Who is the Personal Insurance Federation of California (PIFC)?
PIFC represents its five member companies before the California state government. PIFC’s members include State Farm, Mercury, Liberty Mutual, Nationwide, and Progressive. 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. Proposition 103 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 or country with such a system.
California’s 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; i.e. paid for by consumers.
- 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 period 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 changing their prices for 345 days, including price reductions? All these costs are borne by consumers.
PIFC believes 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 supports this legal change to create predictable, fair rates that will increase insurer competition and deliver benefits to California consumers.
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.
PIFC supports changing Prop 103 to allow insurance companies to offer discounts if they can demonstrate that a new product/discount is related to a risk of loss.
II. Impediments to Innovation
Prop 103 gave sweeping authority to the elected position of Insurance Commissioner, created by the initiative, to approve and regulate innovation in the insurance marketplace. Due to various political factors, this has led to an unfortunate result that innovation is routinely discouraged and stymied. Below are a couple of examples of innovation that could be encouraged by the Legislature:
Accurate Insurance Products to Cover Vehicles with Automated Driving Systems (ADS)
As more automated features are added to cars—and driverless vehicles are purported to be on the horizon, Prop 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 this article from 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 Prop. 103 as the biggest hurdle to enabling insurers and insurance consumers to realize any 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.” He argues that among the regulations created by Prop. 103, the 20 percent 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, just good autonomous vehicles and bad autonomous vehicles. “Proposition 103 is driver-centric, it is not vehicle-centric,” Peterson said.
PIFC supports public policy that keeps drivers and the public as safe—or safer—when contemplating the regulation of ADS and possibly modifying Prop 103 if factors such as good driving, driving experience, and mileage no longer make sense as vehicles become more fully autonomous.
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.
PIFC supports a legal change to allow insurers to communicate with their customers electronically who choose to so do.
III. Labor rate and steering
Policyholders involved in automobile accidents often experience anxiety and uncertainty about the claim handling process and unique benefits available from the insurance contract. Insurers believe educating consumers about their options leads to more convenience, quality repairs and satisfied customers. For nearly a decade, segments of the auto repair industry have alleged that insurers don’t pay adequate labor rates for automobile repairs. And despite a dearth of complaints from consumers, CDI hastily promulgated regulations that increase the cost of automobile repair to the detriment of consumers. Key provisions of the flawed regulations:
- Restrict information insurers may provide their customers about their options and policy benefits.
- Mandate a single methodology to determine the rate paid for labor for the repairs, which has led to an inevitable spike in costs for consumers by enriching auto body shop owners.
In response, PIFC sponsored and, predictably, “consumer” groups opposed, legislation in 2017 to preempt CDI’s regulations. AB 1679 by Asm. Autumn Burke (D – Inglewood) was introduced to guard against automobile insurance rate increases that have resulted from the regulations recently adopted by the DOI. In addition, the bill is intended to clarify and establish legislative parameters on the communications that an insurer is authorized to provide to claimants about options the consumer may choose from. The author believes that the DOI regulations are poor public policy, contrary to the interests of automobile insurance ratepayers, and that these issues should be resolved legislatively. A complete analysis of the bill may be found here on the California State Assembly’s website.
PIFC supports legislation that keeps costs low for consumers by allowing insurers to communicate options to their customers and survey shops to determine a fair labor rate for repairs according to their own, justifiable methodologies.
IV. Challenges Insuring Homeowners in Wildfire-Prone Areas
According to data, over 2 million homes in California are exposed to high wildfire risk. Despite this fact, insurers are constantly under pressure from individuals, who wish to live in wildfire-prone areas, to provide coverage at a cost lower than the financial risk associated with living in or near a forested, wild land space.
It is pressure that PIFC takes seriously, which is why, in 2017, PIFC joined the Governor’s Tree Mortality Task Force (TMTF) to determine if there is an availability crisis in California or steps insurers may take to provide less-expensive coverage. Themes that have emerged from the task force include:
- The State’s wildfire maps inadequately assess the risk of periodic intense wind events, such as Santa Ana winds in Southern California and Diablo winds in Northern California, which flame the most catastrophic wildfires, according to researchers at the University of California at Berkeley. For example, the community hit hardest by the wildfires in Santa Rosa in 2017 were completed excluded from the State’s wildfire maps as an urbanized area. The wind event provided compelling evidence that wildfire risk mapping needs updating to anticipate rare wind events.
- There is no extensive availability crisis. Many homeowners who claim they cannot receive coverage really mean: 1) they haven’t shopped around or 2) they don’t want to pay the cost of insurance that is available in the marketplace that properly reflects the increased risk of living in wildfire-prone areas.
- After a wildfire, attorneys and “consumer” groups try to force insurers, through media and political activity, to pay homeowners for the entire replacement cost of their home, even if the homeowner selected lower, less-expensive policy limits.
PIFC wishes to be part of a solution to provide coverage to homeowners who take steps to significantly reduce their risks, without being subjected to unreasonable underwriting and claims handling requirements. Climate change, historic fuel suppression, unanticipated, dramatic wind events not currently contemplated by the State’s fire mapping apparatus, and explosive labor costs rebuilding homes in an area after a catastrophe are challenges for insurers, state officials, and consumers, which all parties wish to resolve.
PIFC’s goal is to advocate for public policy that does not offload the cost of risk born by consumers who choose to live in fire-prone areas onto homeowners who live in non-wildfire prone, urban settings, while proactively participating in a public policy process with the State to explore opportunities to provide better mapping and stronger penalties for those who try to take advantage of homeowners during a wildfire crisis.