a common misconception advanced by the supporters of Proposition 103 that financial records of insurance companies are somehow closed to public view. The fact is that our books have always been open. Detailed financial reports are filed each year by Farmers and all other companies with the Department of Insurance. These reports are updated quarterly and are available for public inspection.

To the extent that greater public awareness is now focused on these public reports, the myth of “secret books” will be dispelled. From this will develop a clearer focus on the real costs of providing auto insurance.

-- Consumers and insurers can control the costs of auto insurance. We now have a window of opportunity to make the California market a healthy one for customers and insurers. In partnership, insurers, consumers, legislators and regulators can pool their talents to keep insurance costs under more effective control.

This process has already begun. The consumer-sponsored no-fault bill introduced by Assemblyman Patrick Johnston (D-Stockton) is a good step toward reducing unnecessary litigation and speeding payments to accident victims. We support efforts by groups such as Consumers Union to advance no-fault discussions in Sacramento.

And we strongly support efforts to develop a more affordable policy for low-income drivers. This issue has brought insurers together with groups such as the Latino Issues Forum, the Urban League and Public Advocates to work toward creating a workable plan for those who truly cannot afford to purchase insurance now.

Another quite promising yet simple concept will allow consumers to choose between a no-fault policy or the traditional tort policy.

The value of the “freedom of choice” concept is that it gives the consumer options for personal control of what he or she spends for auto insurance. And, if one thing is clear from the initiative battle, consumers want more control. They want o be able to choose their coverages and their prices.

Thus the choice plan, sponsored by Sens. Ed Davis (R-Valencia) and Quentin L. Kopp (I-San Francisco), clearly deserves serious consideration.

--Insurance should be affordable and available to everyone. This is the stated objective of Proposition 103 and it is one in which we believe and will cooperate with all parties to achieve. Unfortunately, Proposition 103 did nothing to reduce the real costs of providing auto insurance. And, as the Supreme Court has ruled, simply mandating a 20% rollback, whether for insurance, groceries or any other product, in no way addresses underlying costs to produce and service that product.

We believe as strongly as our customers that the time for rate relief is now. But this relief must come through reductions in the costs of paying claims and doing business.

We now must get to the business of forming new partnerships with others to reach solutions that will best serve the interests of the insurance-buying public. Best serving the public’s interests also best serves the interests of insurers.

This is the real challenge that lies before us--working together. Insurers, consumer groups and other interested parties must seize this special opportunity to reduce the true costs of auto insurance and thereby make it more available and affordable for everyone.