Examining ‘Emergency’ Insurance Regulations

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“Socialized car insurance.”

That’s what insurers said would happen if California’s Proposition 103 passed in November 1988. Advertisements said the referendum would put “big government into the car insurance business.” The head of the California Chamber of Commerce warned that “massive government intervention” would push insurance rates through the roof.

Twenty years later, those stern warnings seem – how can I put this? Alarmist? Foolish? Mistaken?

Since Proposition 103 passed – requiring that insurers get approval from the Department of Insurance before raising their rates – California has had the lowest rise in auto insurance rates in the nation, according to a study by the Consumer Federation of America.

Nationwide, auto rates rose an average of 50 percent between 1989 and 2005, the most recent year for which comprehensive data are available. In comparison, California rates rose less than 13 percent. California has dropped from having the nation’s fourth-highest auto insurance rates to the 16th-highest.

Thanks to Proposition 103, California drivers have saved an estimated $61.8 billion since 1989, averaging $2,660 per driver, according to the CFA study. The study suggests the savings would have been greater if not for a string of lawsuits and other hurdles that slowed the law from being fully enacted.

The proposition did not prevent insurers from reaping healthy profits. The 10.1 percent profit margin in California is well above the 8.1 percent national average, according to the CFA report.

So everybody’s happy, right? Wrong.

Proposition 103 remains a battleground among insurers, regulators and consumer advocates. The latest skirmish started two weeks ago when Insurance Commissioner Steve Poizner introduced “emergency” amendments revising regulations written by his predecessor, Lt. Gov. John Garamendi.

Poizner, a moderate Republican and former Silicon Valley business executive, has always been a bit friendlier with insurers than Garamendi, a longtime Democratic politician from the Central Valley.

“Insurance companies will get a fair shake with my office,” Poizner said when he was elected, though he also pledged to be “fiercely independent of the insurance industry.”

When he took office in January 2007, Poizner was confronted with 16 sets of regulations that Garamendi drafted in his last weeks of office, mostly as mechanisms for enforcing Proposition 103. To Garamendi, these regulations provided important consumer protections. To Poizner, they were a mess.

“Like so many of these last-minute efforts, (these) regulations were not fully baked,” Poizner wrote Garamendi last week. “It is clear that your rush to submit them was more about legacy building and partisan politics than good public policy.”

Other than his complaint that the regulations were poorly written, Poizner’s chief gripe seems to be that they did not treat the insurance companies well enough.

“It is essential that we foster an environment in which insurers want to compete and expand,” he wrote Garamendi. “If such an environment does not exist, consumers will be hurt in the form of reduced choices and higher prices. The regulation you left me was flawed because it ignored this fundamental principle.”

Given the relatively decent profit margin and high level of competition in the California market – we rank fourth-highest for competitiveness throughout the nation, according to the CFA study – there’s a case to be made that insurers already can compete and expand here.

The amendments Poizner enacted last week go even further. For one thing, they give him the ability to let insurers boost their profit margin by as much as 2 percent above the current rate. In addition, Poizner will let insurers suggest their own base periods to show business trends, which is a key tool for setting rates. In contrast, Garamendi used a standardized base period for fear that insurers could game the system to charge higher rates.

“I am more than disappointed; I am alarmed,” Garamendi wrote Poizner on Thursday after hearing about the changes. “These recent changes represent an attempt to undermine (Proposition 103) in a significant way.”

Consumer advocate Harvey Rosenfield, who authored Proposition 103, accused Poizner of engineering “an outrageous giveaway” to insurers.

Garamendi and Rosenfield, who heads Consumer Watchdog in Santa Monica (formerly known as the Foundation for Taxpayer and Consumer Rights), are equally troubled by the way in which Poizner enacted the changes: as emergency regulations, drafted with little opportunity for public comment.

Before Poizner enacted the changes, he held one public meeting – a workshop on April 7 in Sacramento attended by several dozen insurance executives, lawyers and lobbyists and an attorney from Rosenfield’s consumer group.

Several of Poizner’s more controversial amendments were not aired at the workshop, Rosenfield said. Instead, they were written after he received letters from insurers such as State Farm, 21st Century and the California State Automobile Association. State Farm was particularly helpful, providing a copy of existing insurance regulations marked up with the changes the company wanted to see enacted. Many, but not all, of the proposals were incorporated into Poizner’s emergency proposals.

Using his emergency powers, which allow him to amend regulations with minimal public comment, Poizner drafted a set of regulations that he released Wednesday. Poizner said emergency action was needed because Garamendi’s regulations had to be “clarified” before insurers start filing requests for rate changes in July.

Let’s say, for the sake of argument, that Garamendi did write some shoddy regulations. Let’s say Garamendi was a messy slob who scribbled some ill-conceived laws on the back of his napkin as he darted out of his office to take the lieutenant governor’s oath.

Didn’t that happen 16 months ago? Wasn’t that enough time for Poizner to review the regulations and call public hearings on the matter? Why did he wait until the last minute before calling an “emergency”?

For his part, Poizner said the industry-backed emergency regulations “will help speed lower insurance rates to consumers.” That generally gibes with what we all know about insurance companies, right? I mean, aren’t they always looking for ways to charge us less money?

Poizner’s spokesman, Darrel Ng, said “any suggestion that the commissioner has not fulfilled his duty to protect consumers is dead wrong.”

Regardless of who’s right or wrong in this affair, the way in which these regulations are being enacted seems to sidestep the message of Proposition 103.

Its rationale was to give the public more say over auto insurance rates. Because drivers are legally required to buy the insurance, they should have a say in how much they are charged, or so the theory goes.

The CFA study suggests that this approach has worked not only in California but in states throughout the nation that have since taken Proposition 103’s approach to requiring insurance companies to seek regulatory approval before changing their rates.

“It is very clear that consumers fare best under a system of prior approval of insurance rates,” said J. Robert Hunter, a former insurance regulator who is now the CFA’s director of insurance. “It is also clear that as regulation is weakened, insurance consumers are worse off.”

Whatever their ultimate effect, “emergency” regulations and behind-closed-doors decision-making do not seem the best way to enable public oversight of the industry.
Dean Calbreath: (619) 293-1891; [email protected]

Consumer Watchdog
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