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One of the major reforms implemented by California voters with the passage of Proposition 103 in 1988 was the creation of a “prior approval” process for rate increases. This process requires insurers to apply for and obtain approval for rate changes from the Insurance Commissioner and that the rates set cannot be “excessive, inadequate, or unfairly discriminatory.” In 1991, Commissioner Garamendi adopted regulations to implement the ratemaking provisions of Proposition 103, which were upheld in 1994 by the California Supreme Court in 20th Century v. Garamendi (1994) 8 Cal.4th 216, 243. In 1995, Commissioner Quackenbush resubmitted the regulations, and they went into effect and have remained essentially unchanged ever since.

While these regulations set forth the appropriate methodology for review of rate applications to properly implement the law, several key components, referred to as “generic determinations,” still need to be set forth through regulation. These include rules that establish what is a fair profit, premium surplus, and efficiency in costs, among others. The Commissioner is required to make findings on these generic determinations through regulation in order to apply them to rate applications for prior approval. Without these determinations, there is no public regulatory standard for the Commissioner’s review and approval of rates. As a result motorists have been forced to pay excessive premiums.

A 1998 report on Proposition 103‘s impact on automobile insurance premiums revealed that California motorists paid over $5.2 billion in excessive premiums under Quackenbush in just his first three years in office due to his failure to properly implement regulations governing excessive industry profits.

In October 1996, consumer advocates petitioned for a rulemaking proceeding to “complete the rate approval regulations so the Commissioner can publicly determine when a rate is excessive or inadequate under Proposition 103.” Commissioner Quackenbush granted their petition in November 1996, but instead of undertaking the rulemaking on the narrow issue as requested by consumer groups, he instead commenced investigatory hearings for consideration of alternative methodologies for implementing Insurance Code sections 1861.01(c) and 1861.05. Those hearings took place in March 1997. Ultimately, a task force was convened out of which a report outlining and analyzing various methodologies for the prior approval of rate applications was issued.

Four years later, however, the public is no closer to having a complete set of regulations in place to ensure that the rates they are charged are not excessive.

Consumers who are concerned about insurance premium hikes should to write to Commissioner Low at the California Department of Insurance in Sacramento and send a complaint to FTCR via its Web site.

Consumer Watchdog
Consumer Watchdog
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