Two California companies reduce their auto premiums. Others appear to take a more cautious route.

The Los Angeles Times

Two leading California insurers have cut the cost of auto policies, the first such declines since the industry jammed the brakes on a rate war after investment losses early this decade and the Sept. 11, 2001, terror attacks.

So far, however, there’s no sign that other insurance companies are speeding to compete with the Automobile Club of Southern California, which dropped its average premium 5% last month, and State Farm Mutual Automobile Insurance Co., which will reduce its auto rates an average of 7.6% effective Oct. 1.

Cutting rates is something most insurers will do very cautiously in California, said independent insurance analyst Brian Sullivan of Dana Point, publisher of the Auto Insurance Report newsletter. In the state’s highly regulated market, he said, there’s no guarantee insurers can easily raise rates if market conditions change.

Neither State Farm nor the Auto Club is a publicly traded company, which is one reason why both may be willing to take a chance with rate cuts.

Not having Wall Street scrutinize quarterly results, as it does with public companies, “is always a huge factor,” Sullivan said. “These companies can do things that are focused on long-term objectives.”

State Farm is a mutual company, owned by policyholders who get a share of profit either in dividends or credits against future premiums. The Auto Club‘s insurance program is run by a company affiliated with the club; it also distributes dividends to policyholders in the form of credits against premiums, a spokeswoman said.

The two companies have different goals, and neither are likely to pressure other insurers to cut rates en masse, Sullivan said.

State Farm, the No. 1 California auto insurer with 14.7% of the written premiums, is reducing rates for long-term customers, not new ones, in a defensive move to keep its best customers from being picked off by lower-cost competitors. That will enable the company to keep pitching these customers additional financial products, as is its strategy, but won’t create much pressure on other insurers to cut their rates, he said.

The Auto Club, No. 3 in California with an 8.6% market share, has shown impressive gains in efficiency and lower claims. That has put it in a position to try to boost market share with low rates, Sullivan said.

Nationally, auto insurers appear well-positioned to make cuts. Premiums collected by the industry grew at a faster pace than the claims it paid from May 2001 until this summer, said Kevin Callahan, who helps manage $1.1 billion at Boston’s Century Capital Management. Century Capital owns stock in Allstate Corp., Chubb Corp. and American International Group.

“That’s better than three years of increasing profits,” Callahan said.

What’s more, the auto insurance industry has seen fewer accident claims in recent years, according to the Insurance Information Institute, a New York trade group. It’s unclear exactly why claims have declined or how long that will continue, insurers say. A few companies, notably Farmers Insurance Group in Los Angeles, say rising medical and repair costs have offset that benefit entirely.

Because of the mixed signals, “We cannot say with certainty that the trend is clearly downward,” California Insurance Commissioner John Garamendi said.

“But there are early signs that cost has stabilized, and two major companies have already proved the trend for their customers is down,” Garamendi said. “I think we’ll see some downward movement [on premiums] next in the mid-sized companies.”

Candysse Miller, executive director of the Insurance Information Network of California, said firms are assessing their risks and marketing strategies more independently rather than rushing for market share, which sent rates tumbling in the late 1990s.

Bloomington, Ind.-based State Farm, the largest insurer in California and the nation, made a series of rate reductions totaling nearly 30% for California motorists from 1995 through 2000. But after a 0.1% reduction in 2001, State Farm raised its auto premiums in California 6.8% in March 2002, an additional 14.1% in September 2002, and 4.9% in 2003.

With its basic business solidly profitable again, State Farm has dropped auto rates in 34 states so far this year as a result of “routine monitoring” of costs and payouts, spokesman William Sirola said. (The company has raised rates in seven states.)

“We’ve seen very encouraging trends in the number of accidents,” Sirola said. “There are also slight signs of stabilization in the cost side — the severity of claims.”

“Is it the aging of the population?” he asked. “Has the economy slowed and are people driving less? Is it better law enforcement, fewer DUIs? Is it safer cars, people being injured less? Or is it the fact that roads are so crowded these days that people just can’t get up any speed? It’s probably a combination of some or all those factors.”

Illustrating how State Farm‘s rate cuts are skewed heavily toward long-term customers, Sirola said three-year customers are eligible for premium cuts of as much as 4% and six-year customers can get 12% discounts.

Other companies say their analyses of risks and strategies have yet to make any rate cuts look attractive in California.

Northbrook, Ill.-based Allstate, the fifth-largest auto insurer in California, is confident its premium levels are appropriate and has no plans to alter auto rates in the foreseeable future, spokesman Bob Daniels said.

Farmers Insurance, a part of Zurich Financial Services Group and the No. 2 insurer of California drivers, applied in July to raise premiums 5.8%, citing higher medical and repair costs. Spokeswoman Mary Flynn said the company’s past increases had been more modest than those of many competitors.

The Foundation for Taxpayer and Consumer Rights, a Santa Monica activist group, has challenged Farmers‘ request.

“Based on what Farmers has submitted, they deserve no rate increase at all under Proposition 103,” said foundation President Harvey Rosenfield.

Under Proposition 103, the insurance commissioner has the power to independently call hearings on rates. Garamendi has said that insurers should realize that they won’t be allowed to simply sit back and collect excessive profits by declining to seek rate decreases.

“We’re monitoring them, and it will be interesting to see how they do in the second and third quarters,” he said. “We’ll see how it goes, and in the late fall or early winter I may call for hearings.”

Analyst Sullivan said the difficulty of negotiating with Garamendi and his staff would be a major factor restraining rate-cut requests. Applications for rate increases often have been denied and requests for reductions have been met with demands for greater cuts, Sullivan said.

Rosenfield’s group has used Proposition 103 to press for lower rates. He said that State Farm had proposed to cut its rates 4% in its most recent application, but the commissioner’s office negotiated the 7.6% decrease after the activist group said the reduction should be 8% under 1988’s Proposition 103.