Proposition 103 — Main Provisions and Status

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For a detailed explanation of Proposition 103’s provisions and their present status, read the following link: Background on Insurance Reform: A Detailed Analysis of Proposition 103

(All references are to the provisions of the original version of Proposition 103.)

Rate rollback & reduction. Applied to all property-casualty insurance policies (auto, home, business and other insurance) in effect between 11/8/88 and 11/8/89. Required insurers to rollback all auto, homeowner, business and other property-casualty premiums to November 8, 1987 levels and cut them an additional 20%.

As upheld by California Supreme Court, insurers could be exempted from the rollback only if they can prove that the rollback would deny them a "fair return." (103 originally permitted exemptions if insurer proved it would be "substantially threatened with insolvency" because of the rollback.)

If the Commissioner determined that the company must roll back its rates, excess premiums collected by the company from 11/8/88 to 11/8/89 must be rebated with interest to policy holders. (Sec. 1861.01)

Regulations to implement the rate reductions were adopted by Insurance Commissioner John Garamendi in 1991. Insurers sued to invalidate the regulations, but they were upheld by a unanimous decision of the California Supreme Court in 1994. (The Supreme Court upheld the constitutionality of the rollback requirement in May of 1989). The regulations independently measure the profitability and efficiency of insurers, and whether each company deserves exemption from rollback. Over $1.2 billion in rate refunds have been paid to more than six million California insurance policyholders under rollback regulations A freeze on rate increases, imposed pursuant to Proposition 103 in 1991 until the rollbacks were paid, has achieved enormous savings (see below).
Prior Approval Regulation of Rates.
Requires insurers to open their books and justify all rate increase or decrease requests after November 8, 1989. Commissioner must approve such applications before they take effect. Public hearings are discretionary for increases of less than 7% and 15% in auto and commercial liability insurance, respectively. Increases may be deemed approved in sixty days if no action is taken by the Commissioner or consumers. (Sec. 1861.05)
The Commissioner must establish the procedural regulations governing: the applications of insurers seeking rate increases; public notice; the conduct of public hearings; disclosure of data. In addition, the Commissioner must establish long-term performance and profitability standards by which to judge efficiency of the companies. Companies which reduce waste, high overhead and institute procedures for preventing accidents and limiting losses should be rewarded with a higher rate of return. Between 1989 and 1994, insurance rates were frozen, pursuant to this provision of Prop. 103, as the rate rollback and refund process (see previous item) was implemented.

In 1991, Insurance Commissioner Garamendi placed a freeze on rate increases pending insurers’ payment of the rate rollbacks. The combination of the rate freeze and the requirement that increases be justified has led to a dramatic slowing of premium growth in California. Because insurers were unable to justify an increase, many insurers have not requested rate increases. As a result, Proposition 103 has saved California motorists an estimated $14.7 billion on automobile insurance since 1990, according to a statistical projection. This does not include 103 refunds paid to California motorists under its rollback requirement.

FTCR’s Proposition 103 Enforcement Project has intervened, pursuant to 103’s authority (see below), to successfully challenge several unjustified rate increase requests. The Project has also successfully sought rate decreases.

Between 1989 and 1995, California’s average auto insurance liability premium dropped -0.1%, while the average premiums throughout the rest of the nation increased by an average of 36.3% in the same period. In 1989, California had the 2nd highest average liability premium in the nation. In 1995, it ranked 11th.

Commissioner Quackenbush refused to issue prior approval regulations. As a result, rate change applications had been handled in an ad hoc manner, until final regulations were enacted in 2006.   The new regulations, which took effect in April 2007, set straightforward rules for insurers as they develop insurance rates, a consistent guideline for the Department of Insurance and transparency for the public. (updated 03/08)

Premiums based primarily upon driving record, not zip code. Replaces "zip code"- based territorial-rating rating system. Requires insurance companies to base auto premiums on: 1) the insured’s driving safety record, 2) the number of miles s/he drives annually, 3) the number of years of driving experience the insured has had, 4) any other factor that can be shown scientifically to have a substantial relationship to the risk of loss, e.g. urban/rural differences, etc. (Sec. 1861.02 (b)) The Commissioner must (1) order companies to submit empirical data in support of additional factors, not specifically enumerated by 103, such as territorial differences which have a substantial relationship to risk of loss; (2) conduct independent statistical and actuarial analyses of proposed factors; (3) approve factors determined to be causally related to risk of loss; (4) determine the relative weight of such factors. Must hold public hearings, permit public review of data and analysis.

In 1992, the 2nd District Court of Appeal dismissed an insurance industry challenge to the authority of the voters to alter how rates are set without deciding the merits of the case. After that decision, no action was taken by Insurance Commissioner Garamendi to implement this requirement.

