Loophole Seen Gutting New Car Insurance Plan

By KENNETH REICH

Oct. 4, 1997 12 AM PT

TIMES STAFF WRITER

Although the ZIP Code-based territorial rating system for auto insurance has been de-emphasized in new pricing plans approved by Insurance Commissioner Chuck Quackenbush, he is allowing a loophole that leaves much of the system intact, experts say.

The result is that place of residence remains the most important single element in pricing auto coverage, several officials in the industry said Friday.

Dana Spurrier, a Quackenbush spokeswoman, said Friday: “The regulations are the regulations. They speak for themselves. But it is absolutely not true that the commissioner is allowing a loophole.”

Initial prices under the new system released by insurers show that while rates in the most urbanized areas are coming down, as Quackenbush said Wednesday they would, there are still great differences based on ZIP Codes.

Orange County prices will often remain about half those in central Los Angeles, the Westside and part of the San Fernando Valley.

For instance, State Farm, the largest insurance seller in California, released sample prices for semiannual premiums. The prices are for an adult long-term driver with a clean record, new to State Farm, driving a Ford Taurus more than 7,500 miles a year and buying a full coverage package.

In Compton, a company spokesman said, the new price is $743, compared to $784 under the old system. In Beverly Hills, the new price is $903, compared to the old, $1,055. In Van Nuys, it will be $828 instead of $936. In Diamond Bar, there is a slight increase, to $544 instead of $518.

Orange County prices are lower. Newport Beach will slip to $443 from $489 and Anaheim to $466 from $477.

The new prices were supposed to go into effect industrywide Wednesday. But some companies, such as Allstate, have yet to release their prices.

The stated intent of the new system is to reduce the impact of territorial ratings on prices. But experts say that--contrary to the spirit of the regulation--insurance companies are being allowed to average so-called optional pricing factors in such a way that geographic location will remain the primary factor, as it has been for a long time.

The new regulations say that a motorist’s driving record, annual miles driven and years of driving experience are to be accorded more weight in pricing than any other factors.

But the companies have taken some complicated language in Quackenbush’s regulations, interpreting it in their own way, and he has gone along by approving their new rates, according to Brian Sullivan, editor of the trade publication Auto Insurance Report. Some insurance lobbyists and company spokesmen concurred Friday with Sullivan.

It is true, Sullivan said in an interview, that 14 permissible “optional” pricing factors (such as territory, gender and even driving safety education) are all now supposed to be given less weight in pricing than the “mandatory” factors--driving record, miles driven and years of driving experience.

But, Sullivan said, Quackenbush is allowing the companies to average the total price of the optional factors and then compare the average to the weight they assign to the mandatory factors.

This can have the effect of giving the optional factors--and particularly territory--more weight than the mandatory factors.

In one case Sullivan cited, an insurer gave safety record an initial dollar weight of $20.65, annual mileage $13.64 and years of experience $10.51. These are the mandatory factors.

Then it priced 10 separate optional factors that totaled $98.17. Some were very minor--such as mature driver improvement, just 31 cents. But territory was weighted at $34.60.

By averaging the total optional amount, the company came up with a figure of $9.82, and then said this complied with the regulations, because $9.82 is below $10.51, the lowest of the mandatory figures.

Quackenbush has accepted the averaging, State Farm spokesman Bill Sirola said Friday.

But the original interpretation of the law by consumer groups was that no single optional factor could exceed the weight given to any of the mandatory factors. This would have kept territory in a much diminished status.

Consumer advocate Harvey Rosenfield, whose Proposition 103 Enforcement Project is challenging certain aspects of Quackenbush’s new rating plans in public hearings, called what the commissioner has done “a scandal.”

“The insurance industry has decided, under Commissioner Quackenbush, they can completely ignore the law,” Rosenfield said. “Nothing in the regulation says they can average the optional factors, but they are doing it, and Quackenbush is letting them get away with it.”

Through most of the United States, the industry uses territorial rates as a prime factor in pricing auto insurance. Industry spokesmen generally say such statistics are more reliable than driving record, miles driven and years of driving experience.

Many accidents and traffic violations never get into individual records properly, they say. Drivers often understate the mileage they rack up, insurers add, and when motorists move from state to state even records on their years of driving experience can be lost.

Over the last decade, three California insurance commissioners have struggled with implementing the 1988 decision of the electorate in adopting Proposition 103 to reduce the influence of territory in pricing and make driving record, miles driven and years of experience most important.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Finding the Loophole

An apparent loophole allows the old territorial rating system to continue under the new weighting system. Here’s how:

(1) Auto insurance pricing requires three mandatory categories.

(2) Optional factors in a fourth category are not supposed to exceed mandatory ones.

(3) Insurers, however, are averaging the total of all the options, and using the average figure as the comparison.

(4) Here’s the loophole: The average of the optional factors is less than any of the mandatory categories. But “territory” exceeds any of the others and is the real dominant factor.

Factors in Auto Insurance Pricing: Initial Weight

Mandatory Factors

A. Driving Safety Record: $20.65

B. Annual Mileage: $13.64

C. Years of Driving Experience: $10.51

Subtotal: $44.80

Optional Factors:

1. Usage of Vehicle: $1.46

2. Gender, Martial Status: $25.10

3. Percentage Use by Driver: $2.22

4. Multi/Single Car: $14.52

5. Academic Standing: $2.70