Prop. 33 Likely To Produce More, Not Fewer, Uninsured Drivers

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The campaign in favor of Proposition 33 has been so consistently misleading, it's almost pointless to keep criticizing the measure's supporters for warping the facts. Nevertheless, an advertisement Monday in favor of the measure makes a point that bears rebutting before voters head to the polls.

The proposition would allow auto insurers to offer discounts to drivers who'd been insured by rival companies, offset by surcharges on new customers who'd been uninsured or whose coverage had lapsed. Voters outlawed that sort of discount in 1988 when they passed Proposition 103, which overhauled auto insurance to slash premiums and tie rates more closely to the risks posed by individual drivers. But Mercury Insurance founder George Joseph has seemingly made it his mission in life to end that ban, spending millions from his personal fortune to bankroll Proposition 33 and a similar predecessor, Proposition 17, which failed in 2010.

In Monday's ad, two supposedly independent experts — Milo Pearson, a former deputy insurance commissioner, and Roxani Gillespie, the last of the state's appointed insurance commissioners — say that Proposition 33 would reduce the number of uninsured drivers. Never mind that they're not really independent; Pearson is executive director of a trade group that lobbies for insurers, and Gillespie is a former insurance executive who's now an attorney whose firm often represents the industry. The problem with their assertion is that it's nonsensical.

According to the state Department of Insurance, insurers that offer the new discount would have to charge higher rates to customers who didn't qualify for it. That's because they have to collect enough revenue to cover the risk of loss posed by the entire group of new customers. As a consequence, uninsured Californians would face higher premiums if they tried to obtain coverage, making it less likely they would sign up.

When the department looked at this issue in 2002, it found that many of the people hit with the surcharge were "those that can least afford to pay for insurance or who already have high premiums" for other reasons. "This discourages them from buying insurance, which may add to the number of uninsured motorists and ultimately drives up the cost of the uninsured motorist coverage" for every driver who does obtain insurance, the department found.

Pearson also argues in the ad that "history tells us" Proposition 33 would reduce the number of uninsured drivers. "Uninsured motorist rates dropped from 28% to 14% when similar legislation was in place from 1996 to 2002," he contends.

What similar legislation? Mercury Insurance and several of its competitors began offering a version of Proposition 33's "continuous coverage" discount in 1996 without approval from the Legislature or the voters, but the Department of Insurance ruled in 2002 that it was an improper practice that violated Proposition 103. (The Legislature passed a bill in 2002 to legalize the practice, but it was thrown out by the courts.)

Regardless, there were other factors at work from 1996 to 2002 that explain the drop in uninsured motorists. Incomes were rising, thanks to a growing economy, and insurance premiums were falling as a consequence of the new regulations Proposition 103 put in place. Most important, perhaps, were the stiffer penalties the state enacted in 1996 for driving without insurance.

To give Pearson and Gillespie some credit, though, at least they didn't repeat the canard that Proposition 33 would let drivers switch insurers without losing the loyalty discounts they receive from their current providers. Instead, they both say the measure would create a discount that's not available today.

I've made this point before, and some readers have argued in response that I'm just splitting hairs. But the distinction is important.

Loyalty discounts vary from insurer to insurer, largely because they have to be based on each company's risks and losses. One insurer might offer a 5% discount for people who've renewed every year for five years; another might offer a 10% discount. Under Proposition 33, insurers wouldn't be able to match the continuous coverage discount they offer new customers to the loyalty discount they received from their previous company. They've have to offer the same percentage off to every customer with the same record of prior insurance.

Significantly, they'd have to offer the discount even to people who'd not received loyalty discounts because they'd hopped from insurer to insurer. According to one study from 2009, drivers who switch insurance companies "typically have worse risk characteristics and may be price shoppers." Yet under Proposition 33, those two groups of drivers would have to be treated the same.

That's precisely the kind of rate-making that Proposition 103 discourages. And it's just one of many reasons for voters to question what the yes-on-33 campaign is trying to sell them.

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