May 23, 1989
"PROP. 103 Creates an Insurance Czar, but What Else?"
San Jose Mercury News
By Timothy Taylor and Phil Yost
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WANT to know whether you're going to get an insurance rate rollback
or not? One good clue will be whether Roxani Gillespie, the appointed
insurance commissioner, decides to run for the job in 1990.
Proposition 103, in which the voters demanded a rate rebate from
the insurance companies, also made insurance commissioner an elective
post. If Gillespie announces she'll run, odds of a rollback are
good. What incumbent insurance commissioner would want to run on
a record of having denied the rate rollback the voters thought they
were getting when they passed 103 in November?
Gillespie is the one to watch in any event. Proposition 103 and
the state Supreme Court ruling that upheld and modified it, have
combined to create an insurance czar in California.
The cliche "the ball is in her court" is too weak for
the descriptive job. The whole game -- what the rules are and who
can play -- is in her court.
And the game could be a lot different than the one indignant insurance
consumers thought they were arranging when they passed Proposition
103 and mandated a 20 percent rollback in rates for auto, homeowners
and liability insurance.
The effect of 103, as modified by the state Supreme Court, will
be a lot different than consumers are expecting.
It's OK to regulate insurance rates dramatically, the court said,
but not to threaten companies with insolvency before they can raise
them. "A fair and reasonable return" is the standard set
by the court. And who will decide what that is? The insurance commissioner.
For that standard to mean anything, it must mean "a fair and
reasonable return for an efficient company." Otherwise insurance
companies will in effect be filing expense reports and, once the
documentation is checked, getting a permit to charge what they've
been charging, plus a little profit.
Who's going to set the standards for efficiency? The insurance
commissioner. Should "fair and reasonable return" be applied
to each insurance product -- State Farm's auto insurance, for example
-- or to State Farm as a whole?
That's Gillespie's call too, and she's already made it. Lines of
insurance will be treated individually.
And that raises the distinct possibility that unless politics overwhelms
economics, rates won't go down at all.
The nearby chart provides a balance sheet of the auto insurance
industry in California for 1982 and 1987. (Statistics for 1988 won't
be available until this fall, unless the Department of Insurance
gears up and figures them out.)
The top of the chart displays the one fact everyone agrees on:
Total auto insurance premiums have risen very quickly, doubling
over those five years. The disagreement is over whether the increase
Insurance companies are going to point to balance sheets like these
to argue that their expenses have risen almost exactly as fast as
their premiums. In fact, the "incurred losses" -- that
is, money paid out in claims -- increased even faster than total
These figures are about as easy to refute as arithmetic. But some
of the strongest supporters of Proposition 103 are convinced in
their populist hearts that the insurance companies are making spectacular
profits, and they aren't likely to alter that opinion just because
their facts are wrong.
They will try to challenge the truthfulness of the numbers. The
numbers in this chart are collected by the Insurance Information
Institute, but they originate in figures that the insurance companies
submit to the state and from some private companies, like A.M. Best.
These statistics, like all statistics, are certainly debatable.
One problem is that companies don't separate their auto insurance
business from their other lines of insurance, so some categories
(like investment income) are really only estimates of what part
of the total insurance business should be apportioned to the auto
But the imperfections in these numbers are not going to be large
enough to rescue the 20 percent to 40 percent reductions in premiums
that Proposition 103 promised. Those promises were never even in
the same zip code as reality.
In a line by line evaluation, there's a possibility that rates
actually could go up, especially since 103's limitations on territorial
rating are going to spread the urban costs to rural areas.
The Western Insurance Information Service compared premiums on
identical policies for several areas of California. For an adult
man, the coverage could be purchased for $537 in Redding, $697 in
San Diego, $862 in Monrovia in Los Angeles County, and $1,817 in
Hollywood. For a 19-year-old man, the premium in Redding was $1,812
and in Hollywood an incredible $5,447.
Given those rates, it's easy to understand why the urban counties
approved 103 and the rural counties didn't. Although Santa Clara
County approved 103 by a 51-49 margin, rates here are nowhere near
those in Los Angeles County. Even if total premiums statewide are
cut, will Santa Clara County see a cut if territorial ratings are
Harvey Rosenfield, who heads Voter Revolt, the group that put 103 on the ballot,
is confident that when 103's regulations opening the insurance companies' book
take effect this dilemma will vanish. The waste and inefficiency that will be
discovered and eliminated, he believes, will allow rates to drop regardless of
what the insurance companies are saying now about their expenses. While Rosenfield
is obviously pretty good at enunciating the prejudices of Californians, we have
considerably less confidence in his grasp of the financial dynamics of the insurance
industry. A word to the wise: Don't bother watching the mailbox for your insurance
rebate. If one eventually arrives, it won't go far toward paying the rent.
|INSURANCE BALANCE SHEET
|This table shows the sources of funds for the California automobile
insurance industry in 1982 and 1987, and how those funds were spent. All figures
are in millions of dollars.
|Loss adjustment expenses
|Dividends to policyholders
|Other taxes, licenses, etc.
Source: Insurance Information Institute
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