Who is the Personal Insurance Federation of California (PIFC)?
PIFC represents its six member companies before the California state government. PIFC’s members include State Farm, Mercury, Liberty Mutual, Nationwide, Progressive and Farmers. PIFC’s issues are narrow, but important: personal lines, property-casualty insurance public policy that affect every single person in California.
“Personal lines property-casualty” means auto, home, flood and earthquake insurance sold to individuals. PIFC does not represent our members on any workers compensation, commercial, health, or life insurance products they may sell. There are other organizations in Sacramento who represent insurers on these insurance issues.
Personal auto, home, flood and earthquake insurance is highly regulated in California. This heavy state control is what prompted the member companies to create PIFC, as a voice for fair oversight, allowing property and casualty insurers to compete and deliver the resulting benefits to consumers. PIFC lobbies in all branches of state government and organizes a political and grassroots operation.
PIFC member companies represent nearly half of California’s home and auto insurance market. The insurance industry is an important part of the fabric of California’s economy and serves diverse communities in every corner of the state.
Examples of PIFC members’ community involvement may be found here; some of the highlights of the insurance industry’s economic and community impact include:
- The insurance industry in California employs nearly 300,000 Californians with an estimated payroll of $22.3 billion, according to a 2017 report.
- Since the 1990s, insurers have created and deployed investments into California’s low and moderate income communities, through programs such as the California Organized Investment Network (COIN) and Impact Community Capital. In 2015, insurers invested $21.9 billion in COIN investments. In 2014, insurers spent over $1.5 billion in minority, women, disabled vet, and LGBTQ business enterprises.
- In 2015, insurers invested $51.3 billion in municipal bonds, $14.9 billion in education bonds, $16 billion in government bonds, $6.9 billion in transportation bonds, $8.6 billion in water and energy bonds, $2.5 billion in housing and community development bonds, $1.3 billion in health care facility financing, and $1.1 billion in environmental protection.
Issues of Importance to PIFC
California’s rules for establishing home and auto insurance rates are uniquely complicated when compared to any other state’s or country’s regulatory framework. And, in this case, being different is not a badge of honor: California consumers pay some of the highest cost for insurance in the country.
Advocating for a fair system for calculating adequate insurance rates is one of the most important issues to PIFC. Without a reasonable and predictable rate making process, California consumers have fewer choices than are available in other states, with much less ability to find the products, services, premium, and coverage that best fit their individual and family needs.
California’s insurance rating law has not been updated in 30 years, despite dramatic advancements in the auto industry, computer technology, and analytics.
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 30 years have become antiquated and anti-competitive, and are in need of modernization.
PIFC has identified the following issues as opportunities for modernization:
I. Homeowners Insurance
Proposition 103 which passed in 1988, required insurance companies to roll back prices 20% and mandated future rates be approved by the California Department of Insurance (CDI), which through this ballot initiative became an elected office.
After Proposition 103, insurance rate increases, as well as decreases, were approved by the elected Insurance Commissioner, which has created rate disparities between California and the rest of the United States. As seen in the chart below, between 2009 and 2016, California average insurance premiums increased from $922 to $1000 per year, an 8% increase, while United States average insurance premiums increased from $880 to $1192, a 35% increase.
Source: National Association of Insurance Commissioners
Homeowners Insurance and Wildfire
The 2017-2018 California wildfire season was the most devastating in terms of loss of life, and insured losses at $26 billion dollars according to data from CDI. Despite price suppression and the highest losses on record, 98% of Californians still get their insurance from the admitted market (companies that conform to regulations set by the CDI). Data recently released from CDI showed a slight increase in the number of homeowner’s insurance policies being non-renewed. This data did not address the most important question -was the homeowner able to obtain insurance from another carrier on the admitted market? Given that 98% of customers statewide are getting insurance on the admitted market, one can assume that consumers in most areas of California are able to find an admitted market carrier.
Even with California homeowners’ rates failing to keep up with rates nationwide, and the significant increase in wildfire risk, data from CDI covering 2015-2018 shows statewide availability is relatively stable:
- The number of new homeowners’ insurance policies statewide has increased 1.8%
- The number of policyholder-initiated non-renewals has increased 1.7%, while the number of insurer-initiated non-renewals has decreased 3.9%
- Of the policyholders non-renewed by their insurers, only 13% end up in the FAIR plan
In 2019, PIFC supported Assembly Bill 1816, which increased the notice time insurers provide consumers they will not renew a homeowners insurance policy from 45 to 75 days. This increased timeframe gives homeowners additional time to find replacement coverage without undermining insurers’ ability to appropriately manage risk.
FAIR Plan Insurance
When a consumer is not able to find coverage on the admitted market, there is a financial back-stop for high risk properties through the California Fair Access to Insurance Requirements (FAIR) Plan, which guarantees all property owners access to fire insurance. The purpose of the FAIR Plan is to provide equitable distribution among admitted insurers for the responsibility of insuring qualified property for which basic property insurance cannot be obtained through the admitted insurance market.
