FTCR Invokes Proposition 103 to Force 2nd Largest Insurer to Lower Excessive Rates

Santa Monica, CA — California’s second largest auto insurer, Farmers Insurance, should be prohibited from increasing its auto insurance rates by 5.8%, as the company has requested, according to the non-profit Foundation for Taxpayer and Consumer Rights (FTCR). The proposed hike would cost Farmers‘ customers in California over $100 million dollars.

Using California’s Proposition 103, FTCR filed a formal challenge to Farmers‘ proposed rate hike with the California Department of Insurance, alleging that the increase is excessive.

“Farmers‘ proposed $100 million rate hike is excessive and illegal and must be denied,” said Lawrence Markey, Jr., a staff attorney with FTCR.

In California, under Proposition 103, a 1988 voter-approved ballot initiative that governs the California insurance industry, insurance rate hikes are subject to public scrutiny and require the prior approval of the insurance commissioner before any hike can take effect. The rules do not allow rates to be excessive. The law allows consumers and advocacy groups such as FTCR to request hearings on a rate hike proposal, as FTCR has requested for the Farmers‘ rate increase.

According to FTCR’s analysis of the Farmers proposal, the rate hike must not be allowed based on the data submitted by the insurer:

‘ Farmers seeks a 15% after-tax return on surplus, which far exceeds rates of return previously allowed by the California Department of Insurance;
‘ The insurer’s actuarial projections concerning losses are excessive;
‘ Farmers includes excessive payments that it makes to an affiliated company which inappropriately inflates its expenses.

Farmers‘ requested price spike comes as the insurer’s parent company, the Zurich Group, has pressed it to extract high profits from California consumers. According to the insurance trade publication, The Auto Insurance Report, “Farmers Insurance has a job to do: Send money to the Zurich Group, its once-generous parent which now must lean on the offspring to help bail out good old Mom and Dad. . . . Farmers has kept its powder dry, and milked its markets for wonderful profits.” [August 16, 2004]

“If Zurich’s far-flung business interests are sagging, they cannot look to California drivers to subsidize their unprofitable companies,” said Markey. “Farmers‘ policyholders should not be stuck with this $100 million rate hike and Commissioner Garamendi should work to block it.”

As a result of Proposition 103, insurance companies returned over $1.2 billion directly to California consumers as part of a mandatory rate rollback. Additionally, according to the Consumer Federation of America, Prop 103 has saved consumers more than $23 billion in auto insurance alone.

Commissioner Garamendi has until August 31, 2004 to decide whether to hold a hearing or grant the rate hike.

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