Prop. 103: Illusion Seeking Reality : Insurance: Fairness is a two-way street. The industry can’t keep carrying uninsured and risky drivers at the expense of others.
Ceaseless attacks against the insurance industry are attributing the lack of rate rollbacks and refunds under Proposition 103 to insurance companies’ “greed.”
Let’s take time out to recognize a few realities. The first is that insurance companies do indeed try to make profits. It is called capitalism, the American way of life, a way that has survived and outperformed other economic systems, notably the regulated and bureaucratic structures now crumbling in Eastern Europe.
The second reality is that the operative provisions of Proposition 103 were modified dramatically by the California Supreme Court to make them lawful. As Proposition 103 was originally written, rate rollbacks were required of all casualty insurers. As modified by the Supreme Court in a decision effective only four months ago, insurers could obtain relief from the refunds and rate rollbacks to the extent necessary to earn “a reasonable rate of return.”
Hearings are now being conducted to establish standards and components of a reasonable rate of return. Consumer groups and insurers are both represented at these hearings, accompanied by attorneys. Some seem to think that there is something wrong with allowing the insurers to be part of these hearings. But the fundamental fairness of our system requires that those whose interests are affected have an opportunity to be heard.
To a very large extent, the rollbacks and refunds promised to the public in seeking votes for Proposition 103 are illusory. The rates charged by some insurers are insufficient for profitable operations, and those charged by others are lower than necessary or merely adequate to generate a reasonable rate of return. And persons insured with these companies should not expect refunds or rollbacks.
Of course, some insurers are highly profitable and may be subject to rollbacks and related refunds to the extent that “reasonable rates of return” are exceeded. The complexities involved in determining reasonable rates of return are substantial. Only four months have elapsed since the Supreme Court’s decision became effective, and hearings on the manner and procedures for determination have already commenced. Thus, the hysteria about nothing having been done about rates for a year is inappropriate.
What Proposition 103’s supporters did not tell us is that reform is needed in the tort system for insurance costs to be lowered. Some insist that insurers reduce expenses by going after “fraud,” but this brings us to two other seldom-mentioned realities: Fraud is very difficult to prove, and nonpayment of claims based on unestablished fraud may give rise to charges of “bad faith.” Bad faith claims create even greater exposure to the insurer than the fraudulent claim, which, unhappily, is often paid because fraud cannot be proven.
The simple truth is that the current tort system encourages fraud; it also encourages costly and lengthy litigation over who is at “fault,” and if both parties are, which one bears the larger share of blame. This system returns much more to doctors and lawyers than it does to insured people, and clogs up our courts so that cases often have to wait years for trial.
The solution is not to terminate private enterprise in the insurance business and set up a state monopoly or is it to create another layer of costs associated with rate justifications and hearings. Things can be done to reduce auto repair costs and fraud; however, legislation will be required.
Some people point to the state-run system in British Columbia as a model for California. Essentially, that is a system in which claimants deal with their own insurer (the state) regardless of who is at fault. California voters and the Legislature have defeated “no-fault” measures that would eliminate much of the doctors’ bills and lawyers costs from claims. Such systems have resulted in lower rates in New York and Florida and have been supported by many in the insurance industry.
However, merely by enforcement of two existing laws, those of us who are insured can stop paying for most of the bad drivers across the board. Because of political considerations, there is little effective enforcement of the mandatory insurance law, so many uninsured drivers remain among us. Those drivers provide no reimbursement of costs paid by your company when they cause collisions and injuries.
Those who are insured under “assigned risk” policies, forced by the state on all auto insurers, pay premiums equal to about half of what your company pays out for claims and administrative expenses attributable to those policies. Again for political reasons, increases in assigned-risk premiums have been consistently denied, even though the law requires that rates keep pace with costs. Again, insured drivers subsidize the gap.
Regulation of rates does not mean lower rates; it means that rates are set to permit a reasonable rate of return. Those rates may be lower or higher. If the volume of claims and the costs of doing business continue upward, rates will follow. Costs are increasing due to the rate-making process alone.
We need to take meaningful action to reduce fraudulent claims, require insurance for all drivers, have assigned-risk policyholders pay their fair share, permit negotiated arrangements between insurers and auto-body repair facilities, and even reconsider adoption of a “no-fault” or modified negligence recovery system. These will reduce costs arising from claims, and that will result in lower rates.
There is no free ride--refund and rollback entitlement cannot happen unless rates exceed what is necessary to make a reasonable rate of return. Any other result would be confiscatory.
Thus, we are left with the options of continuing to bash insurers for not rolling back rates because they face increasing claims and costs, or really doing something legislatively about reducing these claims and costs, thereby permitting lower rates.
