Garamendi’s Rate-Setting Plan Shields Commissions

California’s new insurance commissioner, Democrat John Garamendi, has stepped back from a possible confrontation with the state’s insurance agents by proposing a rate-setting regulation that protects the agents’ commissions.

At issue is what expenses insurance companies will be allowed in calculating the rates they can charge policyholders.

Some alternatives proposed in January by Garamendi would have set the same “efficiency standard” on costs for all companies, whether or not they used agents. The agents contended that this could have destroyed the agency system because companies would be penalized in state rate-making proceedings for paying commissions.

Under the plan Garamendi has selected, companies that pay commissions to independent agents to secure customers will be subject to an “efficiency standard” different from companies that write business without using agents. Companies that employ their own agents will be subject to a third standard for their allowable expenses.

Companies that use agents will presumably be given credits for higher costs of doing business when the commissioner sets their fair rates of return, on the way to considering what rates to allow them to charge. Just how much the credits will be is scheduled to be deliberated in a new round of hearings later this spring.

Representatives of the state’s more than 100,000 agents contend that they give more service to customers and therefore ought to have their commissions protected by allowing the companies that pay them to have higher expenses without penalty.

Proposition 103, approved in 1988, gave the state the authority to approve or reject rates filed by the companies before they could go into effect. Garamendi is trying to establish the rules for rate review and determination.

In protecting the agents, some critics suggest that Garamendi is retreating from an opportunity to pursue fundamental reform. Proposition 103 author Harvey Rosenfield said Thursday that in establishing new regulations for implementing his measure, Garamendi is “eyeball to eyeball (with powerful interests) and we’ll see who blinks.

“I’m not saying he’s blinked yet, but his eyebrow is certainly drooping mighty low,” Rosenfield said.

But Garamendi said Thursday that unless his regulations reflect the realities of the way the insurance industry operates, he fears that they will be subject to the kind of legal challenges that immobilized every attempt by his predecessor, Republican Roxani Gillespie, to implement Proposition 103.

Garamendi added that many consumers have told him they favor protecting the livelihood of the state’s more than 100,000 insurance agents because they believe the agents give them additional service that is worth paying for.

The commissioner said in an interview that he had proposed alternatives that would have imposed a single efficiency, or allowable expense standard, for all companies, regardless whether they had heavy agent costs, with the intent of provoking comment and eliciting their views.

In the agents’ case, this succeeded dramatically. Thousands of agents wrote the commissioner protesting any regulation that would treat companies that use agents the same as companies that don’t in setting rates.