7 Insurance Firms Told to Return $305 Million : Commissioner’s Tentative Order Applies Mainly to Non-Automobile Policies; Appeals Possible
Insurance Commissioner Roxani Gillespie Tuesday tentatively ordered seven leading insurance sellers to give $305.3 million in rate rollbacks to their California policyholders.
Beginning the long process of compelling companies to roll back premiums in accord with Proposition 103, Gillespie’s biggest rollback orders, for the most part, applied to homeowner and earthquake, not automobile, policies.
Finding earthquake insurance rates excessive, she ordered rollbacks as large as 92% in those premiums. The homeowners rollback orders ranged up to 9% and most of the auto insurance rollbacks were relatively minuscule, although one company, USAA, was ordered to roll back its auto premiums 16%.
‘Fair Rate of Return’
Proposition 103 originally called for uniform rollbacks of 20% from 1987 levels for most lines of property and casualty insurance. But the state Supreme Court ruled in May that the rollbacks had to be adjusted by the insurance commissioner to assure the companies a “fair rate of return.”
In most of these initial decisions, Gillespie ordered rollbacks well under 20% and in some lines no rollbacks at all, although in a few she ordered rollbacks well in excess of the 20% standard.
The rollback figures she released Tuesday are also keyed to present prices, not to the often much lower 1987 prices Proposition 103 said should be used as the base from which the cuts would be figured.
Each of the orders can be contested by the individual companies at a series of hearings that will begin in September, and final rollback orders can be appealed by the companies to the courts. So it could be months or even years before refund checks are in the mail.
The seven companies subject to the initial orders Tuesday are Allstate, ordered to roll back premiums by an overall $85.7 million (6%); State Farm Fire & Casualty, by $83 million (7.9%); USAA, by $56.7 million (17.3%); California State Automobile Assn., by $44.8 million (4%); Safeco, by $19.5 million (7.9%); 20th Century, by $14 million (2.4%) and Progressive Casualty, by $1.6 million (1%).
The State Farm company listed is not the main State Farm Mutual company, the largest seller of auto and homeowners insurance in California. That larger company, and hundreds of others, will be subject to rollback orders in coming weeks.
In a series of significant statements that gave the first solid indication of Gillespie’s approach to rollback and other impending rate decisions, the commissioner:
- Declared that she is setting the “fair rate of return” standard at an annual 11.2%. This, she said, was the average rate of return for all U.S. property casualty insurers during the years 1973 through 1987. By comparison, she estimated that the insurers have recently been realizing about a 15% annual rate of return in California.
- Said she had found most of 4,000 separate insurer filings for exemptions from Proposition 103-mandated rollbacks “very much biased in favor of the insurance companies.” Having determined that she could not rely on them, she said, she based her first rollback orders on figures developed through examinations of 1988 company records conducted by her staff.
- Concluded, based on industry profitability figures for 1987 compiled by the National Assn. of Insurance Commissioners, that California insurance sellers had earned a 29.2%, or $150 million, return on homeowners policies that year, while losing 7.5%, or $227 million, on automobile insurance. She said this indicates that homeowner policies are subsidizing auto policies in California, although the subsidy is not enough. Other lucrative lines of insurance offset the shortfall.
- Said she hopes, over a period of several years, to make each line of insurance in the state self-sustaining, with the insurers earning close to the 11.2% rate of return, but that this could not be done in automobile insurance without legal reforms that would reduce costly litigation. Proposition 103 is bringing to the surface much information about insurance pricing that the Legislature will not be able to ignore, she said.
- Vowed that, in making rollback decisions, she will not award any company a higher rate than it is charging now.
Gillespie’s tentative rollback orders and her statements Tuesday drew a frosty reaction from insurance firm spokesmen who insisted that the commissioner was being too hard on the companies.
