Home and Auto Insurance Rates;

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Statement from News Conference with Insurance Commissioner John Garamendi

Prepared Statement of Harvey Rosenfield
Foundation for Taxpayer and Consumer Rights
“Home and Auto Insurance Rates”
News Conference with Insurance Commissioner John Garamendi
May 25, 2006

Sacramento, California — What you are witnessing in California today is an unprecedented confrontation between an elected official doing his sworn duty to bring down auto and home insurance premiums and a greedy, profiteering industry trying to corrupt the integrity of the elected office of insurance commissioner and mislead the voters so the industry can continue to gouge us.

Hearings on Rates for Auto and Home

A few years ago, insurance companies were losing money in the stock market, interest rates were at record lows and the economy was fairing poorly. So they started jacking up premiums to offset their investment losses.

The insurers’ investments have improved since then, and now, as the analysis presented by the Insurance Commissioner shows, the insurance companies are rolling in dough. There has been no increase in car accident or homeowner claims in California that would justify the current high rates. In fact, with high gas prices, people are driving less, and there are fewer accidents.

One measure of the degree to which rates are out of control is that
some of the largest insurance companies in California are reporting “loss ratios” that are scandalously low. For every $1 in premiums they collect, Farmers and State Farm are paying out 37 cents in claims to homeowners, for example. The price gouging winner is Safeco, at 26 cents on the dollar. It used to be that insurers got along fine with spending $1 or more for every $1 in premium they took in, because they made a fortune just from investing our premiums for awhile — until they had to pay them back. What are these companies doing with the rest of our premium dollar today that they are not paying out in claims? Fattening the wallets of the fat cats and their already bloated salaries.

Here’s what these loss ratio numbers mean: the insurance companies are engaged in the kind of profiteering that the oil companies have become infamous for in recent months.

But there’s one big difference between the price of gas at the pump and the price of insurance. Here in California, we can do something about insurance company overcharging. Eighteen years ago, the People of California passed Proposition 103, which made the insurance commissioner an elected post and gave the commissioner the authority to regulate and roll back excessive insurance rates by limiting the profits, expenses and loss projection practices of insurers.

Indeed, this week FTCR submitted comments to the California Department of Insurance urging the commissioner to make changes in the regulations governing rate increases. Among our proposals — which are critical to implement immediately — is a requirement of automatic rate reviews whenever the loss ratio dips below 70 cents.

FTCR’s expert’s analysis of industry loss ratios and profits was submitted to the Department last week, and it confirms the analysis presented by the Commissioner today. Profits have become so outrageous that they have reached pre-Proposition 103 levels. Proposition 103 states that “no rate shall remain in effect that is excessive.” The investigation announced by Commissioner Garamendi today is needed immediately. Based on our analysis, companies with loss ratios in the range reported by State Farm and Farmers should be forced to reduced their homeowner insurance rates by between 15% and 25%. FTCR has invoked Proposition 103‘s authority to challenge rates, and we have blocked over millions of dollars in rate increases over the last three years. We will organize a team of lawyers and experts to intervene in the hearings that Commissioner Garamendi has announced this morning, and we will fight for refunds.

Industry Attack on the Commissioner’s Good Driver Reform Decision

As important as the Commissioner’s announcement today is, that is now what has brought me to Sacramento today.

I’m here to discuss another aspect of Proposition 103 that is going to start saving money for good drivers this year. I’m referring to the requirement that auto insurance premiums be based on your driving safety record, the number of miles you drive each year, and the number of years of driving experience you’ve had, rather than your zip code.

Right now, eighteen years after the voters ordered these changes in the zip code system, insurers are still using it, so that today, in any neighborhood here in Sacramento, a good driver pays the same base rate as a bad driver, and someone who only drives to church on Sunday pays the same base rate as the next door neighbor who commutes 100 miles to work every day.

The insurance companies made this part of Prop 103 the target of their $80 million campaign of lies back in 1988. I remember being on this podium, in this very room, in the fall of 1988 explaining to reporters that the insurers were lying to the voters about the impact of Proposition 103. I brought along some of the mailers they were sending out back then, lying to the voters that if Prop. 103’s good driver reforms were passed, rates would go up in all but four counties in California. Some of you reporters investigated, and confirmed in your stories, that the insurance companies had falsified and manipulated data and were lying. I brought a few of those articles along.

Last December, after examining the matter for three years, Commissioner Garamendi announced he was issuing a new regulation to order insurance companies to finally obey the law.

So today the insurance companies are running a campaign to once again fool the voters. Same phony statements. In fact, almost the same phony campaign. Back then, the industry campaigned in the name of “Californians Against Unfair Rate Increases” — but there were only greed-driven insurance companies, and a few of their California executives. Today, they are calling themselves “Californians to Stop Unfair Rate Increases.” It just goes to show you that no matter what the industry has in the way of money it’s PR flacks utterly lack any creativity or imagination.

Why wouldn’t the industry spend $2.4 million — of our premium dollars — to try to block reforms that will save consumers tens of millions of dollars each year on their auto insurance?

But there’s more to the insurance industry’s campaign than that.

As the Commissioner has revealed, one month ago a representative of insurance interests offered him a quid pro quo: delay the good driver regulations, until one of the two presumably m0ore industry friendly candidates take office next year, or face a $2.4 million campaign attacking him just a few weeks before the primary he’s involved in.

Now, in my thirty years as a consumer advocate, I have never witnessed an elected official blow the whistle on this kind of conduct. As a lawyer, I believe the quid pro quo constituted a criminal action under California’s Penal Code, and urge that the law enforcement prosecute the insurance companies involved in this to the fullest extent of the law. Of the two major political scandals in the last three decades in California, the insurance industry figured in both: the conviction of Senate Insurance Chair Alan Robbins, the Quackenbush slush fund scandal. But no executive of an insurance company has ever been prosecuted, much less jailed. The current FBI investigation here in the Capitol should be expanded to include this extortion attempt and the spreading of insurance cash to backers of legislation, A.B. 2840, that would unconstitutionally try to do by law what the insurers asked the Commissioner to do: delay the regulations.

The Commissioner said no to the extortion, and Farmers, 21st Century and State Farm are making good on their threat. But make no mistake: this is no longer about auto insurance rates, either for the industry or for the public. The Farmers/State Farm/21st Century campaign isn’t just trying to deceive voters or punish the Commissioner.

The voters made the office of insurance commissioner an elected post, accountable directly to the people. The commissioner swears an oath of office to enforce the law. The Farmers/State Farm/21st Century attack on the commissioner is an assault on the integrity and independence of that office.

And others. For what Farmers/State Farm/21st Century are doing is sending a message to every elected official in this state: “disobey us and we will make you pay.” If they succeed, what elected official in this Capitol will dare defy the insurance companies?

This unprecedented attack on the integrity of our system of government by Farmers/State Farm/21st Century should be condemned by every member of the public — Republican or Democrat, good driver or bad — and by every public official or candidate for office in California, beginning with the two candidates for insurance commissioner and including those who are inevitable benefiting from the Farmers/State Farm/21st Century campaign: Mr. Garamendi’s opponents in the primary for Lt. Governor.

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

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