State Insurance Commissioner John Garamendi said Thursday that he would propose rules forcing auto insurers to set rates based on the driving records and miles driven by motorists, and to give less weight to where drivers live -- a change that could affect the pocketbooks of 23 million California drivers.
The proposal was embraced by consumer and civil rights advocates who have long complained that city dwellers -- especially in minority neighborhoods -- pay higher rates than drivers with similar records who live in rural towns and suburbs.
But insurance industry representatives said the proposal could lead to rate hikes for more than 60% of California drivers, and they said the formula would deny insurers the ability to set rates based on a proven risk factor.
“We are hoping to go through the regulatory process and come out, at the end of the day, with a change that will balance the competing interests of different drivers,” said Sam Sorich, president of the Assn. of California Insurance Cos. “Fairness requires that rates reflect the risk of loss. The question is whether these regulators will move too far away from that principle.”
As insurance commissioner, Garamendi has the authority to implement new rate formulas after public hearings and legal review. He plans to release details of his proposal next week, with the first hearing set for Feb. 24.
Garamendi said his proposal was intended to implement provisions of Proposition 103, the 1988 voter initiative that said auto insurance rates should be based primarily on three factors -- driving record, miles driven and driving experience.
School records, marital status and ZIP Codes, among other things, could be secondary factors.
Despite the initiative’s mandate, subsequent court rulings gave the state discretion in determining how to weight the various factors, and former Insurance Commissioner Chuck Quackenbush allowed insurers to use ZIP Codes as a primary element.
Consumer groups petitioned Garamendi in 2003 to revisit the formula, triggering workshop sessions around the state that led to Thursday’s announcement.
“I am going to propose regulations that will finally, after 17 years, bring to California drivers the basic fairness that they have been waiting for,” Garamendi said at a news conference in Sacramento. “This has been a very, very long road and a difficult road for many people in California who could not understand why where they lived had a bigger impact on how much they paid than how well they drive.”
Neither Garamendi nor insurers gave a detailed explanation of how the proposed change would affect individual rates.
Motorists in Los Angeles, Orange, San Francisco, Sacramento and Stanislaus counties would on average pay less, while drivers in 52 other counties would pay more, according to the Assn. of California Insurance Cos. In Fresno County, people would on average pay about the same.
Though the formula for setting rates would change, insurers would still collect the same amount overall.
“What’s going to change is who pays more and less,” said Rex Frazier, vice president and general counsel of the Personal Insurance Federation, a trade group. “Imagine you have a balloon and you squeeze on one side. It pops up on the other. In this case, rural drivers are going to subsidize both good and bad urban drivers.”
Consumer advocates, however, said the current system was unfair, because it raised rates for minority group members and others who could least afford the payments.
A female motorist with 22 years of driving experience and a good record who lives in predominantly white Westchester would pay $1,443 a year with Farmers Insurance Group, advocacy group Consumers Union said in a study released this week.
That same driver would pay $2,394 a year if she lived in the African American neighborhood of Baldwin Hills, the group said. Similar disparities occur for customers of other major insurance companies, Consumers Union said.
Insurance executives criticized the study, saying that rates are higher in certain neighborhoods because accident rates are higher, and that neither race nor ethnicity is a factor.
Consumer advocates, however, said Garamendi’s proposal rightly fulfilled the wishes of voters who approved Proposition 103.
“We have the prospect that our auto insurance rates are finally going to be based on factors that are within our control,” said Harvey Rosenfield, author of Proposition 103 and founder of the Santa Monica-based Foundation for Taxpayer and Consumer Rights. “People who drive long distances, have poor driving records or have little experience behind the wheel will pay more.
“Right now, if you are a person who only drives to church on Sunday, you are treated the same as somebody who drives hundreds of miles a week commuting to work.”
The new rules would not prohibit the use of ZIP Codes as a factor in setting rates, Garamendi said, but would simply reduce their influence.
The insurance commissioner said he hoped that the rules could be adopted next summer and that they probably would not affect motorists’ insurance bills until 2007.
Though they expressed reservations, insurance trade groups said they would withhold formal comment until they had a chance to review Garamendi’s proposal.
Still, insurers said they had statistical data showing that driving records, miles driven and years of driving experience were less important in predicting accident rates than people might think.
In particular, the number of miles driven is a poor risk indicator, said Frazier of the Personal Insurance Federation. That’s because the risk of a fender bender is far greater on a five-mile ride through the city than it is during a five-mile jaunt through the country.
“Five miles driven in Tulare is not the same as five miles driven in Los Angeles,” he said.
Even driving records can be misleading, said Sorich of the Assn. of California Insurance Cos. In many cases, drivers don’t report minor accidents, and they’ll go to traffic school to keep speeding tickets off their records, he said.
“Those elements make driving record a less accurate predictor of losses than you would expect,” he said.
Still, the current system’s heavy reliance on ZIP Codes has created wide and seemingly arbitrary rate differences, consumer activists said.
“Commissioner Garamendi’s action is the right thing to do in every sense, both legally to enforce Proposition 103 and to bring fairness and rationality to California’s auto insurance premiums,” said Mark Savage, senior attorney with Consumers Union. “We look forward to seeing real changes across the state.”
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Rates and ethnicity
Drivers in mostly African American and Latino areas pay higher insurance rates than drivers with similar records who live in white areas, Consumers Union found. Insurers say rates are higher in areas with higher accident rates and that ethnicity is not a factor.
Annual premium* by dominant ethnic group in ZIP Codes studied (in thousands)
African American: $1.8
African American: $2.1
African American: $1.7
*For a female driver with 22 years of driving experience and no record of accidents or violations. Based on 2002 data.
Source: Consumers Union