Prop. 103’s Crux Persists for Gillespie

More than halfway through hearings on implementing the auto insurance pricing provisions of Proposition 103, the central question posed for Commissioner Roxani Gillespie remains the same: How will she deal with the reform measure’s mandate for less dependence on a driver’s home address in setting rates?

Under the so-called territorial rating system traditionally used by the insurance industry, it is not unusual for inner-city residents in California to pay rates four times higher than rural or suburban dwellers.

The insurers continue to defend the system, claiming that each neighborhood must pay its own claims costs. They say accidents, thefts and resulting claims are far higher in the inner cities. Opponents, however, say the system is discriminatory, often hurting poor blacks and Latinos who can least afford the highest rates. A coalition of minority and low-income organizations has called at the hearings for abolishing territorial rating altogether.

Last week, insurer and consumer experts on a panel of actuaries--appointed by Gillespie to try to develop a compromise pricing solution that would at least bear some relation to the language in Proposition 103--continued to differ widely on how to readjust the pricing mechanism.

In separate testimony, both actuaries agreed that Proposition 103 allows a driver’s home address to continue to be used as one factor in setting rates. But the insurer representative, Michael J. Miller, argued for pricing rules that would allow it to remain a leading factor, while the consumer representative, J. Robert Hunter, said its significance must be downgraded considerably if the spirit of the measure is to be honored.

Gillespie has already vowed not to do anything that would result in large rate increases for millions of suburban and rural drivers and has said that abolishing territorial rating would lead to exactly that outside Los Angeles and San Francisco.

But the commissioner has also indicated she might accept some adjustments in price and downgrade territorial rating to some extent to make insurance more affordable for inner-city residents. How to accomplish this, without leading to higher prices elsewhere, is her problem.

Proposition 103--approved by voters last year--states that rates shall be determined by the driver’s safety record, the number of miles driven annually and the number of years of driving experience. Those factors, it says, are to be applied “in decreasing order of importance,” along with “such other factors as the commissioner may adopt by regulation that have a substantial relationship to the risk of loss.”

Actuaries Miller and Hunter last week listed between them 25 other factors that could be used, ranging from make and model of automobile to litigation rates to home address. They did not always agree on whether a factor should be used. For instance, Miller said gender, marital status, academic standing of students and theft rates could be used, if justified as a risk factor. Hunter said those factors should not be used. He said use of gender, for instance, would violate the state’s Unruh Civil Rights Act.

Both men agreed that the commissioner should not try to set numerical weights for each permissible pricing factor for all companies, but should allow each to decide for itself--within certain parameters--what weights to assign, and even whether to use the enumerated “other factors” beyond the three named by Proposition 103.

Where they disagreed profoundly--the question Gillespie must ultimately decide--was whether the three top mandatory factors must have more to do with making up the price than any of the other factors, especially territory.

Miller, an actuary with the Tillinghast accounting firm, voiced the traditional insurance industry position. He argued that companies could comply with Proposition 103 by simply considering the measure’s factors--safety record, miles driven and years driving--in that order, without necessarily giving them the most weight in fixing prices. He said hypothetically these three factors might make up only 13% of the price, while territory--even if it is the last factor to be considered--might be allowed to make up 40% of the price.

Miller said that if a company was told to ignore territory and charge a flat rate, it would lose money in urban areas and make money in rural areas. Under such circumstances, insurance would probably soon become easy to buy in rural areas and hard to obtain in the urban ones. So, Miller said, the use of home address as a pricing factor is essential to allow an orderly market to function.

He added that if poor people in the inner cities could not afford to buy auto insurance under the territorial rating system, the state could provide the poor with insurance stamps--just as it provides food stamps.

Another possibility Miller mentioned was subsidizing the urban poor through the assigned risk system, with drivers below a certain income level given lower rates. Under the assigned risk system, drivers are assigned to insurance companies in proportion to their total business in the state. Any losses incurred by a company in paying claims of assigned risk drivers are charged to the company’s regular customers.

Hunter disagreed with Miller’s contention that Proposition 103’s phrase calling for safety record, miles driven and years of experience to be applied “in decreasing order of importance” means that these factors have to be considered first, but need not be weighted highest in setting the price.

The consumer representative said that if the first three factors are given less weight than a driver’s home address, for example, then the commissioner should step in and simply assign the first three factors a higher weight, giving them the most impact on the price charged.

Hunter, president of the National Insurance Consumer Organization, said that under Proposition 103, territorial rating could legitimately make up no more than 24.7% of a driver’s rate.

In his testimony, Hunter also observed that social policy factors should in some instances be viewed as more important in setting rates than insurance business considerations, particularly when business practices contravene Proposition 103.

“Mr. Miller’s testimony . . . attached to the actuary’s philosophy of cost-based pricing great importance,” Hunter said. “Cost-based pricing is, in general, a good idea, but it is an item of actuary ideology, not of law, and where it conflicts with the law there should be no question that it is our ideology which must yield.”

Hunter did agree with Miller that even if rates were adjusted downward to some extent in urban areas in accord with Proposition 103, the adjustments probably would not be sufficient to make auto insurance affordable to all in those areas. Even if the price were reduced, say, from $2,000 a year to $1,700, this would still not bring it within the range of many working people, he said.

Gillespie, commenting briefly on the testimony in an interview, said she is considering a plan to subsidize low-income drivers through the assigned risk system--as suggested by Miller--if she finds that continued use of the territorial rating system as a major factor should continue under Proposition 103.

She noted that assigned risk rates have already been held down in the Los Angeles area, allowing some drivers to obtain auto coverage for less than they otherwise could. But, she said, under the present assigned risk system, the rich as well as the poor can benefit from the lower rates, which she said she wants to change.

Hunter said more time--perhaps two months--should be allowed to gather statistical data before Gillespie draws up regulations for a new pricing plan.