Letter to Legislature regarding SB 689 (formerly AB 1488)

August 6, 2002

Honorable Jackie Speier

Senate Insurance Committee, Chair

State Capitol, Room 2023

Sacramento, CA 95814

Re: AB 1488 (OPPOSE)

Dear Senator Speier:

The Foundation for Taxpayer and Consumer Rights (FTCR) opposes AB 1488 (Chavez) in its current form and with either of the two proposed amendments, which do nothing to lighten the burden on the poor or address the bill’s conflicts with voter-approved Proposition 103. AB 1488 would allow insurance companies to continue a practice, recently dubbed “portable persistency,” that the Department of Insurance, consumer advocates and low-income representatives oppose. AB 1488 is, in fact, an attempt by one insurance company to keep alive an inequitable insurance subsidy.

• Insurance Commissioner Low has determined, through public hearings, that “portable persistency” is illegal and places an unfair burden on low-income motorists.
• Insurance rates are a “zero-sum game.” With four times as many insured drivers as uninsured drivers in California, the “portable persistency” discount is spread thinly among qualifying drivers, but the surcharge is heavily concentrated on previously uninsured drivers who can least afford the extra cost.
• In 1997, a court ordered then-Commissioner Quackenbush to reject any rating plan that included factors based on compliance with the financial responsibility laws (as AB 1488 as proposed to be amended would do).
• AB 1488 will not create any new competition in the marketplace. Companies, including the bill’s sponsor, have been (illegally) applying the “portable persistency” factor for several years. Therefore, this bill will do nothing to improve competition.
• The purpose of the legislation is to undermine Commissioner Low’s decision to ban the use of “portable persistency.”

The Two Proposals

According to Senate Insurance Committee staff, at least two proposals to AB 1488 are under consideration to address the issue of “portable persistency.”

The first proposal (Proposal A) would add the following language to Insurance Code §1861.02 (c): “However, an insurer may use persistency of automobile insurance coverage with itself, an affiliate, or another insurer as an optional rating factor pursuant to paragraph (4) of subdivision (a).

Proposal B would add the above sentence to 1861.02 (c) as well as the following language: “if the insured also demonstrates compliance with the financial responsibility law of the state for the same time period claimed as evidence of the persistent purchase of coverage. The Legislature hereby finds and declares that it is in the furtherance of the purpose of Proposition 103 to encourage competition amongst carriers so that overall prices for coverage will be priced competitively. The Legislature further finds and declares that competition is furthered when insureds are able to claim a discount for regular purchases of insurance from any carrier offering this discount irrespective of whether or not the insured has previously purchased from a given carrier offering the discount. The Legislature further finds and declares that persistency, when combined with evidence of compliance with the financial responsibility law, are together substantially related to the risk of loss and therefore in the furtherance of Proposition 103.”

Both proposals do essentially the same thing: create a new rating factor that would allow insurers to provide a discount to insured drivers and a surcharge on previously uninsured drivers.

Proposal A is straight forward. It would amend Proposition 103 in order to override the Commissioner’s proposed regulation that will ban “portable persistency.”

Proposal B has the same effect as Proposal A and except that it includes an unsuccessful attempt to veil the illegalities and anti-poor qualities of the basic “portable persistency” proposal. According to this proposal, a company may offer the “portable persistency” discount to a driver if the driver has complied with financial responsibility law of the state. This is a virtually meaningless addendum, as compliance with the financial responsibility law means that the driver carries liability insurance, with the rare exception of those whose obligation is met through a bond, or the customer has simply not been driving and therefore not required to carry insurance. The net effect, however, is exactly the same: a driver who was in compliance but not driving, has not been persistently insured and will be surcharged if they seek to purchase insurance, and the driver who previously drove without insurance would also face a surcharge. Either way previously uninsured drivers get surcharged, in violation of Proposition 103.

Additionally, Proposal B contains Legislative findings alleging that the bill furthers the purpose of Proposition 103. Pursuant to Amwest v. Wilson, the legislature can only amend Proposition 103 in order to further the purpose of the initiative. The language of the amendment notwithstanding, the substance of AB 1488 bill contradicts and, in other ways, violates Proposition 103, so the proposed findings cannot be supported. This language is little more than legislative sugar-coating that dissolves immediately.

Commissioner Low Has Held Public Hearings Concerning This Issue

The Department of Insurance has reviewed the “portable persistency” issue through a regulatory proceeding, RH-402. The Department’s public process for RH-402 has included a workshop, a formal public hearing, written comments and testimony from a variety of interested parties. The bill’s sponsor, Mercury Insurance, participated in this proceeding, as did our organization among others. The Insurance Commissioner spent nearly one year considering the matter of “portable persistency,” reviewing the policy impact, considering the available data and judging the legality of the policy with respect to Proposition 103. The Commissioner has determined that “portable persistency” conflicts with consumer interests and state law; the Commissioner has, therefore, moved to stop the application of this factor, the very same factor contained in AB 1488.

