Commissioner John Garamendi wants to pin poor drivers; companies defend ZIP code method
The San Diego Union-Tribune
If you listen to his detractors, Insurance Commissioner John Garamendi is working on a new formula for auto insurance rates that will pit city dwellers against country folk, townies against suburbanites, teenage driving novices against middle-aged commuters.
Garamendi, naturally, presents his proposal in different terms. The biggest tug of war that will erupt out of his proposal, he says, will be between bad drivers and good drivers — and the bad drivers are going to lose.
“Are some people going to pay more for insurance under my proposal?” he asked
rhetorically. “The answer is yes. And it will be bad drivers, wherever they live.”
At issue is a long-running argument over how insurers in California charge their customers for auto policies.
The insurance industry argues that drivers’ ZIP codes should be a dominant factor in determining how much money they pay for insurance.
But Garamendi, relying on a ballot initiative that voters passed 18 years ago, says that individual driving records should take precedence above all else.
Depending on where drivers live, Garamendi’s proposed changes could have a dramatic effect on the amount of money they pay for insurance.
Insurers charge that Garamendi could force insurance rates to skyrocket in rural areas or the suburbs, or make auto insurance far too expensive for teenage drivers or motorists who have caused accidents or have gotten tickets.
“We’ve looked at 20 different ways of changing our rates, but all of them involve taking some group of drivers and being much harder with rates than they deserve,” said Bill Martin, vice president for auto coverage at Farmers Insurance.
But Garamendi said the proposal will help reduce insurance rates for some of the state’s best drivers.
Traditionally, insurers have relied heavily on geography to set rates.
Drivers who live in communities with fewer accidents pay less than drivers who live in more risky communities. Drivers in the countryside or quiet suburbs typically pay less than drivers in congested urban settings.
“In some areas of California, you might be four or five times more likely to get in an accident than in other areas,” Martin said.
But the emphasis on geography — usually based on a driver’s ZIP code — can lead to some anomalies, in which drivers in one ZIP code who have caused accidents or gotten speeding tickets might pay less for insurance than drivers with spotless records in another.
In Del Mar, for instance, an experienced male driver who has caused a car crash pays an average of $742 per year for a basic policy at Fireman’s Fund, according to data collected by the Department of Insurance.
But a driver with no accident and no tickets in City Heights pays $793 for the Fireman’s policy.
That’s for a basic policy, which would not include comprehensive coverage that could push rates higher in City Heights.
Ten of the 53 companies writing auto insurance policies in San Diego County have cheaper policies for bad drivers in Del Mar than good drivers in City Heights.
The same pattern occurs elsewhere in the state.
Among some insurers, drivers with a clean record in San Francisco pay more for insurance than drivers in Marin County who caused an accident. A clean driver in Southwest Los Angeles might pay more than a ticketed speeder in the tony L.A. suburbs of the Palos Verdes Peninsula.
Drivers in rural counties are among the biggest beneficiaries of rates based on ZIP codes.
A driver who caused an accident and got a speeding ticket in rural Mono County would pay $747 a year for a policy from Financial Indemnity, compared with $806 for a driver with a clean record in Chula Vista.
Although only one other company writing policies in Mono County — Metropolitan Direct — has that type of disparity, rural drivers in general have a clear advantage over their urban counterparts, even if they have spotty driving records.
“People who live in rural areas typically file fewer claims than people who live in cities. And the claims that they do file cost less to settle,” said Dave Kranz, spokesman of the California Farm Bureau Federation, one of the primary backers of ZIP code-based auto insurance.
Doug Heller, a longtime insurance industry critic who heads the Foundation for Taxpayer and Consumer Rights in Santa Monica, said that good urban drivers are subsidizing bad rural drivers with their higher insurance rates.
“It’s outrageous that drivers who cause accidents pay less than a good driver like me, just because they have different ZIP codes,” Heller said. “It’s outrageous that a person who only drives to church every Sunday should pay more than a person who commutes back and forth from work 120 miles per day.”
But insurance industry insiders defend ZIP code ratings, arguing that they are one of the best predictors of accidents and liability.
“Abnormalities can occur, based on a particular company’s experiences in different ZIP code areas,” said Bob Downer, an insurance industry consultant. “But that’s no reason to throw out geography as a factor in determining insurance.”
Farmers executive Martin adds, “In some cases, territory is more predictive of future risk than a person’s driving record.”
The argument over geography-based ratings was supposed to have been settled in 1988, when Californians passed Proposition 103. Among other things, the ballot initiative required insurance companies to base rates mainly on three factors related specifically to their personal driving history:
– Safety record, including traffic tickets and at-fault accidents.
– Number of miles driven, since the more a person drives, the greater the risk
of an accident.
– Years of driving experience, since new drivers — especially teenagers —
typically get into more accidents than experienced drivers.
Only after taking those factors into account could insurers weigh in other optional factors, including the driver’s ZIP code, gender, marital status or age. The ballot initiative listed the factors “in decreasing order of importance,” implying that a driver’s safety record should be the primary criterion for setting basic insurance rates.
