Furor Erupts Over Claim by Insurance Companies

A furor erupted Wednesday over a bill adopted last year by the Legislature and signed by Gov. George Deukmejian that some insurance industry lawyers are saying should be construed as allowing the companies a rate of return on auto insurance twice the 11.2% standard set by Insurance Commissioner Roxani Gillespie.

The insurers are making that argument in filings with Gillespie’s office seeking to justify their current rates.

But if Gillespie agrees with the industry arguments, a Consumers Union official contended, she will authorize huge increases in auto premiums when she gains the authority to approve future rates beginning Nov. 8.

Assemblyman Tom Bane (D-Van Nuys), the author of the legislation, insisted in interviews Wednesday that he did not realize that his bill would be interpreted in that fashion and he said he will seek next week to revive a bill that he says will clarify the original legislation’s intent.

However, just the day before, on Tuesday, Bane had agreed to put his clarification bill over until next year. Wednesday, he charged that he had been misled by “those stinking little so and sos” in the Assn. of California Insurance Companies, the state’s leading insurance lobby, into believing that it was safe to wait that long.

Ed Levy, an official of the association, responded that his lobbying group does oppose the Bane clarification. He said it is satisfied with the 1988 bill’s language as an expression of state policy. But he said of Bane’s claim about being misled, “I didn’t mislead him. You’re darn right I didn’t.”

Bane’s 1988 bill was described at the time as an excess profits bill to force companies to rebate premiums to customers if the insurers realized an underwriting profit of more than 5%. (Underwriting profit is the difference between total premiums collected and all company expenses, including claims paid.) Underwriting profits seldom reach the 5% level in the California auto insurance business. Most of the companies’ income is derived instead from interest on investments made with the premiums collected. Bane’s bill did not mention investment income.

But the bill contained a provision stating: “The Legislature has determined that the prima facie reasonable rate of return for underwriting of private passenger automobile insurance is an after-tax profit of 5% of earned premium.” That language was amended into the bill by Bane in the last days of the legislative session.

In a recent rate filing with Gillespie, attorneys for the Allstate company contended that this language sets state policy and “translates into returns on equity for Allstate of 27.8% for auto liability and 18.4% for auto physical damage.”

This would average out to at least twice the 11.2% standard Gillespie has enunciated in recent news conferences as constituting the “fair rate of return” the state Supreme Court told her in May should be applied to premiums under Proposition 103.

An Allstate spokesman said Wednesday that actually the company lawyers were not arguing for a rate of return as high as 27.8% and were merely reminding Gillespie that this was the figure determined as fair by state authorities.

The spokesman said Allstate had noted in its filings that the commissioner might set an overall rate of return for auto insurance as low as 19%.

This would still, however, be higher than what the insurers are getting now, and morethan 70% higher than Gillespie’s 11.2% standard. A Consumers Union official, Judith Bell, said Wednesday that her organization has heard other companies’ lawyers are picking up the Allstate argument.

Deputy Insurance Commissioner Ray Bacon said, meanwhile, that he had discussed the matter with Bane and that the assemblyman “didn’t realize this was in his bill. He forgot to include investment income.”

Bane said he indeed had been unaware what his bill would do, and Wednesday afternoon asked state Sen. Alan Robbins (D-Van Nuys) to put his clarification bill back on his committee calendar for next week.

Rosenfield’s Demand

Meanwhile, in another development in the insurance issue, Harvey Rosenfield, head of Voter Revolt and author of Proposition 103, demanded, in the wake of Gillespie’s statements Tuesday that hundreds of insurance companies are likely to be exempted from rate rollbacks, that Deukmejian either fire Gillespie or explain why he continues to support her.

Deukmejian’s press secretary, Kevin Brett, responded:

“Who’s Harvey Rosenfield? We haven’t heard of him. The last time we checked he was not a member of the governor’s senior staff. If he thinks the governor is going to take his advice, he’s dreaming.”