Prop. 103: An Upheaval on Hold : Insurance: It’s been a year since voters gave the word on reform to the industry and the politicians. So far, they haven’t heard much back.

A year ago today, California voters approved Proposition 103, representing, it seemed, an enormous upheaval in the way auto and many other kinds of insurance were to be sold and priced in California.

But, so far, the upheaval has not occurred. After a year of frustration for all sides, but particularly consumers, the key decisions on implementing the initiative remain to be made.

Although hearings are under way looking to that end, the most difficult questions are ones with political overtones that Insurance Commissioner Roxani Gillespie will ultimately have to answer herself.

And even when she does, her decisions--on the proper level of company profits, which (if any) rollbacks and refunds to order, and methods of pricing--may be challenged in court by the industry or even consumers. Such challenges could cause months or even years of further delays.

As of today--with the exception of a small number of voluntary rate rollbacks, mostly in homeowners and commercial lines--the 20% rollbacks from 1987 price levels called for in the initiative have not been realized.

Auto insurance for most policyholders costs more, not less, than it did a year ago, although on Oct. 2 Gillespie imposed a freeze on further increases.

Neighborhood-based pricing, the so-called territorial rating system under which urban customers pay far more for auto coverage than suburban and rural motorists, remains in place.

Sale of insurance by banks, rebates to consumers of agents’ commissions, the providing of comparative pricing information to consumers by the state Department of Insurance--all called for by Proposition 103--have yet to begin.

“Almost nothing that we wanted to happen happened . . . thanks to the insurance commissioner’s incompetence and the insurance industry’s arrogance,” laments Harvey Rosenfield, author of the measure.

“We anticipated that the industry would resist with all its fury, and we built in a one-year period of adjustment and compliance,” he said. “What we could not anticipate was that a whole industry could willfully disregard the law. Sure, they don’t like it, but it’s the law, and with Gillespie, the law has gone unenforced. This isn’t just a threat to 103, it’s a threat to democracy.”

To this, Gillespie responds that it took six months for the state Supreme Court to rule on the constitutionality of the measure, delaying her implementation plans. And, she adds, she was surprised to find that it then took another six months to get the insurers to cooperate on the implementation hearings that have just begun.

“I don’t think of Proposition 103 as being a year old, because until the Supreme Court came up with its interpretation, we didn’t know what the law was,” the commissioner said in an interview.

“But I feel that that is the past. Now, there is a process in place, and the process is just going to have to take over . . . and turn it (Proposition 103) into a workable law.”

The insurers, defending their position, observe that the legal fight they put up achieved partial success with the Supreme Court. The court held that companies are entitled to “a fair and reasonable rate of return” and would have to have their future rates--including any rollbacks--judged on that criteria.

“What has happened was quite predictable,” said Alister McAlister of the National Assn. of Independent Insurers. “Proposition 103 delved in an unworkable way into a complicated area of law. The state Supreme Court changed it materially. The result is that the policyholders will never get their 20% reductions, and in the long run won’t get rates lower than a fair rate of return would dictate.”

The insurers, particularly the big companies, have spent much of the last year fighting implementation of the measure. They have spent millions of dollars in legal fees on top of the millions they spent in a vain attempt to defeat Proposition 103 at the polls. It is only recently that the companies have indicated a willingness to accept parts of it, such as changes in some of their auto insurance pricing methods, to de-emphasize where a driver lives.

Industry leaders maintain that had Proposition 103 been applied in its original form, with its across-the-board rollbacks, it would have driven many auto insurers from the state altogether. That, they say, would have caused an availability crisis that would be worse for motorists than the present affordability crisis.

“We thought our constitutional rights were offended,” said Stanley Zax, head of Zenith National Insurance Co. and a former president of the Assn. of California Insurance Companies, the industry’s leading California lobbying group. “The court said we were correct. They gave us different relief than we asked for, and now, because of that different relief, there’s a new process that’s unfolding.”

