Auto Insurers Yield to Rate Regulations

Virtually all the state’s major auto insurers succumbed Thursday to years of pressure and began revising the way they set auto insurance rates.

Following the lead of industry giant State Farm Mutual Automobile Insurance Co., 32 of the state’s insurers complied with new regulations requiring rates to be based mainly on motorists’ overall driving records rather than their ZIP Codes.

Insurance Commissioner John Garamendi said it was good news for California drivers.

“Today, the biggest company of all, State Farm, said it would fall in line,” he said at a state Capitol news conference. “The good drivers in the state are finally going to be rewarded.”

Garamendi called the move to comply with new state regulations a finale for what’s been a 17-year political and legal battle over Proposition 103, the automobile insurance initiative approved by voters in 1988.

For years, auto insurers have relied on ZIP Codes as a key element in calculating individual insurance rates. Insurers say that geography is the best way of predicting whether an accident or theft might occur. Consumer groups, on the other hand, contend that ZIP Code rate setting treats all residents of a neighborhood the same whether they are good drivers or bad.

Proposition 103 requires that rates be based mainly on a motorist’s safety record, number of years behind the wheel and annual miles driven. It also provides a 20% “good driver” discount for people with a clean driving record of three years.

Insurers counter that Proposition 103 and Garamendi’s regulations are illegal and would raise rates for 60% of the state’s drivers, who live in suburban and rural areas.

People who live in congested cities generally have more accidents and file more claims than residents of suburban or rural communities, insurers said.

The threat of rate hikes is an insurers’ scare tactic, said Mark Savage, an attorney with Consumers Union, the publisher of Consumer Reports magazine.

“They say your premiums will go up and you should be afraid,” he said. “But it turns out that when they do the filings, premiums are not going up across the state of California.”

That appeared to be the case Thursday as insurance companies rushed to meet a court-ordered deadline for filing their new rate plans.

But unlike State Farm, which tied its rate filing to an 8% cut in premiums, many other insurers offered either small overall reductions or none at all.

AAA of Northern California’s rate plan cut premiums by an average of just 1.9% for 1.1 million members. Farmers Insurance Group and Safeco Corp. submitted plans they called “revenue neutral,” meaning that rate increases for some customers were balanced by reductions for others.

Farmers, the state’s second-largest insurer, came up with pricing criteria that reduce reliance on ZIP Codes but don’t significantly change the premiums for most of its 2 million customers in California, spokesman Jeff Beyer said. In October, the company cut its rates by an average of 22%, he said.

Details on the other filings Thursday will not be known until the documents are analyzed by the California Department of Insurance, department spokesman Norman Williams said.

Nevertheless, Garamendi noted that he had already received filings lowering rates by a total of $370 million from insurers representing more than a quarter of the California market. In earlier submissions, the Automobile Club of Southern California asked for a 7% average rate decrease, and USAA requested a 5% drop.

In Thursday’s filing, State Farm said it would lower premiums by $204 million for 93% of its 3 million drivers at the same time it would comply with the Proposition 103 regulations. State Farm credited a decline in losses with generating extra revenue that would allow the company to lower premiums for motorists living in cities, suburbs and rural communities.

Insurers’ profits have ballooned in the last three years as claims declined, partly because of safer vehicles and more cautious driving, particularly in cities, Garamendi said.

The combination of good times and a series of legal setbacks may have convinced most insurers to quit trying to thwart Proposition 103, said Jim Rogers, an auto insurance industry consultant.

“I think the companies have decided they’ll figure out ways to live with it,” he said. “They may have lost their best predictor of losses, so they’ll just have to hedge their bets.

“They’ve had three profitable years, probably the best three in decades, so they have room to make some changes.”