California has the most consumer-friendly auto insurance industry in the U.S. due to state regulations, the Consumer Federation of America (CFA) says in a report released today.
Twenty-five years after California voters passed Proposition 103, which imposed regulations and rate controls on auto insurance companies, the measures have been declared a huge success by the CFA, which recommends other states adopt similar measures.
California is the only state that has seen a decrease in insurance rates since 1988, when Prop 103 was passed. Other states have seen an average increase of 43.3 percent, according to the report, What Works.
Wisconsin is at the median for rate increases over the 25-year period, with a 56-percent jump, and Nebraska registered the largest increase at 108 percent. In California, rates have declined slightly since 1988, with a 0.3-percent decrease.
Seven million consumers in California received more than $1.43 billion in premium refunds under Prop 103, according to the report.
The national rate increases occurred despite substantial gains in automobile safety, which has reduced accidents, and increased competition created by the arrival of several new players in the insurance market, according to the report.
Proposition 103 “delivered over $102 billion in savings for California’s motorists, an average annual savings of $345 per household,” says J. Robert Hunter, CFA director of insurance and federal insurance administrator under presidents Gerald Ford and Jimmy Carter. “This was the result of strong regulatory oversight and a more competitive market fostered by the 1988 insurance reform measure.”
CFA, which studied data from the National Association of Insurance Commissioners, found the states with the highest increases are Nebraska, Louisiana, Montana, Wyoming and Kentucky; the states with the lowest increases are Hawaii, New Hampshire, New Jersey, Massachusetts and Pennsylvania.
States in which insurers must apply for rate changes are the most effective at keeping rates low, according to the report, while markets with less or no regulation tend to have the most substantial increases.
Based on California’s success, CFA recommends all states set standardized and transparent rate-making standards, such as reasonable rates of return, restrictions on the amount of overhead costs that can be passed on to consumers, and guidelines for projecting future rate increases.
It also wants all states to require that driving record be the most important factor in setting rates for drivers, followed by miles driven and years of experience—not credit scores, occupation, education or prior purchase of insurance, which penalize low-income drivers.
“If every state in the nation were to implement and enforce a regulatory and pro-competitive agenda as demonstrably pro-consumer as that in California, our research indicates that Americans could save over $350 billion over the next decade, or $3,361 per household, even as insurance companies realize reasonable profitability and competition remains robust,” says Hunter.