Auto Insurance Rate Hikes Frozen : 6-Month Ban Sparked by ‘Chorus’ of Proposed Increases, Gillespie Says
Insurance Commissioner Roxani Gillespie on Monday ordered a freeze of up to six months on increases in private passenger auto insurance rates, effective immediately statewide.
Gillespie said the move was necessary because “a whole chorus” of companies had privately informed her that they were planning to follow the lead of the Farmers group and impose rate increases before Nov. 8, when she will acquire authority under Proposition 103 to approve or disapprove all rate hikes.
The commissioner said the freeze will cancel the 5.9% statewide increase Farmers said it would implement Nov. 1, as well as State Farm’s plan to raise the rates of problem drivers by 29% to 36% effective Nov. 8.
Authority Questioned
Some industry spokesmen and attorneys quickly questioned what authority Gillespie had for imposing the freeze.
Gillespie cited language in the May state Supreme Court decision upholding Proposition 103 as giving her the power to set “an interim rate.”
But the industry representatives, including a spokesman for Farmers, quickly challenged this interpretation of the court’s decision and suggested that a legal challenge of the freeze was possible.
The Farmers spokesman, Jeff Beyer, said Farmers had not yet decided whether to rescind its announced rate increase. But Gillespie said it would be illegal under the freeze to try to implement it. Insurance Department attorneys said they would seek a court injunction if Farmers or any other company tries to raise any individual’s rate, except perhaps in the case of a drunk driving conviction.
Meanwhile, a side consequence of Gillespie’s freeze was to temporarily foreclose the possibility that new rate-setting rules would be imposed to cut premiums for urban drivers or that policyholders in general will get rate rollbacks as called for by Proposition 103. Those steps are all in abeyance until Gillespie holds a new and possibly protracted set of hearings.
Although the commissioner characterized her freeze as a cap on increases that will still permit companies to lower some rates, if they wish, industry spokesmen said the companies will be unwilling to adjust anyone’s rates downward unless they are also able to increase the rates of others.
For instance, a State Farm spokeswoman said, it will now be impossible for State Farm to implement its announced plan to lower good drivers’ rates 2% to 20% while increasing rates for problem drivers. That puts State Farm’s plan to lower prices for good drivers in central Los Angeles from 5% to 15% effective Nov. 8 on indefinite hold.
Gillespie’s action made consumer leaders uneasy. Ralph Nader, for example, complained that she “is giving the consumers a freeze instead of a refund, and she’s flouting the pricing provisions of 103. She keeps flip-flopping, and she has now assured insurance will be will be a major controversy in next year’s election.”
Gillespie said the new hearings into the rollbacks and the new Proposition 103 pricing criteria will begin Oct. 30 in San Bruno, a San Francisco suburb. The new rate-setting criteria will require that greater weight be given to a driver’s safety record, miles driven and years of driving experience and less to where the driver lives.
The commissioner expressed hope that the first decisions could come out of these hearings after about a month, and that general rollback guidelines could be agreed upon by the end of the year, thus allowing an early lifting of the rate freeze and a readjustment of rates in accord with Proposition 103.
However, if the various contending groups--insurers, consumers and trial lawyers--are unable to settle some of the issues among themselves and the hearings stretch out, the freeze could last until April 2, Gillespie said.
“We are trying to put pressure on the insurers and others to come to reasonable terms,” said Karl Rubinstein, a special counsel to Gillespie.
Worried consumer leaders noted that failure to agree could also mean further delays of any rollbacks or of implementing savings to urban drivers, so there is pressure on the consumer representatives, too.
Gillespie has long contended, as she did again Monday, that a literal interpretation of Proposition 103’s rate-setting provisions would mean that 70% of the state’s policyholders living in suburban and rural areas would see their rates go sharply upward, while 30%, those in central cities, would see their rates go down.
This, she said Monday, “is unfair, and I will fight against it as long as I hold this office.”
However, a few hours later, she called a Times reporter to say that she still hopes the insurance companies will implement the Proposition 103 pricing criteria on Nov. 8, as long as doing so will not increase anyone’s rates.
But industry representatives said this would be impossible, that any adherence by them to the new rating criteria will entail raising some people’s rates while lowering others.
Monday’s developments meant that for the first time since Proposition 103 was approved by the electorate nearly 11 months ago, state authorities are taking action to prevent further rises in auto insurance prices.
But Gillespie has been unable to keep to her schedule for implementing the landmark initiative.
The commissioner had promised after the Supreme Court’s May ruling to have all rollback decisions made by early November, and she had promised to promulgate regulations on the rate-setting criteria by the first week in September.
Gillespie, however, conceded to reporters that it has all proved more complicated than she first thought.
In two meetings with reporters here Monday, lasting 2 1/2 hours, Gillespie, criticized heavily in August for exempting many companies from the rollbacks, sought to return to her earlier political stance somewhere in the middle between insurance industry and consumer positions.
For instance, she said she is trying to withdraw the rollback exemptions given to 184 small insurance companies in August, and under the new hearings, all companies will be evaluated for rollbacks anew.
But industry spokesmen questioned whether this could legally be done. They noted that earlier the commissioner had taken the position that unless she notified a company of a rollback hearing by Aug. 23, it would be exempted from the rollbacks.
Proposition 103 in its original language said that all rates for auto insurance and a wide variety of other types of policies had to be rolled back 20% from 1987 levels and frozen for a year. However, the state Supreme Court changed this, holding that a company could be exempted from the rollbacks if they could demonstrate that in giving them, they would be deprived of a fair rate of return, or profit.
Since then, there have been interminable quarrels in hearings as to what would constitute such a fair rate of return. In August, Gillespie said 11.2% would constitute such a fair return on an annual basis. But various companies suggested figures ranging up to 28%, and Gillespie subsequently described her figure as tentative. She said Monday that it will be a subject of the new hearings.
Frank Rothman, the industry’s lead attorney in the lawsuit earlier this year that had challenged the constitutionality of Proposition 103, said Monday that Gillespie’s price freeze might clash with the industry’s right to a fair return as laid down by the Supreme Court.
He questioned her power to order the freeze, but said no decision had yet been made to take the matter to court. He and other industry representatives pleaded for more time to evaluate the freeze before deciding what to do.
Gillespie said that under the freeze, companies cannot legally raise an individual’s rates. Each such rate is frozen, not simply the overall revenue of each company, she said.
But she said the freeze did not apply to assigned-risk rates. Gillespie indicated that she may order increases in those rates if it can be shown that the assigned-risk plan has been adequately reorganized.
Farmers cited Gillespie’s delays in raising assigned-risk rates as its justification for the 5.9% increase it announced last week. The company said its regular customers will now have to pay for these losses. A 112.3% rate-increase request from the assigned risk board of governors has been pending since February, but there is resistance to it because it would saddle some drivers with higher annual costs for insurance than they pay now for food.
Gillespie said Monday she believed that Farmers had been “making an excuse.” She noted that right after Farmers’ announcement, many other companies began citing the same justification for raising their rates.
