Gillespie Rebate Action Draws Sharp Criticism : Insurance: Rollbacks and new, higher rates are likely. Candidates and industry blast decision.

Under a ruling by Insurance Commissioner Roxani Gillespie Wednesday, some insurance companies likely will be ordered soon to rebate millions of dollars to California customers on 1988-89 premiums. But the companies probably could recoup that much and more later on in new, higher rates.

Gillespie, in a long-awaited ruling on implementing Proposition 103, the landmark insurance initiative, left many questions unsettled and drew criticism from every side in the dispute over future insurance rates in the state.

On rate rebates resulting from Proposition 103-mandated rollbacks, Gillespie set the permissible annual rate of return for the companies at 11.2% of equity and indicated she would order the rebates by next month, after hearings, from companies that had exceeded this profit level.

Any such orders, however, would be subject to court appeal, possibly delaying rebate checks for months or years.

On future rate regulation, meanwhile, Gillespie, an appointee of Gov. George Deukmejian, said the permissible annual rate of return could vary from 11.2% to as high as 19%.

Although she did not indicate how regulators would evaluate where a company would be placed in that range, part of her decision apparently could open the way to major increases, not only in auto insurance but in other lines such as homeowner and commercial policies, which also are regulated under Proposition 103. And the commissioner said companies could apply for “variances” from the range she set.

Gillespie’s 46-page ruling followed months of hearings on what the companies’ rate of return should be, triggered by a state Supreme Court ruling altering the terms of Proposition 103, which was passed by voters in November, 1988.

In her decision Wednesday, Gillespie also served notice she would disallow some company expenses, such as political contributions and lobbying expenses, and cap others, such as executive salaries, in determining a company’s allowable rate of return.

This part of the decision was a move toward meeting concerns of many consumer groups, but it was soon lost in a furor that erupted over her rate-of-return rulings and the formal regulations she said would follow.

Within hours, Gillespie’s ruling was being assailed generally, and leading the charge were the two major party nominees for California’s first elected insurance commissioner, Democrat John Garamendi and Republican Wes Bannister.

Garamendi, a state senator from the Northern California community of Walnut Grove, said he feared the rebates “may be only pennies compared to the long-range rip-off that may be set in regulatory concrete.”

“We have grave concerns that the method of calculation of future rates may well lead to excessive premiums and high profits for insurance companies,” he said. “It is wrong for this lame-duck appointed commissioner to set in concrete such an important issue before the voters have a chance to choose their commissioner in November. . . . The commissioner should not be guaranteeing profits for insurance companies.”

Bannister, owner of a Huntington Beach insurance agency, said, “I think people are sick and tired of all of this. There are other ways to lower premiums. They (Gillespie and others in the state Insurance Department) don’t seem to be doing anything positive. They just seem to be stirring the water all the time.”

Bannister added that he would not feel bound, if elected commissioner, by any regulations Gillespie promulgates now.

But some experts in state administrative law pointed out Wednesday that once regulations are validated, a new commissioner could only change them through an elaborate hearings procedure that could take months.

Gillespie’s special attorney for implementation of Proposition 103, Karl Rubinstein, responded to Garamendi and Bannister by saying that Gillespie had purposefully built a range of options into future rating decisions and said he was convinced that either man could keep the regulations and yet follow the policies he desired.

But the commissioner candidates’ criticisms were only part of the reaction Wednesday. Criticisms cascaded from everywhere, including from insurance industry representatives who complained that Gillespie was setting too complicated a system into motion.

“My reaction is that California is going to have a very complicated process for obtaining rate changes,” said Judith Mintel, an attorney for State Farm. “Many areas (of her ruling) are unclear and will be in dispute. It is apt to be a very costly process.”

Thomas F. Conneely, president of the Assn. of California Insurance Companies, a major lobbying arm of the industry, said Gillespie’s rulings were “marred by inconsistencies” and that her 11.2% profit standard for deciding on the rollbacks was too “rigid.”

“This ruling really isn’t final,” Conneely added. “Somebody will litigate this, in the interest of their financial viability.”

Gillespie did not challenge this point. Her news release said she “expects she will have to litigate to enforce the new system.”

Meanwhile, those persistently critical of the industry joined in the assault on the ruling.

Atty. Gen. John K. Van de Kamp said the ruling “gives some real hope that California consumers will, in fact, see rebates.” But he said the other part of Gillespie’s decision, setting a profit range for future rate increases, “is a total surrender to the insurance companies.

“Under those rules, it is unlikely any insurance would ever have a rate reduced by the commissioner--as if Proposition 103 had never passed,” the attorney general said.

Harry Snyder, West Coast director of the Consumers Union, called Gillespie’s ruling “a sleight of hand and a shell game. We’ll see a minuscule rollback and then open sesame in the prior approval of rates.”

And Harvey Rosenfield, author of Proposition 103, said that “what Gillespie gives us with the rollback she takes away in the form of huge future rate increases.”

Gillespie’s ruling came after the hearings before Administrative Hearing Judge William Fernandez in San Bruno. Fernandez rendered his own opinion last month on what the commissioner ought to do. But in Gillespie’s ruling, filled with complicated language, she rejected parts of what Fernandez had to say and refashioned things in her own way.

NEXT STEP

Insurance Commissioner Roxani Gillespie will put Wednesday’s ruling into precise regulatory language and then hold hearings in July on several specific companies held to be representative of the various kinds of firms in the business. Rollback orders are then supposed to follow, although because of legal appeals it is doubtful whether many Californians will see rebate checks by the time a new elected commissioner takes over in January.