After three years of pressure by FTCR and other consumer groups, Insurance Commissioner Quackenbush issued regulations to implement this reform in 1997. The regulations did not comply with 103, and the groups sued. In June, 1998, the Oakland Superior Court ruled in favor of the consumer groups, determining that Commissioner Quackenbush‘s regulations allowed insurance companies to continue to base premiums on territorial rating and zip codes, in violation of Prop. 103 . The insurance industry and Commissioner Quackenbush successfully appealed that decision.

In 2006, Insurance Commissioner Garamendi (in his second term) finally approved the rules implementing the voters’ will.  The regulations gave insurers two years to reconstruct auto insurance premium setting to ensure that driving records and miles driven were given more importance than drivers’ ZIP Codes or marital status.  Final implementation is set for August 2008. (updated 03/08) 

20% Good Driver Discount. Requires insurers to offer a permanent 20% discount below the rate otherwise charged for the same coverage to any individual who requests it, provided that s/he has been licensed to drive the previous three years and has had, during that time, not more than one conviction for a moving violation. Moving violations do not include such felony/misdemeanor crimes as drunk driving and use of drugs. "At fault" accidents are considered moving violations. (Sec. 1861.02) The Commissioner must establish regulations to ensure that each qualifying driver receives the 20% discount. Also, the commissioner must determine how to handle multiple drivers. Regulations are in effect.
Right of Good Drivers to purchase policy from insurance company of choice. Eliminates "red-lining" and the placement of good drivers in the Assigned Risk Plan by requiring all insurance companies to sell special policy to any Good Driver who requests it. Qualifications for Good Driver status as listed in 1861.02 immediately above. (Sec. 1861.02(a)) None Widespread violations of this requirement have been reported by insurance agents and consumers. Some companies have unlawfully tried to place "good drivers" in high-risk, high-price subsidiaries to discourage consumers from taking advantage of this provision.
Antitrust Laws Applied. Repeals the industry’s exemption from state antitrust laws. Prohibits price fixing. Prohibits anti-competitive insurance industry "rating organizations" from sharing price and marketing data among companies, and from projecting "advisory," or future, rates, generic expenses and profits. . The Attorney General, local officials and private citizens may enforce antitrust laws. (Sec. 1861.03) None required In January 1991, the Attorney General of California issued a report that concluded insurers may have violated antitrust laws in creating market chaos the day after Prop 103 passed.
Elected Insurance Commissioner. Requires that the Insurance Commissioner be elected by the voters for a four-year term beginning November 1990, in a partisan election. (Sec. 12900) None required First elected insurance commissioner was John Garamendi (D), who served from 1990 to 1994. Insurance companies financed the successful election of Insurance Commissioner Chuck Quackenbush in 1994; he was re-elected in 1998.
Prohibition on arbitrary cancellations/non-renewals. Insurers may only cancel or refuse to renew an auto insurance policy on the grounds of: a) non-payment of premium; b) fraud; c) or, substantial increase in the hazard insured against. (Sec. 1861.03 (c)) The Commissioner must provide regulations defining "substantial increase in hazard insured against." In effect. The state Supreme Court ruled in 1989 that this provision did not bar insurers from leaving the state.
Civil rights and consumer protection laws applicable to insurance industry. Specifies that California’s civil rights and consumer protection laws apply, for the first time, to the actions of insurance companies. Enforcement by state, local law enforcement authorities, private citizens. (Sec. 1861.03(a)) None required  
Broker discounts. Repeals the law which prohibited insurance agents/brokers from cutting their own commissions in order to give premium discounts to consumers. (Repeal of prior statutes) None required Virtually no agents/brokers are offering discounts by rebating. An informal and unauthorized memo prepared by the Department of Insurance under then-Commissioner Gillespie discouraged rebating. Evidence indicates some insurance companies are terminating agents who attempt to engage in such competition.
Bank/Financial Institution Sale of Insurance. Permits banks and other financial institutions to offer insurance policies. (Repeal of prior statute) The Insurance Commissioner and Banking Department must approve applications by financial institutions to sell insurance. Agents unsuccessfully sued to overturn this provision. Over one hundred banks have been authorized to sell insurance.
Comparison shopping database. Requires the Commissioner to provide auto and homeowner insurance rate/premium comparisons to the public for a reasonable fee. (Sec. 1861.04) The Commissioner must develop and publish comparison data. The Department of Insurance has failed to implement this requirement. Consumers Union, the publisher of Consumer Reports magazine, has offered similar comparisons for a fee. New Internet services are also providing this service.
Consumer Right to Challenge Actions of Insurers. A consumer may challenge rates or practices of insurance companies or decisions of the Insurance Commissioner. The Commissioner or a court may award attorneys fees and expenses to any individual or organization which successfully represents consumer interests. (Sec. 1861.10) The Commissioner must establish procedures under which consumer representatives may challenge rate increases and practices and apply for reimbursement of costs of participation in Department proceedings. Regulations in effect. Approximately three consumer groups regularly intervene in insurance proceedings.
Group Insurance sales. Permits individuals, clubs and other associations to unite to negotiate lower cost group insurance policies. (Sec. 1861.12) None required. Data on the utilization of this opportunity are not available.
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