Study Says State’s Drivers Overpaid for Auto Premiums

A consumer advocacy group says Californians paid $7.7 billion too much in auto insurance premiums between 1989 and 1997, a period in which auto insurers enjoyed record profits in the state.

In a study to be released today, the Santa Monica-based Proposition 103 Enforcement Project says the average Californian should be paying $100 a year less for auto liability insurance under guidelines passed by voters in the 1988 initiative.

Insurance department officials attacked the study as politically motivated, saying it was misleading, simplistic and a last-minute attempt to derail the reelection campaign of Insurance Commissioner Chuck Quackenbush.

Quackenbush did not return calls for comment.

Department spokeswoman Dana Spurrier said the study fails to reflect the full impact of recent premium cutting by insurers eager to increase their market share in California. Insurance department officials say rates have declined at least 5.5% since 1995.

The study, conducted for the consumer group by former Texas insurance department economist Birny Birnbaum, blamed Quackenbush for failing to force insurance companies to cut their rates further.

Consumer activist Harvey Rosenfield said recent premium cuts barely make a dent against what he said were excess premiums paid since voters passed Proposition 103, an auto insurance reform measure that has been mired in legal disputes since winning approval. Using average profits earned by insurers nationally as a guideline, the group estimates $5.2 billion of the “excess” premiums have been charged since Quackenbush took office in 1995. It tracked industry profits from 1989 to 1997.

The study says the average Californian’s auto liability premium fell about 1%, to $512, from 1989 to 1996, the last year for which individual premium figures are available. Nationwide, liability premiums rose 36%, to $431.

The study’s authors say that if Proposition 103 had been properly enforced, Californians would have paid less than the national average, or $408, for liability insurance by 1996.

Liability insurance makes up the bulk of most auto insurance coverage, with physical damage coverage providing most of the rest. The group said it used the liability portion to make it easier to compare results nationwide. Fast-rising liability premiums were one of the leading factors behind the passage of Proposition 103.

While the group’s motivations in publishing the survey two weeks before the Nov. 3 election may be suspect, it’s no secret among insurance industry analysts that insurers in California have been enjoying healthy profits.

Figures from the National Assn. of Insurance Commissioners, which represents the leading state insurance regulators, show insurers in California collected profits that were up to 60% higher than the national average between 1994 and 1996, the latest year for which NAIC figures are available.

While nationally insurers saw a return on net worth of 11.4% to 12.1%, in California insurers saw returns of up to 19.3%, NAIC figures show.

Profits have continued to climb since then, insurance analysts said. In fact, California is producing higher auto insurance profits than any state in history, thanks to fewer liability-related losses, said Brian Sullivan, an independent insurance analyst with Risk Information Inc. in Laguna Niguel.

Analysts credit safer drivers, safer cars and more aggressive prosecution of insurance fraud for the decline in liability losses.

Analysts disagree on whether the insurance industry’s profits have been “excessive,” as the consumer group says, because profit in the insurance industry can be defined many ways. Although Proposition 103 included language that restricts insurer profits, no agreement has been reached about what a proper profit level should be.

Birnbaum said he determined what Californians should have been paying for auto liability insurance by using a target profit rate of 12%.

“People may quibble and say, ‘Is 12% the right amount of profit, or should it be 13%?’ But we’re not even in the ballpark” with those figures, said Birnbaum, an Austin-based consultant who was chief economist for the Texas Department of Insurance from 1993 to 1996. “Not even close.”

Despite insurance company legal challenges, California courts have upheld Proposition 103’s major provisions, including a 20% rate rollback, premium refunds and a provision that sharply limits insurers’ ability to use ZIP Codes to determine premiums. In June, a Superior Court judge threw out a Quackenbush rate plan that allowed companies to continue to use ZIP Code-based pricing in a different form. Quackenbush has appealed the ruling.