Someone Is Pushing the L.A. Bubble : Auto Insurance: Gillespie’s latest moves set the stage for a showdown with the court, which has guaranteed insurers a profit. The odds favor the court.
In the last episode of California’s long-running soap opera “The Implementation of Proposition 103,” the state Supreme Court issued an opinion upholding the initiative, but substantially rewriting it. The justices’ primary change was to strike down the rollback of rates to November, 1987, levels and to set aside of the automatic, additional 20% cut.
More important in the long run, the court upheld the insurance companies’ right to earn “a return . . . commensurate with returns on investment in other enterprises having corresponding risks.” The court then returned the issue to Insurance Commissioner Roxani Gillespie, having made its intent clear: California insurance companies have the right to earn a fair rate of return.
After public hearings, hours of testimony and pages of evidence, the commissioner Tuesday issued her new rules, which incorporate two dramatic changes. First, she abolished “simple” territorial rating, which had allowed insurers to levy different premium rates on drivers, according to their home ZIP codes. Second, she limited future premium rate increases for good drivers to the increase in the cost of living.
In addition to the rating factors mandated by Proposition 103, she will also allow what she called “optional factors.” They look a lot like territorial-rating factors. For example, an insurer can take into account auto-theft rates, repair- shop costs, physician rates, accident frequency and the number of uninsured vehicles in the policyholder’s neighborhood.
However, she said these “optional factors” would not be allowed to account for more of the premium than any of the three factors mandated by 103--an individual’s driving record, the number of miles driven annually and years of driving experience. She said this, even though she acknowledged that many experts agree that the optional factors can account for more of the added costs than the three mandated factors. This inconsistency is a result of the terms of the new statute.
Gillespie hinted strongly that she expects her new regulations to be challenged in court, and she’s probably right.
A 1988 report from the Department of Insurance illustrates why. The department surveyed the state to see if different cities had different experiences with claims and costs. It found that the average claim cost for bodily injury and property damage per insured vehicle in California’s 10 largest cities was $157. The lowest was Sacramento, at $130, and the highest was Los Angeles, at $308.
The study also looked at claim frequency, which it defined as the number of claims divided by the number of insured vehicles, times 1,000. The state average was 16.4 claims, with Sacramento again the lowest, at 14.6, and Los Angeles again the highest, at 32.4.
Frequency of uninsured motorist claims was 5.7 statewide, with San Diego the lowest at 4.9 and, again, Los Angeles the highest at 12.0.
The same report said that if territorial rating were abolished and premiums based on a statewide flat rate, “about two-thirds of the vehicles insured would incur increases . . . (averaging) . . . approximately 22%.”
In other words--according to the report, and based on the minimum limits it assumes--two-thirds of the state’s insured vehicles would have had to pay, in 1988, an additional $325 million to subsidize the remaining one-third in order to maintain the insurance companies’ premium income. To make this even clearer, picture California as a giant water bed with an air bubble called Los Angeles and the water being insurance rates. If you push down on the air bubble, the level in the rest of the bed rises.
Now view these facts in light of Gillespie’s determination to limit insurance rates and the Supreme Court’s decision to protect insurance company earnings. Something will give, and it probably won’t be the court.
Let’s put it this way. If you thought that voting for Proposition 103 meant that $325 million was going to come out of the hides of the insurance companies, the Supreme Court has proven you wrong. Because the justices protected insurance companies’ fair rate of return, the $325 million will have to come from somewhere else. Probably from the two-thirds of California’s cars that aren’t in Los Angeles.
Undoubtedly, California’s insurance companies long ago computed what the abolition of territorial rating would mean on their fair rate of return and calculated whether their return was in danger of becoming unfair. If this has been their conclusion, look for them to return to California’s courts and perhaps to the federal courts if there is a federal issue.
Stay turned for further developments in the saga of how Ralph Nader and Harvey Rosenfield fooled the people into thinking they could vote their way to lower auto insurance premiums.
