Prop 103 Consumer Benefits Debate Serves as Focal Point for Calif. Ballot Initiative Expanding Law to Health

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WASHINGTON — Advocates and opponents of California's Proposition 103 are debating whether it has helped consumers 25 years after its passage. Some say the debate is being used to sway voters who will determine whether measures similar to Proposition 103 should be applied to health insurance in the state this fall.

Passed in 1988, the proposition required a 20% cut in automobile and property/casualty insurance rates for one year and restricted how insurance companies could set auto insurance rates based only on a driver's safety record, miles driven annually and years of driving experience.

The nonprofit Consumer Federation of America issued a report when Proposition 103 had its 25th anniversary in November saying it's saved more than $100 billion and has led to California being the only state where rates are lower now than in 1989.

The CFA said insurance companies in California issued more than $1.43 billion in premium refunds to 7 million policyholders under Proposition 103's rollback mandate. State rules prohibit many elements faced by low-income and minority consumers in other states, especially prohibitions on the use of credit scoring and prior insurance coverage. The report said if every other state in the nation were to adopt and enforce a pro-consumer system such as California, consumers would save $350 billion during the next decade.

But Brian Sullivan, publisher of Auto Insurance Report newsletter, argues the reductions in liability claims costs were the reason rates fell, not the regulatory system created by Proposition 103.

Harvey Rosenfield, the head of the nonprofit group Consumer Watchdog that was prominent in Proposition 103's success, told Best's News Service the insurance industry is attacking the law to ensure it would not be used elsewhere and to fight the November ballot initiative.

Insurance industry observers said Proposition 103 supporters are trying hard to convince the public of the law's worthiness before next November's vote that could extend the same treatment to the health insurance industry in California. "It's an effort to build a groundswell of support," said Steve Young, senior vice president, general counsel at the Independent Insurance Agents and Brokers of California.

The new ballot measure would prohibit health insurers from determining policy eligibility or rates based on lack of prior coverage or credit history, effectively limiting rate factors in a manner similar to Proposition 103. Should it pass, Insurance Commissioner David Jones would have the ability to reject health insurance rate changes, an authority he already has in other insurance sectors.

Sullivan's report on Proposition 103 said the CFA failed to incorporate claims costs in its data and reductions in those claims costs are the reason auto insurance rates have fallen in California. It states that from 1989-2010, California's paid losses for personal auto liability rose 16.8% versus a 117.4% increase in liability claims paid in the rest of the nation, according to his analysis of A.M. Best Co. data.

But Sullivan also credited the decline in auto insurance costs to the California Supreme Court, which issued a 1988 decision in Moradi-Shalal v. Fireman's Fund Insurance Cos. that limited third-party bad faith claims in the state. In the 10 years following the decision as well as Proposition 103's passage, paid liability losses fell 5.8% in California while they increased 58% nationwide. Between 1999-2008, the decrease in liability claims paid is only slightly more than in the rest of the nation.

CFA Insurance Director J. Robert Hunter, a former Texas state insurance commissioner, in a statement downplayed the impact of the court case. He wrote the court ruling cannot adequately account for the decline in comprehensive coverage premiums as opposed to increases in the rest of the nation.

The CFA issued a statement indicating Sullivan's report, appearing in his Auto Insurance Report, cherry-picked the data it used. Hunter said the Sullivan report was biased and unreliable. "The insurance industry is desperate to convince regulators, lawmakers and the public that California's consumer protections don't lower insurance rates, even in the face of overwhelming data, from over 22 years, that show significant savings," Hunter's statement said.

Hunter said Sullivan's report was selective in using its data, ignoring 2008-2010 in order to show that premiums fell compared to the nation in the first decade after Proposition 103 passed and then rose later. Had all the data been used, the CFA said, California premiums would be shown as lower not only in the first decade examined, but the second one as well.

Sullivan defended his conclusion. "The overwhelming factor influencing the price of auto insurance is claims being made," he said, adding that claims represent about 65% of any auto insurance price, he said. "The most important thing to do to lower price is to lower auto insurance claims. Nothing in Proposition 103 changes claims in any substantial way." Sullivan said the CFA has claimed various driving factors are more pertinent to prices because they induce safer driving and hence lower rates. "This is no evidence to support it," he said, adding even if every driving factor were improved, the rate decrease in California would still be slight.

The CFA's report called on states to create an intervenor system that provides resources for citizen and organizational watchdogs. It would serve as a check on state insurance departments and keep rates down, it said. Insurers worry this represented a move by supporters of Proposition 103 to expand the law's influence. The intervenor compensation process allows any consumer group representing consumers to file petitions to intervene and stop rate increases, or at least slow the entire process, Young said. Those groups are compensated for experts and time if they are found to have made a substantial contribution to the proceedings.

Consumer Watchdog has been among those using the intervenor process. Rosenfield rejected the idea that nonprofits were looking to preserve their financial position. "It's not about intervenor funding for us," Rosenfield said.

The intervenor system currently in place for auto insurance is a hindrance to more aggressive pricing in California, said Rex Frazier, president of the Personal Insurance Federation of California. He said the presence of intervenors results in companies actually filing at higher rates than they know they should, just because they fear the intervenors can drag the process out to get a lower price. "They can concoct all sorts of explanations about how they bring value to the system," Frazier said of Proposition 103 supporters. "But what is obvious is that the appetite to compete in California is diminished by their involvement."

Rosenfield said Hunter's rebuttals to Sullivan eliminated any credibility his report may have had. Rate decreases have to be attributed to Proposition 103.

"There's no other explanation," he said. The forthcoming ballot initiative extending the consumer protections to the health insurance industry is a threat to insurers because its success might mean a cut in profits, Rosenfield said.

Young said it is hard to say definitively whether Proposition 103 has benefited consumers because so many other things have occurred that impacted rates, including the passage of Proposition 213, which eliminated pain-and-suffering damage recovery for those in auto accidents who lacked insurance coverage. "I don't doubt that the rate-approval process has had a dampening effect on rate increases," Young said.

All public policies have trade offs, Frazier said. Proposition 103 brings something close to rate stability but deprives consumers of price competition — a claim objected to by the CFA — that could result in lower prices. "But most people expect that when costs go down, prices can follow," he said. In a system where intervenor groups and an elected insurance commissioner can impose price controls, the system is not as nimble as it could be, said Frazier.

Young is skeptical about the ability of the upcoming ballot measure to reduce health insurance costs. "It would without question add substantial delay to rate changes, create substantial uncertainty as to outcomes and add substantial expense to the rate process," he said.

This article first appeared in the Feb. 17 issue of BestWeek Americas.

(By Thomas Harman, associate editor, BestWeek: [email protected])

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