California’s rules for establishing home and auto insurance rates are uniquely complicated. But, in this case, being different is not a badge of honor.
Creating a fair system for calculating adequate insurance rates is one of the most important issues to PIFC. Without a reasonable and predictable ratemaking process, California consumers have fewer choices than are available in other states, with much less ability to find the products, services, premium, and coverages that best fit their individual and family needs.
California’s insurance rating law has not been updated in nearly 30 years, despite dramatic advancements in the auto industry, computer technology, and analytics. The current law, established by ballot measure (Proposition 103) in 1988, did the following:
- Created a statewide elected Insurance Commissioner, replacing the Governor’s appointee.
- Established a “prior approval” rating system, where insurers are required to obtain the Commissioner’s prior approval before rate changes (both rate increases and decreases) can be implemented.
- Ordered insurers to return 20% of their previous year’s profits.
- Allowed non-government lawyers to “intervene” in insurer rate filings with the Department of Insurance, with the ability to receive substantial legal fees from the insurers.
While this general approach may look good to some, as with any big change in public policy, there is a much more complicated mix of pluses and minuses.
An example of how this system can malfunction dates back to immediately following the passage of Proposition 103. The first elected Insurance Commissioner declared he would not approve any rate increase requests under the new law. This created a fear among insurers of seeking rate decreases because of uncertainty they could ever increase their rates again if costs would increase. Meanwhile, underlying insurance costs were plummeting after a major California Supreme Court caused auto-related lawsuits to drop by 54%. In the absence of market-based, competitive pricing, consumers were deprived of savings because of an inartful decision on how the state government would regulate price under Proposition 103.
While the authors of Proposition 103 argue that their measure prevented a rapid rise in insurance rates in California, they actually attempt to take credit for the many factors which have reduced the actual costs of insurance since the passage of Proposition 103:
Auto Safety: Car makers have greatly improved product safety. Innovations such as parking sensors and computer-controlled suspension and handling have reduced the number of crashes, and features such as airbags and effective seat belts have reduced the severity of crash injuries. Cost reductions related to these innovations have done much more to keep insurance prices in check than Proposition 103’s rate controls.
Insurance Fraud Reform: In the early 1990’s, the California Legislature required each insurer to establish special investigative units to identify fraudulent claims, instead of just passing along the cost of insurance fraud in higher rates.
Proposition 213: In 1996, this ballot measure further reduced lawsuits by prohibiting uninsured and DUI drivers from suing someone at fault for non-economic (“pain and suffering”) losses. Following passage of the initiative, the Department of Insurance ordered insurers to reduce their liability insurance rates, which they did.
While the auto industry and the insurance industry have changed with the times, Proposition 103 has not. The complicated rules implementing Proposition 103 over the past 25 years have become antiquated and anti-competitive, and are in need of modernization.
PIFC has identified the following issues as opportunities for modernization:
I. Proposition 103 Intervenor Reform
Proposition 103 allows non-government lawyers to “intervene” in insurer rate requests, duplicate the state’s review of insurance rates, and keep objecting until insurance companies pay them substantial legal fees. These “public interest” lawyers add a layer of cost onto consumers and make California the seventh most expensive insurance market in the United States according to a Los Angeles Times analysis. California is the only state with such a system.
This intervenor system discourages insurers from making rate filings and reduces competition in the marketplace. Under Proposition 103, members of the public are able to challenge an insurer’s rate request as being “inadequate, excessive, or unfairly discriminatory.” This is an express part of Proposition 103 and, to be clear, PIFC member companies are not advocating for its elimination. However, self-interested attorneys have exploited this provision and distorted it into a money-making venture.
In fact, the lawyers who wrote Proposition 103 have made millions of dollars from the intervenor system. Consider these facts:
- Since 1988, professional intervenors have made millions of dollars from Prop 103 fees, paid by insurers with policyholder funds.
- The main beneficiary of these millions is one intervenor group, “Consumer Watchdog,” founded by the author of Prop 103.
