Some Drivers to See Higher Coverage Costs
Accident-prone drivers be warned. California auto insurance rates are on the rise. And though rate hikes for so-called preferred drivers may be modest, rates for drivers with tickets and accidents are likely to soar.
Insurers that were cutting rates in 1998 and 1999 are filing rate hike requests by the dozen, regulators said. Although the average rate hike is about 8% statewide, insurers said their high-risk drivers are likely to face double-digit premium boosts, with low-risk drivers enjoying little change.
“We filed for a 6.9% increase,” said Jerry Carnahan, president of Farmers Insurance Group’s personal lines business. “But it won’t be 6.9% for everyone. We have tried to segment it to people who have had driving problems or who are in areas where we’ve had problems.”
Precisely how big a rate hike high-risk drivers can expect is nearly impossible to predict. Individual premiums vary based on the insurer, the driver and up to 19 “rating factors,” which include everything from where the driver lives to his or her credit rating and marital status.
However, a rate increase is nearly assured for the vast majority of California drivers. As of Sept.30, 167 California auto insurers received Insurance Department approval to raise rates. Just 11 companies cut rates during the same period last year. The net increase in premiums for California’s 16 million insured vehicles: $778million.
More rate hike applications are in the pipeline, said Rick Holbrook, head of the Department of Insurance’s rate regulation division in San Francisco.
Nationwide, the auto insurance industry is primed to boost rates an average of 6% this year, said Robert P. Hartwig, vice president and chief economist at the Insurance Information Institute in New York.
The reasons for the hikes boil down to three: more accidents, higher costs and lower investment returns.
In effect, the great stock market conditions that insurers enjoyed throughout the 1990s have reversed themselves--at least temporarily.
“If it feels like rates are seesawing, it’s because they are,” said Brian Sullivan, editor of the Auto Insurance Report, a trade newspaper headquartered in Dana Point. “Practically the nanosecond that insurance companies started cutting their rates in California, their costs started to rise.”
Average auto insurance rates dropped in many states throughout the 1990s, experts said. The average Californian spent $803 on auto insurance in 1995, for example, but in 1999 spent just $659 in 1999--the most recent year for which statistics are available. The average cost of auto insurance in Hawaii fell to $735 from $963, and in Rhode Island, it dropped to $834 from $870.
The declining costs were caused by several factors, including the aging of the baby boom generation, the success of Mothers Against Drunk Driving, the rise of managed health care and improved safety features in cars.
MADD dramatically curbed drunk driving, and air bags and anti-lock brakes reduced injuries when they happened, Sullivan said. Managed-care companies also were able to stem the rise in health-care costs, which auto insurers bear when people are hurt in car accidents.
But demographics may have played the biggest role, Sullivan said. The largest segment of the adult population--the 77-million-strong baby boom generation--moved from their carefree 20s and 30s into middle age.
“In the ‘80s, the baby boomers were wrapping Mustangs around telephone poles after finishing a pitcher of beer,” Sullivan said. “In the ‘90s, they were driving their kids to soccer.”
The result was a nearly decade-long slide in both the frequency and severity of automobile accidents.
In addition, insurers make money by investing policyholder premiums. In the late 1990s, with stock prices soaring, many insurers were willing to write policies at or below cost just to collect premiums that they could reinvest.
But the number and cost of accidents started to rise again in 1997, which is also when insurers learned just how costly it was to replace and repair copious safety features--such as air bags--when a car has been involved in a wreck, Hartwig said.
Meanwhile, managed-care companies began to get sued for putting cost-cutting ahead of patient care. And the stock market tanked, sharply reducing insurers’ investment returns. The combination spurred a modest rise in auto insurance rates last year--about 1.5% nationwide--and bigger projected hikes this year and next.
But the effect of the rate increases is likely to hit some consumers hard and others not at all.
“Some people are going to see these as the end of the world and others are going to think, ‘No big deal,”’ Sullivan said. “It depends on where you are in the spectrum.”
That’s largely because insurers have changed the way they structure rate increases. Where they once were prone to raise rates nearly across the board, giving a larger population of drivers a somewhat more modest rate hike, they’re now more likely to pass on big rate increases to higher-risk drivers, while leaving drivers with no accidents or traffic tickets relatively unscathed.
Companies must use three main factors--driving record, years of driving experience and the number of miles driven annually--when setting premium rates in California. However, they’re allowed to use up to 16 additional factors, which can include marital status, ZIP Code, credit record and vehicle type.
“Some companies may not have used all the available factors when they set their rating class bands up,” said the insurance department’s Holbrook. Now more companies are using more factors, he said.
Los Angeles-based Farmers Insurance, for example, has about 20 different rating categories, Carnahan said. Premium rates go from very low for those in the top tier to significantly higher for those in the bottom. By slicing policyholder groups more thinly, he said the company can more accurately pass on the cost of insurance to the people who represent the greatest risks.
Companies also are becoming stricter about checking the accuracy of insurance applications, Sullivan said. In the past, if consumers forgot to mention an accident or underestimated the number of miles they drove each year, companies might not catch the errors. Now, an increasing number of insurers are scrutinizing applications and double-checking everything from driving records to odometer readings before accepting coverage or providing a rate.
“They might have overlooked a previous accident and put you in a preferred tier in the past,” Sullivan said. “That’s not going to happen today. Companies are checking absolutely everything.”
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More Increases
The number of auto rate increases granted by state insurance regulators is climbing, while the number of rate decrases is falling.
Source: California Dept. of Insurance
