12% to 15% Insurance Profits OK, Nader Says

To the surprise and cheer of insurance industry representatives, consumer advocate Ralph Nader said Sunday that under the terms of Proposition 103, as rewritten by the California Supreme Court, companies might be entitled to a 12% to 15% annual profit.

Under May’s high court decision, Insurance Commissioner Roxani Gillespie is supposed to assure that the companies receive a “fair and reasonable rate of return” when she decides on exemptions from Proposition 103-mandated rollbacks and approves proposed new rates submitted by the companies.

Examination of Books Urged

Nader cautioned that, before the bottom line is calculated, there has to be careful examination of each company’s books by Gillespie to determine whether it is holding excess money in reserve and whether its stated costs are reasonable. But his endorsement of the 12% to 15% profit heartened insurers attending the annual convention of the Independent Insurance Agents and Brokers of California and appeared to cause some discomfort to Proposition 103 author Harvey Rosenfield.

Nader, Rosenfield and a number of insurance industry representatives were appearing in a lengthy debate that marked the opening session of the convention at the Hotel del Coronado.

Much of what was said had been heard many times before, but Nader’s use of specific figures to describe a permissible insurance company profit went beyond what even Gillespie has been willing to do. She has steadfastly avoided citing any numbers as a reasonable profit.

At a news conference that followed the debate, Robert Vagley, president of the American Insurance Assn., said that 12% to 15% would be “a far more generous rate of return than the industry has seen in California” and that if Gillespie should adhere to such a standard, “it would put upward pressure on rates.”

Rosenfield, asked if he agreed with Nader, said, “I think it’s a mistake to focus on a number.” In setting rates of return, he said, regulators should distinguish between efficient insurance companies and the “typical slothful, wasteful” ones.

It was one of the few times in the long, contentious debate over insurance issues in California that Rosenfield had taken even mild exception to anything Nader has said.

Responding to Vagley’s prediction of upward pressure on rates, Nader said he is convinced that the recent insurance price spiral in California will come to an end even under Gillespie, whom he has criticized as too pro-industry and urged to resign.

When rate regulation begins, Nader said, “there’s no way rates are going to be as high as they would have been without regulation.”

Industry representatives, however, suggested that the costs of regulation by themselves may contribute to higher prices.

Nader Paid $10,000

Jerry O’Kane, executive director of the agents and brokers association, said Nader was paid $10,000 to appear at the convention while Rosenfield and J. Robert Hunter, president of the National Insurance Consumer Organization, were each paid $2,500. Four industry representatives in the debate appeared without charge, he said.

In welcoming remarks to the 1,550 delegates, Sen. Pete Wilson (R-Calif.), who plans to be a candidate for governor next year, said a New York-style no-fault insurance plan “is something that might be looked at in California.”

Under the New York system, lawsuits are sharply curtailed, motorists collect most of their losses from their own insurance companies and there is strict rate regulation. Benefits are quite generous, but the plan has succeeded for the most part in keeping price increases down in New York.

Wilson said that, as a lawyer, he believes “the legal profession is very costly to the consumers of this nation” and cutting their role in the system would save everyone money.

Later, Tom Conneely, president of the Assn. of California Insurance Companies, said most estimates are that installation of a New York-style no-fault in California would result in only a 0% to 4% immediate decrease in prices. Its main advantage, he said, would be to stem future price increases.