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In order to protect consumers during the transition to the stringent regulatory system established by Proposition 103, and to offset rate increases taken by insurers during the year prior to the election in anticipation of the voter’s approval of the law, the initiative froze automobile and other property-casualty insurance rates and premiums at 80% of the November 8, 1987, levels for one year.

The 20% rollback avoided “locking in” the excessive rates of the preceding years, during which time insurance companies increased rates to unjustified levels. During the period of the rate freeze and rollback, November 8, 1988, through November 8, 1989, insurers were prohibited from raising rates or premiums. However, the initiative was drafted to allow an insurer to obtain increases from the Insurance Commissioner if the freeze or the rate rollback “substantially threatened” the company’s solvency.

The rollback provision of Proposition 103 became the focal point of the insurance industry’s legal challenge to the initiative filed two days after the election. In May, 1989, the California Supreme Court unanimously upheld the 20% rollback. However, the Court ruled that the “substantially threatened with insolvency” standard could be interpreted by the Insurance Commissioner in a manner that might deny insurers their constitutional right to obtain an adequate return on their property. The court substituted a “fair rate of return” constitutional standard, leaving it to the Commissioner to determine on a company-by-company basis, through the individual rollback exemption hearings contemplated by section 1861.01(b) of the California Insurance Code, whether the rate rollback would deprive an insurer of a fair rate of return. Virtually all of the insurance companies operating in California filed requests for a rollback exemption hearing, claiming that they would be deprived of a fair rate of return if forced to comply.

The fair return standard is well established in constitutional jurisprudence, as is the corollary principle that not every enterprise is entitled to earn a rate of return–only those which operate reasonably and efficiently. It was not until the California’s first elected Insurance Commissioner took office in 1990 that normative standards for analyzing insurer profitability and efficiency were promulgated as regulations. These regulations contained a “rollback” formula, the application of which determines whether an insurer should be ordered to issue premium rebates with interest. Specifically, the rollback formula:

* caps the rate of return;

* establishes ceilings for executive salaries and sets an overall limit on expenses equal to the industry average, rewarding insurers who operate more efficiently with a higher rate of return. Expenses in excess of the limit cannot be included in the rate base;

* prohibits insurers from engaging in bookkeeping practices that inflate their claims losses and limits the amount insurers can set aside as surplus and reserves; and

* forbids insurers from passing through to consumers the costs of the industry’s lobbying, political contributions, institutional advertising, the unsuccessful defense of discrimination cases, bad faith damage awards, and fines or penalties.

Insurers challenged the formula as confiscatory. In August, 1994, however, the California Supreme Court unanimously upheld the regulations as constitutional.

Text of Proposition 103:

Insurance Rate Rollback

1861.01.(a) For any coverage for a policy for automobile and any other form of insurance subject to this chapter issued or renewed on or after November 8, 1988, every insurer shall reduce its charges to levels which are at least 20% less than the charges for the same coverage which were in effect on November 8, 1987.

(b) Between November 8, 1988, and November 8, 1989, rates and premiums reduced pursuant to subdivision (a) may be only increased if the commissioner finds, after a hearing, that an insurer is substantially threatened with insolvency.

(c) Commencing November 8, 1989, insurance rates subject to this chapter must be approved by the commissioner prior to their use.

(d) For those who apply for an automobile insurance policy for the first time on or after November 8, 1988, the rate shall be 20% less than the rate which was in effect on November 8, 1987, for similarly situated risks.

(e) Any separate affiliate of an insurer, established on or after November 8, 1987, shall be subject to the provisions of this section and shall reduce its charges to levels which are at least 20% less than the insurer’s charges in effect on that date.

Amendments (changes from voter approved law in bold):

After intense lobbying by surety and credit insurance companies, the Legislature sought to exempt the two industries from 103’s rollbacks and regulation. This effort was invalidated by the California Supreme Court. (See section THE LEGISLATURE AND PROP. 103)

In addition, the insurance agents trade association lobbied the Legislature to allow agents to keep commissions on the premiums subject to Proposition 103 refunds. This legislation was invalidated by the California court of Appeal. (See section THE LEGISLATURE AND PROP. 103)

Status of Provision:

Over $1.2 billion in refunds were paid by insurers pursuant to Prop. 103. Under California law (Civil Code section 1523; Insurance Code section 12936(b)), insurance companies are required to transfer any 103 refunds not collected by consumers to the state Controller, who will pay such refunds upon presentation of a valid claim. Contact the Controller for more information.

Source Documents:

Read the list of insurers which issued rate refunds (from the California Department of Insurance website as of September, 2002).

Read the California Insurance Commissioner’s 8/15/91 announcement of the rollback regulations capping profits, expenses, etc.

Read the California Insurance Commissioner’s 10/16/91 announcement ordering the fourteen largest insurance companies in California to pay rollbacks totaling $1.57 billion.

Relevant Legal Materials:

The California Supreme Court’s 1989 decision upholding the constitutionality of Proposition 103, including its 20% rate rollback, can be found at law libraries: Calfarm Ins. Co. v. Deukmejian, 771 P.2d 1247, 1250 (Cal. 1989).

The California Supreme Court’s 1994 decision upholding the constitutionality of regulations that told insurance companies how to calculate the amount of refunds they would have to pay pursuant to the rollback can be found at law libraries: Twentieth Century Ins. Co. v. Garamendi, 878 P.2d (Cal. 1994) cert. denied sub nom. Century-National Ins. Co. v. Quackenbush, 513 U.S. 1153 (1995) and State Farm Mut. Auto. Ins. Co. v. Quackenbush, 513 U.S. 1153 (1995).

Read the rollback regulations and FTCR’s comments on them.


For a narrative description of how Proposition 103 works, review An Analysis of California Proposition 103.

Visit our press release section to read about FTCR’s efforts to monitor the rollbacks.


Updated: January 28, 2003

Consumer Watchdog
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