The Mystery of Prop. 103 Is Why the Voters Bought Such Outrageous Claims

Are you a fan of the tabloids? Do you crave such headlines as “Transsexual Gives Birth to an Alligator” and “Space Aliens Mate With a Mule”? Well, this is your lucky day: Rumor has it that another such revelation soon will read, “Naderites Protect Insurance Consumers.”

Skepticism is wholly appropriate. Having ranted endlessly about the purportedly “obscene” profits earned by California insurance companies, the leftists now feign heartfelt shock at the inevitable (and courageous) decision by Insurance Commissioner Roxanie Gillespie that the requirement for a fair return exempts most companies from the enormous rollbacks and refunds promised so glibly before the election last November.

The real mystery is why anyone would believe that an industry with hundreds of firms and thousands of additional potential competitors consistently could earn “obscene” profits or display “gross” inefficiency. If such profitability were the rule, why are new firms not clamoring to enter the California market? If the industry is so inefficient, why is takeover activity not rampant?

Unsurprisingly, Proposition 103 sponsor Harvey Rosenfield and his allies argue that the industry is both highly inefficient and highly profitable. It is easy to doubt that they actually believe such silliness; their real goal is political power for themselves rather than greater efficiency or benefits for consumers.

Should you question that assertion, merely consider the proposals made by Voter Revolt and its allies for implementation of Proposition 103. Interestingly, these regulatory proposals would enhance the prospects of the Voter Revolt candidate for the new elected post of state insurance commissioner and of Atty. Gen. John K. Van de Kamp in the gubernatorial race--and consumers be damned. In order to see this, it is necessary to recognize that Proposition 103 and the developing system of insurance-rate regulation will favor some consumers--particularly those in high-loss areas--and penalize all others. That is why Proposition 103 was defeated in 50 of 58 counties; seven of the remaining eight are high-loss areas. In the longer term, virtually all consumers will lose, for the following reasons:

Quality will decline and rates will rise. Rosenfield and his allies argue that in setting rates, the costs of an arbitrarily chosen “low-cost” insurer should be used as a standard and other insurers’ costs above that standard be rejected. But no adjustment for higher-quality service is allowed; such higher quality is difficult to measure but certainly is more costly to produce. A Mercedes-Benz is more costly to produce than, say, a Plymouth; this does not mean that the Mercedes is “inefficient.” If the costs of higher quality cannot be recovered, then higher quality will not be supplied. Does the Voter Revolt crowd believe that consumers will be made better off if the options available to them are diminished? Presumably they do not, but people who prefer higher-quality insurance services disproportionately are unlikely to vote for Rosenfield’s preferred candidates.

Even as quality declines for customers of “high-cost” insurers, firms whose costs are lower than the standard will receive, under the Rosenfield approach, no reward for their “efficiency.” Their rates will be held down below those of other firms. Yet should these “efficient” firms allow their costs to rise toward the standard, they will suffer no penalty. Their rates will be allowed to increase. In short, consumers will be whipsawed between declining quality and rising costs.

Moreover, under Proposition 103 regulation, there will be little incentive to scrutinize claims because allowed rates will rise automatically with payouts. Such payouts are a legitimate cost, and the elected commissioner--regardless of who it is--will not be able to scrutinize claims or induce the insurers to subject themselves to bad-faith accusations. Thus, claims and payouts--and rates--will rise inexorably. Under the Rosenfield approach, “consumer savings” are a delusion.

Some consumers will be forced to subsidize other consumers. Voter Revolt argues that it is perfectly acceptable--indeed, that it is almost required constitutionally--for some lines of insurance to lose money as long as other lines make up the difference. This means automatically that some consumers must subsidize others. For several reasons, such a cross-subsidy system is not viable, but the central point here is that it is dishonest for such a scheme to carry a “consumer” label. Gillespie already is struggling to figure out how to subsidize drivers in Los Angeles and San Francisco without penalizing almost everyone else. Unsurprisingly, it is the Voter Revolt constituencies that will win under such rules of the game.

The efficiency of the industry will be reduced. Voter Revolt argues that income from such non-insurance operations as outside investments be counted in the determination of whether an insurance company is earning an adequate return. This means in effect that insurance consumers would be subsidized by other investments made by insurance company shareholders. Does that mean that insurance consumers should bear the losses of such investments gone sour? Whatever the answer, the market will not allow this cross-subsidy to be perpetuated. Other profitable activities will be spun off and the efficiency with which the companies are able to pool risks will be reduced. The upshot: riskier investment in the insurance industry and higher rates.

None of this is news; it is sheer cynicism that enables Rosenfield and his ilk to engage in such dishonesty. And Van de Kamp’s prospects for the governorship actually may be enhanced by his participation in this farce. Is this a great country or what?