New System for Determining Auto Insurance Rates Backed

A state agency approved plans Friday to base auto insurance rates largely on drivers’ safety records and experience, and not on where they live.

The state Office of Administrative Law ruled that rating formulas proposed by state Insurance Commissioner John Garamendi complied with state law, clearing the way for the new criteria to take effect in about 30 days.

Garamendi said the changes would force auto insurers to adhere more strictly to the mandates of 1988’s Proposition 103, which said drivers’ safety records, the number of miles they drive and their years of driving experience should be given the greatest weight in setting rates. Most insurers now base much of the rate on where drivers live.

“Californians have waited 17 years, six months and eight days to end the system of basing auto insurance premiums based on where you live, rather than how you drive,” said Douglas Heller, executive director of the Foundation for Taxpayer and Consumer Rights in Santa Monica, the successor to the organization that pushed Proposition 103.

He predicted that “in coming months, we are going to see reform and it’s going to feel good for a lot of motorists.”

Still, there may be more hurdles to clear. Insurers can comply with the rules by filing new rating formulas, as the Automobile Club of Southern California did Thursday, or they can file suit to fight the regulations.

Representatives of the state’s largest auto insurers -- State Farm, Farmers and Allstate -- said Friday that they were weighing their options.

“I really wouldn’t be surprised if there were some actions filed,” said Ken Gibson of the American Insurance Assn., a Sacramento-based trade group.

Even if they don’t contest the changes, insurers would have up to two years to fully adopt new formulas. They contend that Garamendi’s new risk factors could hike rates for 60% of the state’s motorists, especially those living in less populated areas.

“The regulations will create a very unfair situation for millions of drivers around the state,” said Sam Sorich of the Assn. of California Insurance Companies.

Garamendi maintains that insurers are making enough profit to restructure their rates without sticking drivers with the bill.

“This is very good news for good drivers wherever they may be in California, rural, suburban or urban,” he said.

Consumer advocates say that factoring a driver’s ZIP Code into the rate punishes poorer drivers who can least afford to buy insurance. Two professors at UCLA recently completed a study that says many African American and Latino motorists living in Los Angeles are the victims of “redlining” by insurers, who charge disproportionately high premiums for their customers in low-income neighborhoods.

Although increased risk is part of the equation, “redlining factors explain more of the gap in auto insurance premiums between black and Latino and white neighborhoods,” said the study by Paul M. Ong and Michael A. Stoll, professors in the School of Public Affairs.

Insurance industry representatives said they had not seen the report and could not comment. However, industry officials have consistently maintained that rates are based on risks.

Insurance companies now use an array of factors, including such things as gender and marital status, and no two companies use the same exact formula. But insurers generally give heavy weight to where drivers live, saying that is a strong predictor of future claims.

Drivers going even short distances on crowded city streets are more likely to be involved in accidents than motorists driving longer distances in rural areas, according to insurers.

Under the new guidelines, insurers still would be able to use ZIP Codes, gender and other factors in setting rates, but they would be unable to make them more important than the three primary factors of driving record, miles driven and years of driving experience.

On Monday, the auto clubs of Southern and Northern California said they would revamp their rates to comply with the new formula.

The Auto Club of Southern California filed papers Thursday formally seeking the Insurance Department’s approval to change its pricing. If approved, the changes would take effect Dec. 1.

The Auto Club said it would implement a 7% across-the-board rate cut as part of the changes. As a result, the Auto Club says, about 88% of its policyholders would see a rate cut or no change. About 12% will face rate hikes, which will typically be less than 5%.

Urban customers will get the biggest price breaks. For instance, a young married couple in Inglewood with two compact cars would see their bill cut by about 16%, the Auto Club says.

If the same couple lived in suburban Escondido, they would see a reduction of 1%, according to the Auto Club.

In its filing, the Auto Club also said it expected to start charging more for liability coverage on big sport utility vehicles, such as Suburbans and Hummers, since they tend to do more damage to other cars in an accident.

For motorists with other insurers, the effect of the rate changes would vary.

Although each insurer has a different formula for setting rates, most already weigh driving record heavily.

Putting greater weight on miles driven, however, could cause a bigger swing in rates. State Farm’s rate-setting formula, for example, only has two mileage categories -- one for people driving less than 7,500 miles a year and another for those driving more, said Mark Savage of Consumers Union.

The company may now add more gradations, Savage said. State Farm said it was reviewing the rules and had no comment.