Steadfast Believer in Numbers

George Joseph has always had a head for numbers.

In World War II, he navigated a B-17 bomber through 50 combat missions. After the war, he earned a degree in mathematics and physics from Harvard. And the company he launched in 1962, Mercury General Corp., pioneered the use of ZIP Codes and other data in fine-tuning auto insurance rates.

So when California Insurance Commissioner John Garamendi recently announced plans to overhaul the way car insurance is priced -- making motorists’ driving records the No. 1 factor -- it was almost as if he had proposed making two plus two equal five, at least to Joseph’s way of thinking.

Insurance rates should be based on the statistical chances of a customer’s filing a claim, the 84-year-old Joseph believes. Armed with years of empirical evidence, Mercury and most of the state’s other insurers have concluded that the best way to calculate those odds is to look at where a driver lives -- specifically, his or her ZIP Code.

“People in rural and suburban areas will be forced to subsidize people in heavily urbanized areas -- that’s my concern,” the Los Angeles billionaire said of Garamendi’s proposal. “Would it be fair for people in Burbank to pay more so that people in Beverly Hills can get lower rates?”

Consumer advocates say, however, that the Mercury approach defies not only fairness but also the law. Proposition 103, the 1988 auto insurance initiative, declared that rates should be based mainly on three factors: driving record, how many miles people drive and years of experience, in that order.

By homing in on ZIP Codes, insurers keep rates high for poor people and members of minority groups, who live disproportionately in congested neighborhoods, consumer groups assert. Moreover, they say, the current system punishes good drivers who happen to live in densely populated areas.

“You move from one side of the street to the other, and suddenly you have to pay more? That’s nonsense,” Garamendi said. “Rates should be based on how you drive, not where you live.”

Chuck Quackenbush, one of Garamendi’s predecessors as insurance commissioner and a friend to the industry, adjusted the ranking factors in 1996. Garamendi hopes this year to restore what he sees as the intent of the landmark 1988 law.

Shortly after Garamendi unveiled his plan in December, Joseph prepared to launch an initiative campaign with two goals: to thwart Garamendi’s effort and to allow discounts for drivers who maintain continuous insurance coverage, even through different carriers.

Joseph said statistics showed that customers with uninterrupted coverage posed lower accident risks, and that those in congested areas were more likely to file collision and theft claims.

“Having started in this business as an aspiring actuary, I’m sold on the idea that insurance should be cost-based,” Joseph said in an interview at Mercury’s modest mid-Wilshire headquarters.

Few would disagree that a motorist with a string of fender-benders and a glove box full of speeding tickets should pay higher rates. But according to Joseph, such drivers increasingly avoid being red-flagged by their insurers by going to traffic school and by paying for small mishaps out of their own pockets.

“Driving records have gotten progressively -- please don’t use that word, it reminds me of a competitor -- less predictive,” he said.

Nor, based on Mercury’s experience, is annual mileage significant enough to warrant the No. 2 weighting, he added.

Though he recently dropped his initiative proposal amid industry dissent and threats of a consumer countermeasure nicknamed Son of Proposition 103, analysts say Californians surely have not heard the last from Joseph, who remains committed to correcting what he sees as regulatory excess.

“I’ve been in the L.A. area since 1948, and it’s hard to think of a single example of a California business figure who is the equivalent of George Joseph,” said Charles T. Munger, vice chairman of Berkshire Hathaway Inc., the company led by Warren Buffett that owns rival insurer Geico.

“He was nothing when he started,” Munger said, “but his combination of genius, diligence, trustworthiness and longevity has created amazing results.”

Born in Beckley, W.Va., to a working-class Lebanese immigrant family, Joseph remembers being drawn to the stability, as well as the profit potential, of the insurance business.

“You could put in as many days as you wanted and as many hours as you wanted,” said Joseph, who became an independent agent in the 1950s, operating out of an $80-a-month duplex near Olympic Boulevard and La Brea Avenue. “When you grow up in the Depression, one of the things you always want is a lot of work.”

He launched Mercury, named for the Roman god of speed and commerce, with five employees and 200 independent agents, slowly building an industry force whose revenue last year reached $3 billion.