- The same “intervenor group” has been paid hundreds of thousands of dollars by the CDI for helping to write the regulations for rate review under which the intervenors later received intervenor fees. Who gets to write the state government rules determining how they will make money?
- The CDI has increased its staff and developed more expertise since the inception of Prop 103. As a result, intervenors’ “contributions” to rate review can duplicate the work already performed by the Department and intervenors do not even need to demonstrate they bring new arguments to the table.
- Intervenors cause unnecessary delays in filing approval (for increases and decreases), often delaying approval time up to 3 times the normal time for rate filing review and approval without intervenors. From 2005 to 2011, the average number of days for a rate approval involving an intervenor was 345 days – this included filings for rate decreases. What kind of system prevents business from reducing their prices for 345 days, including price reductions? All these costs are borne by consumers.
- Intervenor groups often lack transparency and accountability. In the twenty-five years since Prop 103 was enacted, state and local government agencies have adopted robust good government best practices; however, the intervenors who benefit monetarily from rulemaking and from intervention operate largely in the dark. Implementing strict rules around the disclosure of donors to intervenor groups, restrictions on the “revolving door” in which intervenor groups hire staff from CDI and then game the system by using that staff in the intervenor process, and requiring strict compliance with California’s Fair Political Practices rules are but a few examples of good government practices that are long overdue in helping to protect the public’s best interest.
Despite this layer of additional cost created by lawyers and passed onto consumers, purportedly to protect them from high insurance rates, California still has the seventh most expensive insurance market in the United States according to a recent study by the R Street institute. The intervenor lawyers, commonly represented in the press and political arenas by Consumer Watchdog, argue that California has the lowest insurance rates, but that is simply false when comparing identical policies in California across other states. California’s average costs appear lower because of the mandate to provide lower-limit minimum policies than other states, even though, according to the program’s own website, “…the affordable policies obtained through California’s Low Cost Auto (CLCA) Insurance program do not provide coverage for theft or physical damage to [an insured’s] vehicle.”
Public participation that aids CDI decision-making makes sense, but not the current system which enriches a handful of lawyers. PIFC supports a legal change that would require intervenors to demonstrate that 1) consumers would be harmed without their involvement and 2) they would provide non-duplicative value to CDI staff, before being granted the right to profit from insurer rate review.
PIFC believes consumers will benefit from the price competition that is possible under improved rating rules which preserve effective state government supervision. They need a system allowing insurers to better predict the result of their rate change requests in advance of a filing, instead of being fearful of an adverse outcome – whether through an unfair rating process or a shakedown intervenor system.
PIFC supports a legal change to create predictable, fair rates that will increase insurer competition and deliver benefits to California consumers.
II. Electronic Commerce with Insurance Customers
In an era when consumers may review their medical records, obtain mortgages, and otherwise perform all their financial planning and banking online, California insurance law, amazingly, prefers paper over electronics – even if a consumer does not want paper. PIFC strongly believes that California law should, at a minimum, allow consumers to opt-in and choose to transact insurance electronically with their insurance companies.
Across the country, consumers are turning to the Internet to facilitate their insurance needs and that trend is growing. Unfortunately, much of the California Insurance Code was written in the 1940’s and has not been modernized to reflect all the choices today’s insurance consumer should have.
In 2013, members of the Legislature and the Governor recognized this shortcoming in existing law and passed a bill allowing consumers to opt-in to receive a narrow range of insurance documents electronically (home and auto insurance renewal documents). But, insurers cannot even electronically add a child to an insurance policy. SB 251 was a great first step in modernizing California’s insurance laws to reflect the technology that is available today, but more is needed.
The next frontier for electronic communications is already here and it includes secure inbox capabilities, real-time claims reporting and many other customer-friendly features enabled by mobile phone apps. As the majority of commerce moves to an online platform driven largely by consumers, PIFC believes it is appropriate to review remaining prohibitions on the electronic transaction insurance – particularly empowering consumers to opt-in to this.
