Rescuing the ‘Revolt Without a Rebate’

The crisis slowly but surely engulfing Proposition 103 is not only the failure to deliver the promised 20% insurance-rate rollbacks. As importantly, it is the shadow that the measure has thrown over the California initiative process itself.

The primary reason for grave concern is the recent behavior of Insurance Commissioner Roxani Gillespie. She has exempted the largest insurers from rate rollbacks without holding credible public hearings, has advised motorists not to expect car insurance reductions and has suggested that her proposed 11.2% “fair rate of return,” which is based on the industry’s own stated 1973-87 profits, may be too low.

The question is, how could this farce be happening if the avowed purpose of Proposition 103 was to achieve rollbacks and reform?

Let us be clear that Proposition 103 addressed a real problem--soaring rates and industry arrogance. The industry is ripe for a needed dose of regulation. But the sponsors of Proposition 103 unexplainably left too much short-run discretionary power in the hands of Gillespie and her ultimate boss, Gov. George Deukmejian, both of whom opposed the measure. Thus, it is up to Gillespie to decide whether to call public hearings, whether profits are unreasonable and whether rollbacks are even required. If ever there was a case of assigning the fox to protect the chicken coop, this was it.

Moreover, even though pro-business justices control the state’s highest court, Proposition 103’s sponsors thought that they could radically rewrite the laws of profit with the stroke of a reformer’s pen. They demanded 20% rollbacks from every company, disregarding differences between efficient and inefficient firms, unless a company could prove that it would become “insolvent.” Such reasoning assumed either that all companies were making super profits in the 30%-plus range (in which case they could afford a heavy rate cut), or that they would willingly remain in business when their profit margins were lowered to just above insolvency.

The California Supreme Court, in upholding Proposition 103, predictably threw out the insolvency test, replacing it with the “fair and reasonable rate of return” standard that has applied to property law, including rent control, for decades.

That colossal but sincere misjudgment by Proposition 103’s sponsors, and the predictable intransigence of the Deukmejian Administration, leave an ever-deepening insurance crisis. As Walter Zelman, executive director of California Common Cause, puts it, “the government process itself may soon become an object of public scorn and ridicule.”

Here is the vicious circle at work: Reformers tap into public frustrations with an unresolved crisis, then they draft initiatives promising insurance rollbacks, clean water or a tobacco tax, to cite three recent examples. The governor thwarts or fails to implement the new law, and it winds up in court for years. Lesson: Passing initiatives is an imperfect strategy in the absence of a governor who will abide by them.

Proposition 103 suggests an escape from this impasse by the direct election of an insurance commissioner next year. With public anger rising, a credible consumer advocate no doubt could be elected. But an elected commissioner still has to grant 20% rollbacks within the difficult framework of also ensuring fair profits. The outcome is likely to be a gradual limit on the speed of rate increases--as with rents and utility rates--rather than actual refunds.

Moreover, Proposition 103 does not prohibit the insurance industry, the trial lawyers or other special-interest groups from making campaign contributions to candidates for commissioner. Nor does it affect the sedentary bureaucracy now at the Department of Insurance. Therefore, the politics of the insurance commissioner’s office will eventually be dominated more by voices of the status quo than by independent consumer advocates.

The authors of Proposition 103 are not without a plan, however. Having overcome industry opposition with the sweet promise to the voters of 20% rollbacks, they intend a next phase of demanding that the new system work and, if that fails, returning someday to the ballot with a proposal for a state-run insurance company.

Whether or not that is desirable or a pipe-dream, Proposition 103 simply cannot continue to be litigated while voters stay frustrated.

Gillespie should resign so that she may pursue her anti-103 views as a candidate rather than sullying what should be a nonpartisan objective process. The governor should appoint an interim nonpolitical commissioner with a mandate of beginning public hearings on rates that would include meaningful participation by legitimate and knowledgeable consumer advocates.

Also, all announced candidates for the office of commissioner should explain how they intend to combine sharp rate rollbacks with fair and reasonable returns, and without ending up in court for years.

The public is right in becoming cynical. Proposition 103 has become a revolt without a rebate. In its defense, it has forever changed the process by which rates are set from a private to a more public one, akin to utility rate decisions (with all their flaws).

The theory is that rip-offs are more difficult to implement in daylight. Probably so. But for now we advise the waiting consumers to keep their hands on their wallets.