Before Mercury, California auto insurers typically specialized in drivers categorized either as low-risk or as high-risk, but Joseph saw a need for a carrier that could take on almost any customer, analyzing data to set competitive -- yet profitable -- rates.

“My thought was, there must be a proper rate for all those exposures -- why not do it all in one company?” Joseph said.

Mercury was among the first insurers to set up a special unit to investigate suspected cases of fraudulent claims, burnishing a reputation as a tight ship.

But perhaps a bigger key to Mercury’s success is the bond between the company and its army of independent agents, which now numbers 4,900 in 15 states.

Mercury works agents harder than many of its competitors do, requiring detailed customer applications and, in some cases, vehicle photographs.

But the company pays hefty commissions and bonuses and Joseph makes himself available to agents who have questions, said Brian Sullivan, editor of Auto Insurance Report, an industry newsletter based in Dana Point.

“A lot of CEOs think they’re above talking to the salespeople, but he is not like that at all,” Sullivan said.

Joseph is amiable and even-keeled, said his executive secretary, Judy Walters, who has worked with him for 38 years. “He never loses his temper -- ever.”

Joseph knows how to motivate his employees as well as his agents.

When a small team was creating Mercury’s original computer system, progress was slow and tempers were high. Joseph handed each person a generous but unsigned check, promising a signature when the system went live.

Joseph still works a full week, driving the one-mile commute from his Hancock Park home in his black 1985 Jaguar Vanden Plas, and he makes a point to call customers who send letters seeking his help. He has turned over daily operations to Mercury President Gabriel Tirador, shifting his focus to company strategy and public policy issues.

Outside of work, the entrepreneur, who has five adult children from his two marriages, enjoys a quiet home life with his second wife, Vicky. He plays tennis three times a week, tends his garden and unwinds at night with trade magazines and field reports from his agents.

“We’re not very sociable people,” he said. “I have an invitation tonight to go to Gov. Schwarzenegger’s house for dinner, but we’re not going to go.”

Ranked by Forbes magazine as the 283rd-richest American, with a net worth of $1.2 billion, Joseph has found that wealth helps when it comes to politics. He and Mercury have given more than $7.1 million to state and federal political campaigns since 1989, including those of Sacramento power brokers from both major parties, and successfully lobbied for legislation over the years.

“This industry is not that easy to understand,” he said. “It’s good to have a few people up there you can spend some time with.”

Joseph’s critics see another motive for the hefty contributions -- a desire to get his own way.

“He is a stubborn, stubborn man who has all the money in the world and refuses to take no for an answer,” said Norman Goldman, a Los Angeles lawyer who defeated Mercury in a class-action suit over its marketing practices. “That’s dangerous.”

Consumer activist Harvey Rosenfield, who wrote Proposition 103, said, “The only way you can applaud a guy like this is if you measure a man by how much money he is able to accumulate.”

Auto Insurance Report’s Sullivan says such characterizations are off-point; if it was simply more riches he wanted, Joseph could have declared victory long ago. “George Joseph is driven by things far beyond money,” he said.

Though Proposition 103 turned Joseph and Rosenfield into adversaries, Sullivan said, the law was “the best thing that ever happened to Mercury.” The company grew dramatically after the initiative’s passage, he noted, as many of its rivals fled the state.

“George should be sending Harvey cases of wine,” Sullivan said.

Joseph remains coy about his next move, declining to commit to challenging Garamendi’s effort at upcoming hearings or in court.

But he clearly has not been deterred from his views.

He said private polling showed strong support for continuous-coverage discounts, even when voters were told that the insurance industry was backing them. And he said the consumer benefits of Proposition 103 have been overblown.

Rosenfield and others credit the law with saving California drivers more than $23 billion, but Joseph said insurance rates are down since the late 1980s because of safer vehicles, anti-theft devices and a state court ruling that cut down on accident-related suits.

Beaming as he pointed to a thick spreadsheet, Joseph noted that in 1988, 50% of Mercury’s property claims in California also involved bodily injury claims. In 2004, he said, that number had fallen to 36%.

“I will bet $1 million that you can’t prove to a qualified actuary that Prop. 103 has saved people anything like $23 billion,” he said. “If Garamendi believes it’s true, if Harvey believes it’s true, that offer is open.”