All admitted homeowners insurance companies are required to be members of the FAIR Plan as a condition of doing business in California. The FAIR Plan operates without any state financial support. If the FAIR Plan is short of funds, it will assess admitted insurers, as required. The FAIR Plan does not cover water damage, liability, or theft, these coverages can be found in policies known as Difference in Conditions, or DIC, and can be added by homeowners as a wraparound policy. The FAIR Plan on its own is fully sound and guaranteed policy that satisfies lenders’ security requirements and protects the property against the primary risk factor of homeowners in the Wildland Urban Interface (WUI) – fire. Of the 123,000 properties insured by the FAIR Plan, only 34,000 are located in brush areas with medium or extreme brush exposure.
Insurance “Rates” versus “Premiums”
There is a difference between insurance “rates” and the “premium” a particular homeowner pays to their insurer. The rate refers to the average price paid by customers that will generate an adequate amount of money required to cover the insurer’s anticipated expenses and make a reasonable rate of return. The “premium” that any particular homeowner pays is the result of the approved rating plan, or class plan that uses a series of positive and negative factors to determine that actual price paid. The class plan spreads the cost required to cover the insurer’s losses, expenses, and return, as defined by CDI regulations, among the insurer’s policyholders based on a set of factors also approved by the CDI. A factor that reduces the premium charged in one area must be offset by a factor that increases the premium charged in another area. When those factors result in an insurer charging premiums inadequate to pay for losses associated with a category of homes, the gap must be filled by higher premiums charged for categories of homes with lower losses.
Insurance subsidizes those with losses through the premiums paid by people without losses. Considering subsidies in a larger sense, determining how risk will be priced and how groups of insureds will be assembled to share the risk will create financial incentives and disincentives. Premiums that were historically paid by homeowners in the WUI were substantially subsidized by lower risk policyholders in urban areas. Actions to reduce this subsidy will cause WUI premiums to rise independent of any consideration of the new normal in wildfire danger, and billions of dollars in recent losses throughout California. For example, effective April 1, 2019, FAIR Plan policies with the lowest risk of wildfire had a rate decrease between 10-30%, while policies with the highest wildfire risk received as much as a 69% increase according to CDI.
The ability for insurance companies to appropriately distribute and diversify risk in the policies they write is vital. Insurance modeling is done with the assumption that one or two homes may burn, not entire communities as has occurred the last two fire seasons. The importance of policy diversity is seen through Merced Property and Casualty, an insurance company that was bankrupted by insurance claims from the Camp Fire. The small San Joaquin Valley insurance company had assets of approximately $23 million, but anticipated claims from Paradise properties to be as much as $64 million. The company was founded in 1906, and sold insurance throughout California, while the company wrote plans throughout Central California, the concentration of policies in Paradise is what caused the company to become insolvent.
PIFC supports homeowners receiving fair notice in the event their insurer must non-renew their homeowners’ policy so they have adequate time to find a new policy. Insurers must also be able to analyze their overall portfolio to ensure they are not overly concentrated in any one area exposing their underwriting to undue risks.
II. Proposition 103 & Auto Insurance
Proposition 103 passed in 1988, with a provision that received little attention from voters, allowing individuals to challenge proposed insurance rates and get reimbursed for their costs, known as the “intervenor process”. California is the only state or country that has a system like this. California has the seventh most expensive auto insurance market in the United States according to Forbes, partially due to the intervenor process.
Under Proposition 103, members of the public are allowed to challenge an insurer’s rate request for being inadequate, excessive, or unfairly discriminatory. PIFC supports the concept of transparency and public participation in rate approval, but does not support how the intervenor process currently operates.
The California Department of Insurance (CDI), has increased staff and expertise since the implementation of Proposition 103 over thirty years ago. And CDI staff conducts reviews of all rate requests. The intervenor reviews duplicate work already performed by CDI, and the intervenors do not have to demonstrate they bring new information to the table beyond what CDI is already considering.
Intervenors have made millions of dollars from the intervenor system as disclosed by CDI, these fees are paid by insurance companies through policyholder funds, meaning consumers purchasing auto insurance in California. The 2015 analysis from the R Street Policy Group published average days for rate filing resolution from six states. California took an average of 138 days to resolve, if an intervenor got involved it increased to 343 days. New York had the next highest average days for rate resolution, of 57 days.
Consumers, insurance companies, and CDI all benefit from a quick and efficient rate approval process, but intervenors benefit when the approval process is drawn out, as they are able to bill more hours. Intervenor expenses are paid by insurance companies but the true cost is born by California auto insurance customers.
The biggest benefactor of the intervenor system is the group Consumer Watchdog, which was founded by the author of Proposition 103. In addition to authoring Proposition 103, this organization was compensated by CDI for writing the regulations for intervenor rate review, which Consumer Watchdog now profits from. According to a 2017 Sacramento Bee article, more than three-quarters of the $17.6 million in intervenor fees awarded between 2003 and 2017 went to Consumer Watchdog and its predecessor organization.
