Insurer Backs Move in Congress for U.S. to Preempt Regulations

State Farm, the largest seller of both auto and homeowner insurance in California, is supporting action in Congress to preempt enforcement in California and all other states of both rate regulation and restrictions on pricing auto insurance according to where policyholders live.

Such action for federal preemption of traditional state prerogatives over the insurance industry would gut two of the main provisions of California’s Proposition 103 and sharply reduce regulation in such states as New York, Michigan, Massachusetts, Pennsylvania and New Jersey, all of which have elaborate regulation.

Although company officials said they have been in favor of federal preemption for some time, State Farm representatives appearing in numerous public hearings of the California Insurance Department since Proposition 103 was passed in November have said nothing of such a position.

State Farm’s call for federal preemption became clear this week after company attorneys were asked to elaborate on general conversations held at company headquarters here last week with State Farm Chairman and President Edward B. Rust Jr. and Executive Vice President Vincent J. Trosino. Most of the clarifications came from State Farm general counsel Pete Ingham, who sat in on the original conversations last Thursday.

Rust and Trosino had talked in general terms of pushing for federal assumption of some state responsibilities over auto insurance, and had expressed resistance to spreading state regulation, which they asserted would only harm consumer as well as company interests.

Ingham this week described in specific terms State Farm’s call for the federal preemptions, which would reverse a 40-year-old federal policy of leaving insurance regulation to the states. He emphasized that State Farm does not want the federal government to set rates nationally, that it simply wants the states prohibited from setting rates individually.

Provisions in Proposition 103 that have been upheld by the state Supreme Court established a comprehensive system of rate regulation in California for the first time. The provisions require approval by the insurance commissioner of not only auto insurance rates, but the rates of most other lines of property and casualty insurance, including homeowner and commercial.

Many other states also regulate rates, including New York, which with a combination of no-fault auto insurance and rate regulation is frequently cited even by insurers as having a model system.

Proposition 103 also has mandated California’s first restrictions on neighborhood pricing, known in the industry as the territorial rating system, although it is uncertain how the language in the measure will be interpreted and applied by the state Insurance Department.

According to Proposition 103, a driver’s record, the number of miles driven and the years of driving experience are supposed to be more important as rating factors than where the driver lives.

If State Farm were to get its way with Congress and the federal government were to preempt these areas of insurance law, it would in effect repeal these key regulatory provisions adopted last year by the California electorate.

In the conversations here, Trosino in particular expressed the view that implementing Proposition 103 would bring about a “monumental change” in State Farm’s pricing, and company rate programmers who were interviewed said it would cost the company millions of dollars and take three to four months just to make necessary computer changes.

“Proposition 103 means basing auto insurance on the driver, not the car as is presently the case,” Trosino said. “We could do it, but there would be many problems.”

Gathering of Data

He and Rust said insurers would have to obtain extensive new information on how many cars a person drives, how much he drives, how safely he drives and so forth. Reliable information would be extremely hard to obtain, they said. They suggested that there would be little likelihood that policyholders would like the new system any better than the old.

The two executives said that State Farm recently had prepared, at a cost of several million dollars, a new pricing plan for its policyholders in Ontario Province in Canada, only to be told at the last moment by regulators who had ordered the new plan not to implement it. They said the regulators had realized that, despite all their efforts and instructions, the plan would mean higher rates.

Ingham said State Farm believes that leaving companies free to set whatever rates they desire will enhance competition and serve consumer interests best in the long run. He said State Farm wants state insurance regulators to be left free by the federal government to concentrate on checking insurer solvency and market conduct.

These were other highlights of the conversations:

- The officials exhibited little enthusiasm for a suggestion by Allstate executives last Wednesday that a new no-fault auto insurance initiative might be put on the 1990 ballot if the California Legislature does not act this year to mandate such a system. The State Farm executives, however, did not completely rule out participating in such a campaign.

- State Farm, Trosino said, has been reluctant to suggest insurance system reforms on its own in California “because we don’t want to promise anything that, two or three years on, we won’t be able to deliver.”

- Rust said State Farm has never favored compulsory auto insurance laws such as California’s, and Trosino says the company fully understands why poor people faced with a choice between buying food and buying auto insurance would choose food. He expressed “sympathy” with the plight of such people under California’s mandatory insurance law, but asserted that it is not feasible to do anything about the neighborhood pricing system under which the urban poor often pay the highest rates.

- Competition has forced State Farm to narrow its neighborhood pricing zones in California. Originally, the company had only a few such basic pricing territories: Los Angeles, San Francisco, the suburbs around them and then the rest of the state. Theoretically, the officials said, fewer zones might be more desirable.

- Trosino said that the anger among California consumers that resulted in the passage of Proposition 103 was, according to industry polls, centered even more among middle classes than among the poor.