Reaction Is Mixed
Reaction from consumer groups was mixed, with some compliments from representatives of the Consumers Union and the Insurance Consumer Action Network on grounds that Gillespie has toughened her attitude toward the companies, and strong criticism from Proposition 103 chairman Harvey Rosenfield and his favored candidate for insurance commissioner, Conway H. Collis, who both said she was not nearly tough enough.
State Farm Fire & Casualty promptly said it will resist giving any rollbacks. “We feel our rates are fully justified and we’ll be able to demonstrate that at the hearing,” said Judith Mintel, a company lawyer and rate expert.
“Our reaction is one of disappointment,” said Rick Dinon, a spokesman for 20th Century. He said his company has always sought to be an efficient, low-cost provider and does not think rollbacks of its premiums would be justified.
Bob Murphy, a spokesman for Allstate, said Gillespie’s orders represent only the start of a long process and that his company is convinced that hearing officers will uphold Allstate’s present rates.
On the consumer side, Rosenfield called the commissioner’s pronouncements “all bogus” and insisted that Gillespie was, in fact, accepting most of the “phony” financial figures submitted by the companies.
‘Not Justified’
Collis said, “The ordering of such minimal rollbacks is not justified by either the facts or the law. . . . She has placed the burden on consumer representatives to fight in the hearings for greater rollbacks. . . . She has prejudged the process in favor of insurers. The insurers may act unhappy, but, in fact, they must be ecstatic.”
But Judith Bell of the Consumers Union gave credit to Gillespie for “stepping out front and taking on some of the larger companies,” and Steven Miller of the Insurance Consumer Action Network said he found “a lot of promise” for consumers in what the commissioner had done.
Bell cautioned, however, that in setting “a fairly low rate of return” standard for the companies, Gillespie may have paradoxically ushered in a new, protracted period of insurer litigation, thus delaying refund checks indefinitely.
Miller, for his part, expressed concern that in setting one standard for fair return Gillespie might be favoring less efficient companies while penalizing the more efficient. He noted, for example, that she had directed a 17.3% overall rollback for one of the most efficient companies, USAA, while ordering only a 1% rollback for Progressive Casualty, which he said is viewed as a less efficient one.
Huge Profits Cited
One sidelight of interest in Gillespie’s statements Tuesday related to earthquake insurance, where she ordered the largest rollbacks.
The commissioner noted that federal tax laws prohibit companies from reserving premiums against the possibly distant time of a damaging earthquake. So there are huge profits being made in this line of insurance.
But, she also noted, since the reserves are held down, it is unlikely that many companies would have the wherewithal at the time to cope with paying for the damages caused by a truly major quake.
TENTATIVE ROLLBACK ORDERS
The following figures represent the state Department of Insurance’s assessment of what rate rollbacks for individual insurance companies should be under Prop. 103. Figures focus on four primary areas of coverage. Percentage figures indicate the percentage of premiums that would be returned based on present prices. Money figures in millions of dollars. The figures are subject to being contested by the companies in hearings that will begin in September. Final orders could be appealed to the courts.
COMPANY AUTO HOMEOWNERS QUAKE FIRE Allstate 4.3% 6.9% 42.3% 3.1% or $40.6 or $22.6 or $14.6 or $0.5 Cal. State 3.6% 4.3% 45.8% N/A Auto. Assn. or $36.6 or $3.3 or $3.9 Progressive 1% N/A N/A N/A Casualty or $1.3 Safeco 5.7% 8.9% 56% 6.5% or $6 or $5.4 or $4.6 or $0.7 State Farm N/A 9% 35.3% 9% Fire and or $40 or $14.1 or $0.3 Casualty 20th Century 2.2% 4.5% 26.6% N/A or $11.4 or $1.4 or $1.2 United 16% N/A* 92.7% 51.7% Services or $39.1 or $10.2 or $2.1 Auto. Assn.
N/A: Figures not available or coverage not offered * USAA has already voluntarily agreed to give 20% rollback in homeowners insurance Source: California Department of Insurance