PIFC believes public participation that aids CDI decision making is a benefit to the public and insurance companies, but the current intervenor system does not accomplish that.
PIFC supports a legal change that would require intervenors demonstrate consumers would be harmed without their involvement, and they would need to provide non-duplicative value to what CDI staff is already doing before being granted the right to profit from an insurance rate review.
PIFC supports a legal change to create predictable, fair rates that will increase insurer competition and deliver benefits to California consumers.
Many people are familiar with the disclaimer at the end of insurance advertisements on television: “Not Available in All States”. This disclaimer generally means that an insurance product is available everywhere but California. Examples of discounts not available in California include: accident forgiveness, new car replacement, paperless discounts, electronic funds transfer (EFT) discounts, and discounts based on driving behavior.
CDI currently chooses to ban such discounts. Under CDI 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 CDI, 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, yet California is a leader in innovation and technological sophistication in most other industries. Instead, consumers are stuck with an antiquated regulatory system in which innovation and progress is dramatically stifled by a changeable framework.
PIFC supports allowing insurance companies to offer discounts if they can demonstrate a new product or discount is related to a risk of loss.
Impediments to Innovation
Proposition 103 gave sweeping authority to the elected position of Insurance Commissioner, which became an elected position with the passage of Proposition 103, to approve and regulate innovation in the insurance market. Due to various political factors, this has led to an unfortunate result that innovation is routinely discouraged and stymied. The Legislature could encourage innovation in the space of Automated Driving Systems (ADS) and increasing ease of allowing insurance customers to opt into electronic communication.
As more automated features are added to cars, and driverless vehicles are on the horizon, Proposition 103’s age and potential inadequacies to regulate a changing auto insurance marketplace have begun to surface, as noted during an informational hearing by the Senate Committee on Insurance in March, 2017.
According to the Insurance Journal, many insurance experts agree autonomous and even semi-autonomous vehicles have the potential to reduce claims costs and save money for consumers, but point to Proposition 103 as the biggest hurdle to enabling insurers and insurance consumers to realize savings.
Santa Clara University Law School Center for Insurance Law and Regulation Director Robert Peterson noted:
“Unfortunately California has not positioned itself to nimbly adjust its insurance rates so its savings can be passed on to consumers as these cars develop… Proposition 103 is driver-centric, it is not vehicle centric.”
He argues that among the regulations created under Proposition 103, the 20% good driver discount most directly flies in the face of an autonomous car owner because at some point there may no longer be good or bad drivers, but good autonomous vehicles and bad autonomous vehicles.
PIFC supports public policy that keeps drivers and the public as safe, or safer, when contemplating the regulation of ADS and possibly modifying Proposition 103 if factors such as good driving, driving experience, and mileage no longer make sense as vehicles become more fully autonomous.
For nearly 40 years insurance companies have been subject to comprehensive standards for the collection, use and disclosure of personal information in connection with insurance transactions. These privacy laws and regulations were developed over decades pursuant to the federal Gramm-Leach Bliley Act (GLBA), and California’s Insurance Information Privacy Act (IIPPA), and the California Financial Information Privacy Act (CFIPA). These three Acts combine to provide significant statutory and regulatory consumer privacy protections that are specifically crafted for oversight of the insurance industry.
Enacted in the wake of highly publicized data privacy scandals involving the technology sector, the California Consumer Privacy Act (CCPA) is a sweeping new (2018) privacy law that applies to businesses of all sizes in nearly every industry, which hastily passed the legislative process without input from crucial stakeholders. CCPA was passed due to a ballot initiative threat, while the business community opposed CCPA because it was very flawed and unclear in ways that will likely lead to litigation, there was wide agreement it was better than the potential ballot initiative.
Since it overlaps with existing GLBA, IIPPA, and CFIPA provisions, the CCPA creates a dual regulatory structure that is enforced by two separate regulators (the Insurance Commissioner and the Attorney General). Requiring compliance with differing laws and regulations that are enforced by separate regulators is untenable. This dual regulatory structure creates substantial compliance costs, confusion, and delay for consumers and insurers. For example, the IIPPA requires insurers to protect the privacy of California consumers, and already covered many of the same aspects as the CCPA including:
- What personal information is protected
- Whose personal information is protected
- Requiring disclosure of a consumer’s rights regarding the collection and use of protected information
- Permits consumers to opt-out of sharing marketing information
- Addresses a consumer’s right to have information deleted or amended
- Requiring insurers to have detailed security programs designed to protect the personal information they hold; and
- Subjects insurers who violate the provisions of the IIPPA to sanctions
PIFC supports exempting insurers, insurance agents, and insurance support institutions from the CCPA. The insurance industry is already subject to robust state and federal privacy rules that are substantially similar to the CCPA consumer protections, but are specifically designed for the unique challenges of the insurance industry.