III. Affinity Groups
One lesser-known provision of Proposition 103 allows groups of people to get discounts under “group insurance” plans. These groups, which have become known as “affinity groups,” provide well-known discounts, such as for members of the AARP or the California Teachers Association. Interestingly, the authors of Proposition 103 are now trying to convince the Department of Insurance to eliminate these group discounts, contrary to the explicit language of the initiative they wrote.
The specific language of Proposition 103 (in Insurance Code Section 1861.12) provides that “any insurer may issue any insurance coverage on a group plan, without restriction as to the purpose of the group, occupation or type of group. Group insurance rates shall not be considered to be unfairly discriminatory, if they are averaged broadly among persons insured under the group plan.” [Source: Consumer Watchdog]
Under this clear rule, for almost three decades, the California Department of Insurance, and every elected California Insurance Commissioner, have approved hundreds of different group discounts, recognizing that group discounts are actuarially sound under Proposition 103. Thanks to these group discounts on auto insurance, and the current safeguarding of these group discounts by Insurance Commissioner Dave Jones, millions of California consumers have secured lower premiums under Prop 103, including teachers, nurses, firefighters, police officers, librarians, seniors, public employees, military veterans, and recent college graduates from our state colleges and universities. These group discounts help make auto insurance more affordable for working families and provide needed discounts for hundreds of thousands of consumers who live paycheck to paycheck.
Prop 103’s Group Discounts under Attack?
However, rather than looking for opportunities to expand access to group discounts so that more consumers can benefit from lower costs, Consumer Watchdog has embarked on an aggressive effort to pressure the Department of Insurance to prohibit certain consumers from accessing group discounts. Their motivation may simply be a tool to demonstrate value to their contributors by creating a crisis around a broad theme of class warfare.
The Consumer Watchdog’s selectively-biased argument is that an economically advantaged group (e.g. doctors) shouldn’t get an affinity insurance discount. The truth is working families, teachers, nurses, librarians, public safety personnel, fixed-income AARP members, members of the military, recent UC and CSU college graduates, among many others, all benefit by preserving the prevailing interpretation of the law guiding group insurance plans.
Reaffirming this interpretation, as recently as 2014, an Administrative Law Judge rejected Consumer Watchdog’s legal challenge by ruling that group discounts are protected in law for all consumers. After this legal defeat, Harvey Rosenfield and Consumer Watchdog lawyers put political pressure on Commissioner Dave Jones and the California Department of Insurance to reject or significantly limit access to group discounts.
Commissioner Jones has stood with consumers, successfully protecting the same group discounts that have saved consumers money for almost thirty years. Moreover, the California Legislature stood by Commissioner Jones and the Department of Insurance by submitting a bipartisan letter rebuking Consumer Watchdog’s push to regulate group affinity automobile insurance rates, which may be found here.
Still, Consumer Watchdog continues to pressure the California Department of Insurance. Their goal is to push new regulations, which appear to be illegal under Prop 103, to significantly restrict access to group discounts millions of consumers have relied on, threaten the privacy of countless consumers, add new administrative burdens on unions, employers and membership groups, and increase auto costs for consumers who can least afford it. And, if successful, history tells us they would ask to be paid healthy legal fees.
IV. Anywhere But California
Certainly, every television viewer has heard the familiar disclaimer at the end of insurance advertisements: “Not Available In All States.” This disclaimer generally means that an insurance product is available “Anywhere But California.” Examples of discounts not available in California include: accident forgiveness, new car replacement, paperless discounts, EFT discounts, and discounts based on driving behavior.
Proposition 103 does not require this result. The Department of Insurance currently chooses to ban such discounts. Under Department of Insurance rules, insurers can get permission to use discounts if the Insurance Commissioner agrees that the “rating factor” is “substantially related to the risk of loss.” Insurers can demonstrate this relationship using actuarial science, but the Department of Insurance, as a matter of policy and “fairness,” continues to reject insurer requests to bring more discounts to the insurance market.
Thus, insurers are left with denials of new products and discounts even while California tells the world it is a leader in innovation and technological sophistication. Instead, consumers are stuck with an antiquated regulatory system in which innovation and progress is dramatically stifled by a changeable framework. We can do better.