Specifically, the Commissioner has found that the “portable persistency” proposal violates Proposition 103‘s ban on the use of a driver’s status as insured or uninsured in determining rates [Ins. §1861.02 (c)]. Additionally, AB 1488 sets a dangerous new precedent by establishing in statute, rather than regulation, an “optional rating factor” that could be used to determine insurance rates. California law specifically hands that task to the insurance commissioner, whose responsibility it is to determine whether or not a proposed rating factor is substantially related to risk of loss and in compliance with other laws of the state. The legislative process typically does not afford the opportunity to analyze ratemaking factors in the comprehensive a manner available to the Department.

Unlike the Department’s year-long process, there has been no independent actuarial review of AB 1488 by the Senate or competing actuarial analyses by interested parties, as is appropriate for the determination of such rating factors. This bill represents a radical departure from the standard separation of regulatory and statutory functions in government, and marks an attempt by a regulated insurer to go around the Commissioner after the company was rebuffed in the regulatory process. Although the new regulation has not yet been finalized, Mercury Insurance has come to the Senate in order to undermine the judgment of Commissioner Low.

AB 1488 Creates a Subsidy of the “Haves” By the “Have-Nots”

A recent Department of Insurance analysis of Mercury Insurance rates indicate that, as a result of the “portable persistency” factor employed by that company, previously uninsured motorists in the analyzed group pay more than $200 more per year than a previously insured driver. Are they worse drivers? No. Do they drive more miles per year? No. In fact, the only difference between these drivers and those who receive the discount — a subsidy — is that the overcharged consumer simply has not been able to purchase insurance in the past, generally because of the product’s high cost. Under this scheme, the previously uninsured driver who is trying to get into the market, comply with the law and protect other drivers finds yet another roadblock in their way. In the aforementioned Mercury policyholder analysis, previously uninsured motorists pay 17% higher rates than they would if there was no “portable persistency.”

This proposal allows insurers to provide a small discount to drivers who have been insured and imposes a much larger surcharge on previously uninsured motorists. Because insurance rates are a “zero-sum game” any discount provided to one class of drivers must be offset by a surcharge on other drivers. Therefore, if the number of drivers who qualify for a particular discount is the same as the number who do not qualify for the benefit, then a 10% discount off the base price for one class yields a 10% surcharge for the other class. If only a small class of policyholders qualify for a discount and a large number do not, the larger, surcharged class will sustain a relatively smaller surcharge. Similarly, the opposite holds true, as in the case of AB 1488. Because there are approximately four times as many insured drivers in California as uninsured, the “portable persistency” discount would be spread thinly among most drivers, while the surcharges would be heavily concentrated on those drivers already least able to afford insurance, as illustrated in the table below.

Driver (all other characteristics equal) Premium

Previously Insured $950

Previously Uninsured $1,200

All Drivers if no “portable persistency” $1,000

(Using $1,000 Base Rate, 5% Discount for Portable Persistency)

Court Ordered Quackenbush to Reject Use of Prior Insurance History

Two separate 1997 court orders (The Proposition 103 Enforcement Project v. Quackenbush and Consumers Union & Southern Christian Leadership Conference v. Quackenbush), required the Department of Insurance to inform insurers that class plans which included a rating factor based on a driver’s prior compliance with the state’s financial responsibility laws are unacceptable. The court ordered then-Commissioner Quackenbush to reject plans that use such a factor alone or in conjunction with other factors to determine consumer rates, because such plans violated Insurance Code §1861.02 (a)4.

No New Competition

The sponsor of the bill has argued that this law change is necessary to give consumers more choices in the marketplace. However, this bill would not create any new competition in the insurance marketplace. Some insurance companies, including the bill’s sponsor, have been using this “portable persistency” strategy in recent years. In other words, the market already reflects the putative competition that the insurance company sponsors argue would ensue if AB 1488 were enacted.

The fact that most insured drivers, including members of the Insurance Committee are not aware that this portability actually is being used now belies the notion that AB1488 will provide consumers with more choices. Until the Department of Insurance promulgates the new regulation, “portable persistency” will continue to be used (albeit illegally) by some insurers. The value to insured consumers is simply too insignificant to enhance competition, yet the detriment to uninsured motorists is comparatively severe. This bill will not do anything to improve competition in the marketplace; it will simply allow the bill’s sponsor to continue to surcharge poor people in violation of the law.

For the reasons stated above, we oppose this bill. Thank you for considering our views.

Sincerely,

Doug Heller