Agency OKs Guidelines for Pricing of Auto Insurance

The state Office of Administrative Law gave its approval Friday to regulations issued last week by Insurance Commissioner Roxani Gillespie that strike down the use of sex and marital status in setting auto insurance rates. The regulations also would curtail insurers’ use of neighborhood-based pricing and impose a cap pegged to the consumer price index on annual premium rate increases.

The approval, which was required before the regulations could become legally effective, included an amendment that appears to even further diminish use of neighborhood or ZIP code-based pricing.

The amendment submitted by Gillespie could mean a more drastic decrease in auto insurance prices for urban drivers, particularly in Los Angeles and San Francisco, than had been envisioned when Gillespie issued her regulations Dec. 5.

However, a spokesman for California’s insurers said Friday that a broad-based lawsuit to invalidate the regulations is inevitable. The spokesman, Ed Levy of the Assn. of California Insurance Companies, said the insurers simply cannot live with a regulation that forces them to lower their prices sharply in urban areas without permitting them to recoup these decreases by raising their rates sharply in rural and suburban localities.

Linda Stockdale Brewer, director of the Office of Administrative Law, said her office had required Gillespie to offer the amendment on the neighborhood-based pricing question because public comments had indicated that the original wording of the regulation was unclear.

As always with implementation of Proposition 103--the insurance initiative approved by voters last year--the matter is highly complicated.

Under the regulations issued by Gillespie last week, insurers are required to give the most weight in setting auto insurance prices to three factors specifically mentioned by Proposition 103--a driver’s safety record, the number of miles he or she drives annually, and the number of years of driving experience, in that order.

But, in the regulations as originally worded, Gillespie also allowed the insurers to use 25 “optional” pricing factors, of which nine could be construed as substitutes for a driver’s home address or ZIP code. At the time, this was generally interpreted as allowing the insurers to add up each of the optional factors to a total pricing weight that could easily exceed the three factors named by Proposition 103.

In other words, if each of the nine substitute factors--such as a locality’s population density, its vehicle density, its accident frequency or its litigation rates--were ascribed a 4% rate, the total weight given to those factors could amount to 36%, or more than the 25% that might be given to the safety-record factor named by Proposition 103. This would have minimized downward price adjustments in the urban areas.

At the request of the Office of Administrative Law, however, Gillespie amended this late Thursday to indicate that a driver’s record, miles driven and years of experience would have to account for approximately 75% of the price, and all the optional factors combined could not exceed approximately 25%.

This, if it goes into effect after the 150-day adjustment period Gillespie has set, could mean radically lower prices in urban areas.

The cap of about 5% on cost-of-living increases in all other areas that Gillespie set last week was not changed by this week’s amendments.

Gillespie’s special attorney for the implementation of Proposition 103, Karl Rubinstein, said Friday that he did not think the amendment was really any substantial change in what Gillespie had said in her regulations in the first place, but both insurer and consumer representatives sharply disagreed with him.

“Of course this is a major change,” said Levy, an official of the industry’s most important Sacramento lobby. “It makes it clear that territorial ratings (neighborhood or ZIP code-based prices) must be subordinated. If there was ever any doubt we would have to sue, this removes it.”

Harvey Rosenfield, author of Proposition 103, agreed with Levy that the amendment does subordinate the neighborhood-based prices much more than the original wording of the regulations did.