Prop. 103 May Be Dwarfed by Other Industry Woes : Insurance: Conditions among insurers are reminiscent of the early signs of trouble in the savings and loan business.

We’re now at the “elected insurance commissioner” part of our story of California’s quest for lower auto-insurance rates--or Phantom Promises, the Saga of Proposition 103.

While the legality of Proposition 103 has generally been upheld, the court has clearly protected the right of insurers to a fair economic return. This has rendered the proposition, in effect, unworkable. To provide the promised rebates and premium reductions, the insurers’ income would have to be cut, no doubt, to levels below what the courts would deem “fair.”

So, in the 19 months since its passage, the only thing California policyholders have seen is an increase in their premiums to pay for the army of regulators needed to carry out 103’s edicts. In fact, about 38% of the Insurance Department’s 1990-91 budget is for Proposition 103 regulation.

From the campaign outpourings of proponents Harvey Rosenfield and Ralph Nader, it would appear that Proposition 103’s “enforcement” is the only thing our new commissioner will have to do. In fact, 103 will only be one of many tasks.

For example, there is a continuing dilemma about the role of the California Automobile Assigned Risk Plan and the subsidy of its rates by “good” drivers. The plan currently runs an annual deficit that could reach $1 billion in 1990.

But that problem pales when compared to the similarity between today’s insurance business and the early warnings that appeared in the scandal-plagued savings and loan industry. A recent congressional report, ominously titled “Failed Promises,” cautions that “if such warnings are not heeded, the insurance industry and the nation could face a solvency crisis rivaling the present savings and loan situation.” This situation alone could occupy the entire term of our new commissioner. As evidence, consider that of the state’s 1,900 insurance firms, more than 200 are under “special surveillance,” 10 under conservation and 64 in liquidation. In other words, the solvency of about 16% is in question. How serious is this? The report says that the collapse of two firms (Mission Insurance Co. and Transit Casualty Co.) could cost the public about $6.5 billion.

Or the new commissioner could work on even more devastating problems--in both general economic and personal terms--than auto-insurance costs. For example, in our national frenzy of corporate asset leveraging and buy-outs, unscrupulous new owners have liquidated employee pension funds and replaced them with insurance annuities, many of which are secured in major part by shaky junk bonds.

Because this practice has continued for several years, the retirement security of thousands of American workers and retirees is at risk. Not only is this a corporate moral and legal problem; it’s also an insurance regulatory issue. Have we heard any of the candidates mention it?

As I see it, there are two groups of voters: those for whom 103 produced the rebates and premium reductions it promised--and the rest of us. Candidates Wes Bannister, a Huntington Beach city councilman, and state Sen. John Garamendi (D-Walnut Grove) can opt for failure and appeal to the first group by tying themselves to the pieces of 103 that can’t be realized or they can use what’s left of it to try to lower premiums by getting insurers, consumers and attorneys to the table without having to return to the costly and time-consuming courts. Having laid that issue aside, and because neither candidate appears well-versed about arcane insurance problems, they should seek knowledgeable, dispassionate and impartial advisers forthe more important issues.