Insurers’ System for Rates Varies
Gender matters to auto insurer Mercury General Corp., while Farmers Insurance Exchange cares more about marital status.
And at Automobile Club of Southern California, the people setting the rates look closely at how many vehicles you want to insure.
California’s biggest auto insurance companies use a variety of factors to set rates, and no two are exactly alike in how they weight them. Industry officials say the various risk-weighting practices show the industry is highly competitive, with each plan custom-designed for the mix of policyholders in each company’s customer pool.
The entire system, however, would be overhauled under California Insurance Commissioner John Garamendi’s proposal to require compliance with Proposition 103.
The 1988 ballot initiative, backed by consumer groups, said three mandatory driving-related factors must have the greatest effect on rates: safety record, miles driven and years of experience, in that order.
Garamendi’s proposal is the latest salvo in a decades-long battle centered mainly on the industry’s practice of giving the most weight to ZIP Code factors that measure the cost and frequency of accidents and thefts in an area.
A Los Angeles Times review of insurer rate filings with the Department of Insurance shows these so-called frequency and severity factors remain the most heavily weighted by most of California’s biggest auto insurers.
But many other factors considered supplemental under Proposition 103 also are given more weight than the mandatory driving factors in the company filings.
In Mercury Insurance’s latest rate filing with the state, gender is assigned twice as much importance as years of experience in calculating rates for bodily injury and property damage coverage, which California law requires all motorists to maintain.
At Farmers, marital status is nearly three times as important as driving experience or miles driven in setting premiums for those liabilities. Even more important in Farmers’ formulas are the ZIP Code factors -- a decision based on years of analysis of what best predicts future accidents, officials said.
“The fact is that mileage driven is a lot less predictive than where that car is based,” said Bill Martin, vice president of Los Angeles-based Farmers.
The largest auto insurer, State Farm Mutual Automobile Insurance Co., makes a combination of gender and marital status its No. 1 factor, although that heavy weighting is lessened as drivers get older and eventually is phased out.
State Farm’s No. 2 consideration combines the frequency and severity ZIP Code factors. Drivers’ safety records, miles driven and experience trail in importance -- but would have to be moved up under Garamendi’s plan.
Changing the rate formulas would be a major task for virtually every insurer, even those already concentrating on the good drivers in congested areas that Proposition 103 aimed to help.
Woodland Hills-based 21st Century Insurance Group, for example, says it sells policies mainly to urban drivers with clean records. But it still assigns twice as much weight to the frequency of accidents in given ZIP Codes as it does to drivers’ safety records.
If the Garamendi plan goes through, “there’s going to have to be almost an across-the-board adjustment,” Sam Sorich, president of the Assn. of California Insurance Cos., said in an interview last week.
In general, Garamendi’s proposal would probably lower rates in urban areas such as Los Angeles and raise them in suburban and rural communities. Industry executives say the plan is wrongheaded because it would force them to set rates based on factors that may not apply to their customer base.
“That’s why we disagree so vehemently with [Proposition 103 author] Harvey Rosenfield -- because there’s no one-size-fits-all formula,” State Farm spokesman Bill Sirola said.
Consumer activists, by contrast, say the broad range of approaches shows the companies overstress factors such as marital status or owning multiple cars to the benefit of certain customers at the expense of demonstrated good drivers who happen to live in a neighborhood where claims are high.
“This really exposes the industry,” said Doug Heller of Rosenfield’s Santa Monica-based Foundation for Taxpayer and Consumer Rights. “They say it’s all about cost-based pricing. But this shows it is all about marketing. If it were truly about risk, you wouldn’t expect to see such a wide range of approaches.”
Under Garamendi’s plan the changes would be phased in gradually starting late this year. Because insurers have different strategies and mixes of policyholders, the effects could vary widely, making comparison shopping -- always a good idea -- even more important, regulators, industry spokesmen and consumer groups said.
