15th Anniversary Study Shows California Insurance Rates Dropped 22% Under Regulation Despite National Trend Toward Higher Rates
A new study of auto insurance rates in California shows that auto liability premiums in that state have declined by more than 22% since voters approved the landmark insurance reform initiative known as Proposition 103 on November 8, 1988. During the same period motorists' premiums around the country have increased 30% for the basic coverage. California's insurance rate regulation system is the nation's most stringent and effective, according to the nonprofit, nonpartisan Foundation for Taxpayer and Consumer Rights (FTCR). Earlier this year, South Carolina Senator Fritz Hollings introduced legislation to implement a national version of Proposition 103.
"Fifteen years ago California voters enacted Proposition 103 to curb insurance company profiteering and it worked," said Proposition 103 author Harvey Rosenfield. "While premiums around the country have skyrocketed, Californians' premiums have fallen steadily since voters decided to regulate insurers."
Under Proposition 103, insurance companies must justify any rate changes prior to imposing higher rates. The law, which applies to most lines of property-casualty insurance also sets standards for company profits, allows consumers to review insurer data and challenge proposed rate increases and applies anti-trust laws to insurance companies, which are exempt from such laws in most of the country. Proposition 103 also required insurers to refund over $1.2 billion directly to consumers to compensate for excessive premiums during the 1980s.
In addition to the new data illustrating that California has bucked national auto insurance premium trends, consumers have recently earned important victories in other lines of insurance because of Proposition 103. In the last three months, FTCR has utilized Proposition 103 to block or dramatically reduce proposed homeowners and medical malpractice rate increases saving California policyholders over $62 million.
"California's experience under Proposition 103 proves that the way to rein in skyrocketing insurance rates is through active regulation of insurance companies," said FTCR's senior consumer advocate Douglas Heller.
The Garamendi Effect
According to the FTCR study, auto insurance premiums throughout the country, including California, have increased since 2000. The data synchronize with national economic factors, namely declining investment income, that historically have led insurers to increase rates in order to maintain profits earned from investment income during stronger economic periods.
Though Californians, under Proposition 103, have seen premiums increase somewhat less rapidly during the downturn, the regulatory function of the Department was severely weakened during and after the scandal that led to the resignation of former Insurance Commissioner Chuck Quackenbush. While complete national data is not in, consumers in California faced more auto insurance rate increases in 2002, while the Department was being reorganized under interim Insurance Commissioner Harry Low.
Initial data from 2003, however, indicate that the flow of insurance rate increases has been stanched under the new administration led by John Garamendi, who was elected commissioner in November 2002. Only two among the twenty largest insurers have even requested auto insurance rate increases in 2003 and to date no increases have been approved.
"There has been a Garamendi effect, in which fewer companies are pursuing rate hikes and the Commissioner is applying the rigors of Prop 103 to protect consumers from unjustified increases," said Heller.
California a profitable market for insurers under Prop 103
Despite the insurance industry's automatic negative reaction to insurance regulation, California, under the stringent rules of Proposition 103, has been a more profitable environment for insurers than the nation as a whole, the study also explains. For auto liability insurance, homeowners, medical malpractice and others profits have been above average in California over the last ten years. Notably, workers compensation has not been as profitable in California as that line has been nationally. Workers compensation, however, was deregulated in California in 1993 and is in crisis currently.
According to FTCR, regulation serves to restrain the companies from damaging themselves as well as hurting consumers. Insurance regulation serves to produce the most appropriate premiums for the risk insured; insurance regulation guards against both excessive and inadequate, as well as unfairly discriminatory rates. As a result, regulated lines of insurance result in more stable rates for customers, even if they are not the absolute lowest premiums at certain points in time.
Proposition 103 Still Under Attack From Insurers
Proposition 103 has been a phenomenal success for consumers, and it has also been a profitable law for insurers. Still, insurers continue to seek ways to undermine the regulatory regimen of Proposition 103. Over the past two years Mercury Insurance has contributed nearly a million dollars to politicians as it waged a legislative battle to strip from Proposition 103 an important consumer protection against insurance discrimination. The proposal, which was signed by Governor Davis this year, would allow insurers to surcharge motorists who have never been insured in the past or have had a lapse in insurance coverage. Proposition 103 bans any discrimination against drivers based on their prior insurance status. FTCR has recently sued with other consumer and civil rights groups to invalidate the law.
Over the years there have been other efforts to dismantle Proposition 103, including challenges to the initiative's rollbacks and the rewriting of regulations to allow insurance companies to base auto premiums primarily on a driver's zip code rather than their driving record. California Insurance Commissioner John Garamendi has agreed to review current rules, which consumer groups argue allow zip code to play too great a role in setting insurance rates, in violation of Proposition 103.
"Despite the broad success of Proposition 103, it remains the insurance industry's number one enemy in California. Fifteen years after the voters enacted Proposition 103, insurance companies are still campaigning against it in every branch of government," said Heller.