Give Consumers at Least Half a Loaf : Despite the Confusion, Insurance Commissioner Can Do More

Last week Insurance Commissioner Roxani Gillespie threw another curve into the auto insurance ballgame. The commissioner divided her review of the insurance-rate rollbacks, mandated under Proposition 103, into three separate groups.

Only 13 companies will have their rates reviewed in upcoming hearings. For 219 companies, including the three largest writers of automobile insurance in California, Gillespie created a special “slow track.” Hearings for these companies, she declared, could take as long as 10 years and probably would not result in any decrease in automobile insurance rates. The third group, the state’s smallest insurers, will not have to decrease rates.

This far-reaching pronouncement was made without explanation. Gillespie did not show any analysis of the profits or losses of the insurance companies, nor did she explain what criteria led to her conclusion.

Rather, the commissioner declared that the only way to get lower automobile insurance rates is to change to a no-fault system.

But no-fault is a separate issue--unrelated to the current debate of how to implement Proposition 103. And to implement the initiative, Gillespie faces several hurdles. The state Supreme Court’s decision upholding the constitutionality of Proposition 103 nevertheless makes the measure’s promise of immediate and substantial rate cuts for all consumers impossible. By ruling that insurance companies have a right to a “reasonable rate of return,” the court’s decision will allow insurers higher rates than the initiative promised. At best, only some consumers will pay lower rates.

Gillespie is the bearer of this bad news but her hands are tied by the Supreme Court decision. Still, she can give consumers half a loaf. Unlike last week’s pro- nouncements, the commissioner should release preliminary calculations showing which firms can decrease rates and receive a reasonable rate of return.

Unfortunately, the first scheduled rate hearings are off to a shaky start. The commissioner received several proposals for standardized rules for regulating the insurance industry and determining whether rates and practices are fair. She rejected all of them. Thus, there aren’t any standards for such critical issues as efficiency, allowable expenses or reasonable rate of return.

The result is that the structure and content of each rollback hearing depends on the participants--the hearing officer, consumer intervenors, the insurance company lawyers and the Insurance Department’s staff. At best, the process is cumbersome and time-consuming. At worst it degenerates into a four-ring circus.

The insurance industry’s response to the confusion is to produce mountains of briefs and papers filled with outrageous interpretations of Proposition 103 and California’s insurance law. The proponents of Proposition 103, both Voter Revolt and its new partner, State Board of Equalization member Conway Collis, seem to know only one tune. Whenever possible they claim that the commissioner is the villain. This creates a political climate with little room for constructive public-policy debate.

A reasonable regulatory system will only be established with meaningful public participation. Proposition 103 gives the commissioner broad powers to adopt regulations. The initiative provides the outline to shape her actions. The first part of the permanent regulatory system is being shaped in the debate over how the territorial rating system should be changed.

Territorial rating utilizes a consumer’s postal zip code as the primary factor in determining auto insurance rates. Proposition 103 changed this, adopting driving record, number of years of driving experience and number of miles driven as the key factors in determining rates. Other factors may be added if they prove to be related to losses.

The companies focused their campaign on this provision of Proposition 103. They ran advertisements and sent mailers claiming that the initiative would eliminate territorial rating. They argued that suburban and rural rates would rise to subsidize decreases in urban areas. Now, the companies have adopted a twisted analysis to claim that territorial rating is left intact under Proposition 103.

Gillespie has not dismissed this ridiculous argument and a final decision about territorial rating has not been made.

The companies may sue if they don’t get their way. The proponents of Proposition 103 are responding with their vitriolic rhetoric. They, too, may sue.

In this arena the commissioner is not constrained by the Supreme Court decision. After a careful analysis of Proposition 103’s new rating criteria, she should adopt regulations that preserve the intent of the initiative: to make driving records a primary factor in calculating rates. The regulations can also assure that no consumer suffers a dramatic increase in rates.

By ordering rollbacks wherever possible, issuing standard regulations and implementing the new rating system, Gillespie can prove that she is an able regulator. She must be willing to fight, even if it means meeting the insurance industry’s lawyers or Proposition 103’s proponents in court. If the commissioner succeeds, she will deliver the remaining promises of Proposition 103 to California consumers.