Getting Prop. 103 on the Road
More than a year ago California voters approved Proposition 103, hoping to reduce skyrocketing auto insurance rates. They have yet to see a difference in their bills, but now they have a glimmer of hope. The controversial initiative will finally take effect under new rules announced last week by Insurance Commissioner Roxani Gillespie.
Consider Proposition 103’s rocky first year: For various reasons implementing it was delayed, whether out of legal considerations or political ones. Immediately after it passed, the insurance industry challenged the initiative in court. Then in May the state Supreme Court addressed the question of whether Proposition 103 was constitutional: Yes, it is, as long insurance companies can still get a “fair rate of return” on their business.
Other delays were more problematic. Gillespie insisted that she needed detailed hearings and studies to define a fair rate of return before she could put the complex initiative to work. With more than 700 companies licensed to sell auto insurance in California, this process dragged on too long for the taste of most consumers. This made Gillespie pretty unpopular and accounts for her recent decision to not seek another term in her post when the insurance commissioner’s job becomes elective next year. But at least Gillespie can put Proposition 103 to work without worrying about political consequences.
At first glance, her new regulations governing the setting of automobile rates just may work for consumers, at least for big-city motorists with good driving records. Gillespie ordered the elimination of territorial redlining, a system that sets rates according to where a driver lives. Insurance companies still can use territory-related factors, such as population density and the number of accidents that occur in a given area, but only if they can statistically justify those factors. And no such factor can be given more weight in setting auto rates than an individual motorist’s driving and safety record, as Proposition 103 stipulates. Analysts have warned that insurers will compensate for lower rates in big cities like Los Angeles by charging higher rates for all drivers, even good ones, in rural areas and smaller cities like Fresno. To prevent that, Gillespie has also ordered insurers to not raise their good drivers’ rates higher than the annual increase in the Consumer Price Index.
So it appears that Gillespie, a former insurance executive who has been criticized for favoring the industry, is now tilting towards the consumer. Her new rules may not result in the 20% rate rollback mandated in Proposition 103. Each insurance company’s rates will be lowered, or raised, depending on what its fair rate of return is. But even if the initiative proves not to be the panacea it was billed to be, it is still a step towards creating a regulatory structure in California that can keep insurance rates under control.
Some insurance companies are likely to challenge Gillespie’s new regulations in court and that is their right. But the industry must not forget that the reason Proposition 103 passed, despite the expensive political campaign waged against it, was that consumers are desperate to see auto insurance rates cut. In some inner-city areas, according to one recent study, a family could pay more in one year for automobile insurance than for food.
Rather than continuing to pick nits in Proposition 103, the industry would be better advised to join Gillespie and the consumer groups that have been cooperating with the Department of Insurance to plan and implement the additional steps that must still be taken to improve California’s auto insurance system. They include a no-fault law like New York’s, a better vehicle registration system that would require motorists to prove they have auto insurance before they can register a car and a no-frills auto liability policy that even poor drivers could afford. Proposition 103 is on its way, but the road toward full reform is still a long one.