Elusive Definition

Gillespie’s administrative law judge in the implementation hearings, William J. Fernandez, succinctly summarized the Supreme Court’s action: “The voters wanted to reduce rates regardless of what it did to the insurance companies, but the Supreme Court said they couldn’t do it ‘regardless.’ ”

But the standard of “fair rate of return” set by the court has turned out to be so difficult to define and apply, both politically and technically, that the rollbacks remain up in the air.

The decisions in the cases of individual companies are perhaps months away. Meantime, some small insurers complain that their ability to obtain capital for expansion or other purposes has dried up.

In the last month, Gillespie has adopted a more friendly attitude toward consumer interests. She has imposed the rate freeze, reopened rollback possibilities that she had earlier said were foreclosed and approved compensation to consumer intervenors in department hearings, putting them on a more equal footing with the heavily financed industry representatives.

Yet, she has failed to satisfy either side.

Bill Zimmerman, political manager of the Proposition 103 campaign, said that Californians remain “sincerely disillusioned with the ability of state government to solve problems.” The experience of the last year with Gillespie and the Deukmejian Administration, he said, has made consumers “more cynical and more alienated.”

Meanwhile, Alan Morris, director of insurance underwriting for the Automobile Club of Southern California, says recent decisions in the Department of Insurance have been politicized. “The mystifying thing,” he said, “is that I don’t think she (Gillespie) has a hope in hell of being elected anyway” when the insurance commissioner post becomes elective next year.

The experience of the last year shows, in the view of some observers of state affairs, just how difficult it is for the electorate to challenge a major industry--particularly in a complicated field like insurance.

Such an industry clearly has the resources at its disposal to fight back effectively, in court and politically. But some of the observers believe the standoffish attitude of Gov. George Deukmejian allowed the insurers more leeway for their resistance than they would otherwise have had.

Steven Miller, head of the Insurance Consumer Action Network and now a paid consultant to Gillespie on Proposition 103 implementation, said that he felt Deukmejian “did everything he could to ignore the initiative after it passed.”

“There was a period of vacillation that could have been avoided, had the governor exerted leadership,” he said. But, lately, he added, Gillespie, the governor’s appointee, has been “doing so many right things. I feel positive about what’s going on now.”

Gillespie commented on implementation: “It’s a very complex undertaking, and let us remember it has never been tried in California before. This is a $55-billion industry, a business that is arrogant and used to having its own way. And we’re dealing with a group of people that have never worked together before, the consumer groups and the insurance companies.”

If progress has been slow in California, meanwhile, Ralph Nader--the consumer advocate who was a key supporter of Proposition 103--asserts that it has had quite an impact elsewhere in the country.

“I think the effects outside of California have been tremendously salutary,” he said this week. “Just take the new Advocates for Auto and Highway Safety, where the insurers joined with consumer groups to litigate, lobby and petition to put out new auto safety standards. It’s clearly a result of 103.

“Proposition 103’s impact was to throw the industry on the defensive, jolt them out of their complacency and consider what they could do in these areas of loss prevention. And all over the country, the initiative now is with insurance reform, not tort (legal) reform. Legislators are being emboldened, consumers groups encouraged, and customers are beginning to talk back.”

In California, at least, he added, “it’s grinding its way through and consumers are not going to be worse off.”

DEVELOPMENTS SINCE THE PASSAGE OF PROP. 103 * Nov. 8, 1988--California voters approve Proposition 103, the wide-ranging insurance measure, by a vote of 4,853,298 to 4,630,689, a margin of 222,609.

* Nov. 9--Insurers file nine separate lawsuits to invalidate the measure.

* Nov. 10--The state Supreme Court suspends implementation of the measure pending review.

* Nov. 21--Insurance Commissioner Roxani Gillespie says she will add 300 employees to her 515-member staff and add $18 million to her department’s $33-million annual budget if the Supreme Court validates Proposition 103.

* Nov. 29--Gov. George Deukmejian, in a split with Atty. Gen. John K. Van de Kamp, asks the Supreme Court to continue to stay the entire measure while its constitutionality is reviewed. Van de Kamp wants the stay lifted.

