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Two Views: This is one of two commentaries written for the Business Journal regarding the debate over automobile insurance rates.
There soon may be new rules to determine auto insurance rates in California. The California Department of Insurance has developed rules, set to become effective in August, that would force insurance companies to manipulate data to generate artificially high premiums for some drivers that would subsidize artificially low premiums for other drivers. Called “fairer” by the CDI, this “zero sum” change is bad public policy, does nothing to address the underlying cost escalators in the insurance system and should be rejected.
Under the current system, the CDI allows auto insurers to use 19 different rating factors to determine a driver’s premium. Insurers must first consider, and give the full data-supported weight for, a driver’s safety record, annual mileage and years of driving experience.
After giving full weight to these three “mandatory” rating factors, insurers can use any, none or all of the remaining sixteen “optional” rating factors. The CDI can add optional rating factors to the list if, and only if, they are “substantially related to the risk of loss.” The CDI has permitted optional rating factors such as gender (women are relatively less risky than men), student grades (better students are less risky), frequency of car accidents in an area (drivers in congested areas are more risky than in less congested areas) and severity of an accident in an area (the expense of auto body shops, medical treatment, fraud and lawsuits are higher in major urban cities). These last two rating factors are the so-called “territorial” factors and must be considered, and weighted, last if used by an auto insurer.
There is a long-standing public debate over which rating factors should be given the most weight: the mandatory or optional factors. The current insurance commissioner, along with a Santa Monica attorney, believes that the mandatory factors should be given more weight than territorial factors because they are “fairer” factors than where a driver lives. On the other side is a coalition of rural and suburban elected officials, along with farm and taxpayer-related groups, who support the current system which accounts for the obvious cost differences of providing insurance in rural, suburban and urban areas.
Unfortunately, the law governing this debate is a poorly worded ballot initiative, Proposition 103, passed by 51.4 percent of the voters in 1988. The initiative does not specify the “weight” that rating factors should receive. Rather, the initiative says that the mandatory factors must be applied “in decreasing order of importance” but, at the same time, the rating factors must have a “substantial relationship to the risk of loss.”
In 2000, the First District Court of Appeal examined the language of Proposition 103 to determine whether the current system appropriately implemented its demands. In Spanish Speaking Citizens’ Foundation Inc. v. Low, the court stated: “The current regulations manage to implement most of the law’s conflicting demands thereby preserving a substantial relationship between rating factors and risks of loss Unrefuted evidence establishes that territory is a more important determinant of the risk of loss than any other single factor.”
Significant change
Despite the current system being upheld as consistent with Proposition 103, the Insurance Commissioner still wants to change the system. A diverse coalition of local elected officials, business groups, community groups, statewide groups such as the California Farm Bureau Federation and the Regional Council of Rural Counties, as well as insurance companies, have expressed their opposition to the proposal. But the commissioner is intent on re-opening this settled issue and forcing a change.
The new proposal would significantly alter the current system, resulting in a system in which the price a driver pays for insurance is not based upon their actual risk of loss. The system would result in arbitrary, non-cost-based insurance rates that we believe violate Proposition 103.
The current system, based upon actual predictors of loss, produces the lowest premiums for the most good drivers and should stay in place. The proposed system, based upon zero-sum redistribution of insurance premiums, would result in arbitrary insurance rates with the state picking winners and losers. The new proposal would do nothing to reduce the underlying costs of insurance rates and simply creates subsidies that pit one set of drivers against another. The new regulations should be rejected.
Rex Frazier is president of the Personal Insurance Federation of California, an industry trade group.
