Auto insurance companies, their profits boosted by a sharp drop in accident costs in recent years, overcharged Californians by more than $800 million last year, a consumer group contends in a study to be released today.
Consumers Union--the Yonkers, N.Y.-based publisher of Consumer Reports magazine--said California policyholders would have seen an average price cut of 7%, or $55 per insured vehicle, if Insurance Commissioner Chuck Quackenbush had enforced the profit-margin ceilings set under Proposition 103, the 1988 rate-rollback initiative.
Consumers Union formally petitioned Quackenbush to investigate the rates and profits of the state’s 10 largest auto insurers.
“The findings of our report should act as a litmus test for Commissioner Quackenbush. It should give him the opportunity to make auto insurance more affordable for Californians,” said Bill Ahern, who headed the study for Consumers Union. He was a top deputy to former Insurance Commissioner John Garamendi.
The study is one of the most comprehensive of its kind ever undertaken in California, a state that has about 19 million licensed drivers and about 12% of the nation’s auto insurance market.
Quackenbush criticized the report’s conclusions, saying in a statement Tuesday that the data were out of date and did not reflect falling rates in 1996. He noted that he already has approved rate cuts this year for three of the state’s 10 largest auto insurers and has a rate-cut application from a fourth, Allstate Insurance Co.
Quackenbush, who was in New York City for an insurance regulators convention, had not seen the full report, a spokeswoman said, adding: “We’re going to be looking at the study when we receive it.”
Private insurance analysts say that auto insurance profits have surged since the late 1980s, fueled not by large rate increases but by an extraordinary decline in claims costs.
“Auto insurance has been highly profitable lately, and there is every indication that it will remain highly profitable over the next two to three years at least,” said Claude Fongemie, research director for Conning & Co. in Hartford, Conn.
The trend is national, but has been especially pronounced in California because of court-imposed limits on lawsuits against insurers, strong antiifraud enforcement and the impact of an 85% rate increase in the state’s high-risk auto insurance pool, Consumers Union said in its study. But insurers have not passed the savings on to their customers, the organization said.
For the analysis, Consumers Union hired an independent actuarial firm, Wakely & Associates of Stone Mountain, Ga. The study drew on data from, among other sources, the Department of Insurance, the National Assn. of Insurance Commissioners, the companies and the insurance rating firm of A.M. Best & Co.
The study shows that the top 10 companies’ average return on surplus (a key measure of insurance profitability) was 28% in 1995, with Allstate’s 35.8% return topping the list.
Consumers Union noted that in two cases last year, Quackenbush determined that rates above 14% would be considered excessive under Proposition 103.
If the companies had been held to that 14% ceiling in 1995, the study said, it would have resulted in rate cuts of 12% for Allstate, 11% for the Auto Club of Southern California and Safeco Insurance Co., 10% for 20th Century Insurance Co. and United Services Auto Association, 8% for State Farm Mutual Automobile Insurance Co., 5% for Mercury Insurance Co. and 4% for Farmers Insurance Group.
For the top 10 as a group, premiums would have been 7% lower, resulting in a total savings of $684 million. Consumers Union estimated that savings would be well over $800 million if all California insurers were included.
Quackenbush said in his statement that the 14% profitability ceiling involved homeowners and earthquake insurance cases. “No industrywide standard for auto insurance has been set,” he said.
Ahern said that since auto insurance is a far less risky line than homeowner or earthquake insurance, the profit margins should be lower, if anything.
The study estimated State Farm’s 1995 return on surplus to be 29.7%, a figure that a company spokesman dismissed as grossly inflated. He said he could not provide the exact number, however, but noted that State Farm returns excess profits to its policyholders in the form of dividends.
Allstate did not dispute the 35.8% return on surplus cited in the study, but said in a statement Tuesday that one year’s results can be misleading: “While 1995 was a profitable year for Allstate, we had underwriting losses in seven of the 10 previous years.”
Allstate added that its improved profitability is reflected in its current application for a rate reduction.
The other three top 10 companies that applied for and received rate cuts this year are Safeco, 6%; USAA, 5%, and 20th Century, 3%, a Quackenbush spokeswoman said. “This is a continuing trend toward decreasing auto insurance rates that we anticipate seeing more of in the near future,” the commissioner said in his statement.
Republican Quackenbush’s campaign to succeed Garamendi attracted substantial financial support from the insurance industry. Consumer groups have criticized some of his moves but also have praised him for such actions as requiring insurers to base their rates on drivers’ safety records and miles driven rather than on where they live. Those regulations are now being debated in the state Legislature.