* Dec. 7--The Supreme Court lifts the stay on implementation of most of the measure, but continues the stay on the 20% rate rollback provisions, pending a constitutional review.

* Dec. 19--Insurance industry legal briefs ask the Supreme Court to strike down the measure in its entirety.

* Jan. 10, 1989--Gillespie and Howard Gould, superintendent of the state Banking Department, remove barriers preventing banks from selling insurance, but no banks begin such sales.

* Jan. 12--Deukmejian and Gillespie, in a brief filed with the Supreme Court, take no stand on the constitutionality of Proposition 103.

* Jan. 30--State Farm, the state’s largest seller of auto insurance, becomes the first big carrier to raise its rates since the election, announcing an average statewide rate hike of 9.6%.

* Feb. 7--Insurers ask Gillespie to approve a 112.3% average rate hike for the 780,000 drivers enrolled in the assigned risk program. (But no hike has been approved as hearings continue.)

* May 4--State Supreme Court upholds Proposition 103, but changes the standard for exempting insurance companies from the rate rollbacks. The court holds that a company should be exempted by the commissioner, if, by giving a rollback, it would not receive a fair and reasonable rate of return.

* May 5--Ralph Nader, a key sponsor of Proposition 103, demands Gillespie’s ouster.

* May 11--Gillespie promises she will make all of her decisions by Nov. 8 on whether to grant insurance companies exemptions from rate rollbacks. (As of today, she has yet to make her first final decision.)

* June 15--Gillespie says she may run for insurance commissioner when the post becomes elective in 1990.

* June 19--Insurers testifying at hearings called by Gillespie urge continuation of neighborhood-based auto insurance pricing, the so-called territorial rating system, despite provisions in Proposition 103 that it must be given less importance than a driver’s safety record, annual miles driven and years of driving experience.

* June 26--Gillespie says that 443 insurers, including the 15 biggest sellers of personal auto coverage, have filed applications for exemptions from rate rollbacks.

* Aug. 1--Gillespie tentatively orders seven leading sellers to give $305.3 million in rate rollbacks to California policyholders, but notes that the companies are entitled to hearings where they can contest the orders. The commissioner also declares she is setting a “fair rate of return” standard at an annual 11.2%.

* Aug. 3--Gillespie says she is considering establishment of a regionally based pricing system for auto insurance, with six regions, in an attempt to minimize huge price adjustments that she says would result from a literal interpretation of Proposition 103’s pricing provisions.

* Aug. 22--Gillespie says that three of the state’s largest auto insurance sellers, State Farm Mutual, the Farmers group and the Automobile Club of Southern California, are among hundreds of companies likely to be exempted from rollbacks.

* Aug. 28--An Insurance Department aide to Gillespie says the 11.2% annual fair rate of return set for the industry Aug. 1 is only a “tentative” figure and may be revised upward.

* Sept. 15--A bill by Assembly Speaker Willie Brown to provide state-required liability insurance to low-income drivers for a flat rate of $25 a month narrowly wins passage in the Legislature but is later vetoed by the governor.

* Sept. 25--The Farmers group of companies announces it will raise auto insurance rates by an average 5.9% before Nov. 8, the date when Proposition 103 gives Gillespie prior-approval authority over rate changes.

* Oct. 2--Gillespie orders a freeze on all auto insurance rate increases for up to six months, canceling the Farmers increases, and calls for hearings to begin Oct. 30 on all Proposition 103 implementation issues.

* Oct. 3--Gillespie tells insurers they can no longer set auto rates based on where a driver lives. But the order is later canceled, pending results of the implementation hearings.

* Oct. 10--Los Angeles Superior Court Judge Miriam Vogel upholds Gillespie’s insurance price freeze, but only until the end of November.

* Oct. 27--Judge Vogel strikes down new challenges to the rate freeze, and indicates it might be allowed to continue indefinitely.

* Oct. 30--Gillespie opens what are expected to be at least two months of Proposition 103 implementation hearings. All rollback and neighborhood pricing decisions are delayed pending testimony in the hearings.