Rollbacks and Proposition 103

Your call for insurers to issue rollbacks ordered by Insurance Commissioner John Garamendi (“Insurers Must Do the Right Thing,” editorial, Aug. 19) overlooks an important concern of insurers and why they may turn to the courts to protect their rights. The commissioner has set company rollbacks based on his estimate of a minimum non-confiscatory 10% rate of return, rather than a “fair rate of return” ordered by the California Supreme Court last year. A disagreement of just 1% amounts to $25 million, no small change to an industry with low profitability.

Stock companies believe they should be allowed to earn a rate of return of 15% or more in order to compete with other industries for investment capital necessary for growth. According to Forbes, the national beverage industry made 23.2% return on equity in 1989, the metal products and apparel industries made almost 18% return, banks made 13.3%, and the property and casualty industry made a 9.6% return.

That same year in California, the industry lost money on automobile claims and expenses but turned a small net profit of 6.7% on investment income.

The new rollback orders are another mountain of red tape being piled on a competitive industry by a commissioner borrowing regulatory models from the monopolistic utility industry. More regulations addressing marketing, pricing and policy services are on the way. Insurance companies are not just fighting Proposition 103, they are fighting for their lives.

PETER GORMAN

Assistant Vice President

Alliance of American Insurers

Schaumburg, Ill.