Auto Insurer Revs Measure’s Motor

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L.A.-based auto insurer Mercury General Corp. is spending millions of dollars to convince California voters to make it easier for the company to woo customers of its rivals. That’s how some characterize Mercury’s role as the main sponsor of Proposition 17 on the June ballot. The proposition would allow auto insurers to offer discounts to lure longtime customers from other carriers. Other insurance companies have declared that they are either neutral or taking no position on the matter.

Some consumer advocates don’t like Proposition 17. They say the proposition also may allow insurance companies to slap surcharges on customers who allow their insurance policies to lapse, perhaps because they were late with a payment or they didn’t need insurance for a time. Backers dispute that Proposition 17 would allow insurers to impose such a surcharge.

If the proposition passes, Mercury or other insurers could send an advertisement to customers of their competitors offering discounts to longtime policyholders. That type of solicitation is currently forbidden.

Radio advertisements for Proposition 17 started airing recently. They are paid for by the Californians for Fair Auto Insurance Rates, which is entirely backed by Mercury.

Mercury had poured more than $3.5 million into the campaign as of the last state filing period ending Dec. 31, about 95 percent of the total war chest. The rest has come from independent insurance agents and brokers, many of whom place clients with Mercury. The independents’ professional association claims the proposition will lead to increased competition.

The campaign filings show no contributions from the state’s other major auto insurers, including such large players as L.A.-based Farmers Insurance Group; State Farm Mutual Automobile Insurance Co. of Bloomington, Ill.; and Allstate Insurance Co. of Northbrook, Ill.

So why is Mercury, known in the industry for its aggressive discounting, alone in this battle?

“Mercury wants to grow and believes that, with this measure, it can take customers away from State Farm, Allstate and Farmers,” said Brian Sullivan, editor of Auto Insurance Report, a Dana Point newsletter.

It’s believed that Mercury customers are more price sensitive; they are more inclined to jump around, seeking the best price for car insurance, although the company disputes that. As a result, other companies have bigger pools of long-term customers coveted by discounters such as Mercury.

“This measure would benefit consumers by increasing competition, choice and by lowering insurance rates, because they could take these discounts with them when they switch insurers,” Mercury stated in an e-mail response to Business Journal questions on the company’s support of the proposition.

Mercury, headquartered in the Mid-Wilshire district, writes policies through independent brokers in 13 states. It is the third largest auto insurance underwriter in California by market share.

Industry split?

Some of the smaller players might welcome the measure and, like Mercury, jump at the chance to pick off desirable customers from major carriers.

“The companies that will take it in the chops are the ones that have most of the market share,” said Mike D’Arelli, executive director of the statewide Alliance of Independent Insurance Agents & Brokers, which supports Proposition 17.

Spokespeople for State Farm, Allstate and Farmers limited their comments to saying that the companies have taken no position on the proposition.

The trade association representing most of the major insurers in the state, the Association of California Insurance Companies, voted last week to support the measure, but would not campaign for it. Mercury is not a member of the association.

Waging such a high-visibility campaign is risky for Mercury, which has been dogged by state allegations of claims-handling violations, and charging higher rates for drivers in the military and certain other professions.

In 2008, Mercury paid $300,000 in fines to settle the claims-handling allegations without admitting fault. Proposition 17 opponents have emphasized Mercury’s run-ins with regulators in their campaign.

Sullivan and other industry observers said the other major auto insurers are not actively campaigning on the measure because of their history with Proposition 103, which was passed in 1988 and regulates auto insurance in California. “The industry is inherently conservative on ballot measures since losing on Proposition 103,” said Fred Pilot, editor of the California Insurance Law Report. “They really don’t see the benefit of going to the mat and spending lots and lots of money on a ballot measure unless something really threatens them.”

Proposition 103 was introduced as a price-control measure. It bans surcharges for lapsed policyholders and it banned the practice of luring new customers with lower rates because they had maintained continuous coverage in the past. Instead, insurers were allowed to give “loyalty discounts” to their own longstanding customers.

Mercury has long sought to overturn the ban on discounting for new customers who had maintained continuous insurance coverage.

Proposition 17 is Mercury’s third attempt to offer discounts to lure new policyholders. This time, Mercury has the support of the Alliance of Independent Insurance Agents & Brokers, which sees the measure as a way to increase competition in the auto insurance industry.

“Our members are independent mom-and-pop insurance agents in California that have the job of shopping for California drivers and consumers,” said executive director D’Arelli. “To be able to offer the consumer a multitude of insurance quotes and coverage options because of the continuous coverage discount will allow more opportunities for consumers to save money.”

Only one insurance carrier so far has come out against Proposition 17: United Services Automobile Association of San Antonio, which insures members of the armed forces and their families. USAA is concerned that when drivers discontinue their auto insurance while serving on tours of duty, they could be hit with surcharges when they try to reinstate their insurance.

Proponents of Proposition 17 said it specifically exempts members of the military from such surcharges for lapses in coverage.

But opponents, including Doug Heller, who works with Proposition 103 author Harvey Rosenfield at Santa Monica-based Consumer Watchdog, said the real aim of Mercury is to lift the ban on surcharges for drivers who need to reinstate coverage after letting their auto insurance policies lapse.

“This would allow Mercury to jack up prices for customers they don’t really want,” said Heller, spokesman for Campaign for Consumer Rights, the main opposition group to Proposition 17.

Mercury takes issue with that.

“Consumer Watchdog is one of the few groups opposed to extending this discount to California consumers, and instead of arguing the merits of the initiative, they are trying to divert attention away from the issue by attacking Mercury Insurance,” the company stated in its e-mail to the Business Journal.

“Theirs is the anti-consumer position on Prop. 17 and feel they need to hide behind attacks instead of stepping up to discuss Prop. 17 itself.”

Consumer Watchdog
Consumer Watchdog
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