“People should be curious about what the changes will mean, and look around for the best deal,” said Mark Savage, a Consumers Union lawyer who strongly backed Proposition 103’s emphasis on driver records, mileage and experience.
Despite the initiative’s mandate for those elements, subsequent court rulings held that the insurance chief has broad discretion over how risk factors are weighted.
To the dismay of consumer activists, former Insurance Commissioner Chuck Quackenbush allowed insurers to use any of 16 optional factors including marriage, gender and location of residence to carry more weight than the mandatory factors, so long as the average weight of all optional factors was less than that for the third mandatory factor, experience.
Consumer groups petitioned Garamendi in 2003 to revisit the formula, triggering workshop sessions around the state that led to his decision on the risk factors. As insurance commissioner, Garamendi has the authority to implement new rate formulas after public hearings and legal review, but a fight could be in the offing.
Mercury General’s chairman, George Joseph, has taken steps toward qualifying a ballot measure for the November election that would rewrite Proposition 103 to diminish the emphasis on driving records, miles driven and driving experience.
Joseph and other Mercury officials didn’t respond to repeated requests for comment on the company’s unusually heavy weighting of gender. Industry experts, however, note that Mercury caters to younger drivers, where differences in accident rates are higher for men than women -- a gap that presumably is addressed by weighting more heavily for gender.
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How auto insurance rates are set
Here are the top factors used by the state’s three largest auto insurers to calculate rates for bodily injury and property damage coverage (Mercury Insurance and Mercury Casualty are sister companies). ZIP frequency is the frequency of accidents within a ZIP Code, and ZIP severity refers to how costly those accidents are. The multi-vehicle factor is a discount for customers insuring several cars.
Bodily injury/property damage
State Farm
Factor 1: Marital status/gender*
Factor 2: ZIP freq./sev.
Factor 3: Safety record
Factor 4: Miles driven
---
Farmers
Factor 1: ZIP severity
Factor 2: ZIP frequency
Factor 3: Marital status
Factor 4: Safety record
---
Mercury Insurance
Factor 1: ZIP severity
Factor 2: ZIP frequency
Factor 3: Safety record
Factor 4: Gender
---
Mercury Casualty
Factor 1: ZIP frequency
Factor 2: Safety record
Factor 3: Gender
Factor 4: ZIP severity
---
The next four largest insurers in the state use separate ranking systems for determining rates for bodily injury and property damage coverage.
Bodily injury
SoCal Auto Club
Factor 1: ZIP frequency
Factor 2: ZIP severity
Factor 3: Safety record
Factor 4: Multi-vehicle
---
AAA of NorCal
Factor 1: ZIP frequency
Factor 2: Safety record
Factor 3: Multi-vehicle
Factor 4: Marital/gender*
---
Allstate
Factor 1: ZIP frequency
Factor 2: Safety record
Factor 3: Marital status
Factor 4: Miles driven
---
21st Century
Factor 1: ZIP frequency
Factor 2: Safety record
Factor 3: ZIP severity
Factor 4: Miles driven
---
Property damage
SoCal Auto Club
Factor 1: Safety record
Factor 2: ZIP frequency
Factor 3: Multi-vehicle
Factor 4: Miles driven
---
AAA of NorCal
Factor 1: Safety record
Factor 2: ZIP frequency
Factor 3: Marital status/gender*
Factor 4: Multi-vehicle
---
Allstate
Factor 1: Safety record
Factor 2: ZIP frequency
Factor 3: Marital status
Factor 4: Multi-vehicle
---
21st Century
Factor 1: ZIP frequency
Factor 2: Safety record
Factor 3: Multi-vehicle
Factor 4: ZIP severity
---
Prop. 103-mandated factors
Factor 1: Safety record
Factor 2: Annual miles
Factor 3: Experience
Factor 4: Other**
*Also factors in years of driving experience
**Optional factors, such as marital status and vehicle type
Source: Department of Insurance filings