“When Californians passed Prop. 103, they were saying they wanted insurance rates based on how we drive, rather than where we live,” said Heller, whose group was one of the key forces behind the proposition.
Because of the wide-ranging impact of Proposition 103, however, it took nearly a decade for the Insurance Department to enact regulations related to the premium-setting formula.
In 1996, then-Insurance Commissioner Chuck Quackenbush drafted regulations that allowed insurers to rely on ZIP codes far more than any of the three main factors.
Quackenbush said insurers were in compliance with the law as long as the average score of the optional factors did not total more than the lowest score of the three factors required by Proposition 103.
In State Farm Insurance’s latest rate filing for auto collision insurance, for instance, the biggest single factor in its 121-point scoring system is gender and marital status, which accounts for 21 points, and “cost/frequency,” a category based largely on ZIP codes, at 19 points.
Both of those scores rank higher than the three categories required by Proposition 103, which come in at 17 points for driving record and 14 points for mileage and experience.
Because several of the remaining categories are ranked at less than 1 percent, however, the average for the optional items comes to 6 percent, well below any of the three categories required by Proposition 103.
Consumer groups and municipal governments — notably the city of Los Angeles — sued to overturn Quackenbush‘s regulations. But in December 2000, a three-judge state appellate panel sided unanimously with Quackenbush.
“Unrefuted evidence establishes that territory is a more important determinant of the risk of loss than any other single factor,” Justice Daniel Hanlon wrote in the ruling.
But Garamendi is preparing a proposal that would revise the auto rating system to push driver experience into the dominant role.
“Under our proposal, ZIP codes could still have a significant impact — just not the main impact,” said Insurance Department spokesman Norman Williams. “Theoretically, if you assigned 20 points to each of the top three categories, you could still assign 19 points to ZIP codes.”
Garamendi’s proposal has won the endorsement of the cities of Los Angeles, San Francisco and Oakland, as well as several consumer groups. But rural communities — from El Centro to the Oregon border — have united to oppose the plan, citing statistics in a study that Garamendi himself commissioned.
Working with information collected from several major insurers, the Mercer Oliver Wyman consulting firm compiled three different scenarios for the Insurance Department.
In each scenario, most of the benefits of the proposal would go to the state’s most urbanized counties: Los Angeles, Orange, San Francisco and Alameda. Rates would drop in inner-city neighborhoods, but would rise in suburban and rural areas, which have traditionally had lower-than-average insurance rates.
Under one set of calculations developed by the Mercer analysts, insurance rates would drop by an average of 17 percent in Coronado’s 92133 ZIP code area, 7 percent in Miramar’s 92145, and 4 percent each in Point Loma’s 92135 and Oceanside’s 92055.
But rates would rise in most other neighborhoods of San Diego County, topped by a 15 percent jump in Fort Rosecrans’ 92152 and 11 percent in rural Santa Ysabel’s 92070.
And those figures come from Mercer’s best-case scenario.
Under the worst-case scenario, there would be double-digit increases in insurance prices in 46 out of San Diego County’s 111 ZIP codes, with only three ZIP codes declining: 11 percent at Oceanside’s 92055, 4 percent at Coronado’s 92135 and 1 percent at La Jolla’s 92135.
Bryant Henley, staff counsel at the Department of Insurance, downplays the importance of the survey.
“The Mercer study was designed to look at three of many possible scenarios,” said Henley, who worked with the researchers who developed the study. “It’s a little frustrating for the results of the study to be touted saying this is how your rates will change, since there are many other scenarios.”
But the insurance industry, which has been campaigning hard against Garamendi’s proposal, has seized on the Mercer study, drawing attention to its worst-case scenario.
Under that scenario, insurance rates in Imperial County would rise an average of 37 percent, a larger increase than any other county.
San Diego rates would rise an average of 9 percent. The only counties with decreases would be Fresno, Orange, Stanislaus, Sacramento, Los Angeles and San Francisco.
“That particular scenario was an industry-suggested study, using a parade of horribles to show the worst consequences possible,” Henley said. “It’s based on a very extreme, unorthodox way of complying with the commissioner’s recommendations. I think it’s a bit disingenuous for people to tout it.”
Garamendi said there is no reason for rural rates to change so drastically. He notes that under his proposal, ZIP codes can still play an important role in determining rates, as long as driving record, mileage and experience come first.
He said that if insurers concentrated their changes on the groups targeted by Proposition 103 — accident-prone or inexperienced drivers, speeders or long-distance commuters — they could avert drastic changes in the rural counties.
But Farmers executive Martin said that shifting the rate changes onto bad or inexperienced drivers would create draconian rates for anyone who lacks a spotless record.
“You could take the 10 percent of Californians with the worst driving records and start overcharging them dramatically, but you’d still be asking for a very small group of people to subsidize a very large number of people,” he said.
Garamendi hopes to finalize his proposed changes this summer. The main sticking point now is coming up with a formula for comprehensive rates, because geographical location — such as ZIP codes of high auto-theft areas — will play a more important role.
An emphasis on geography
Setting insurance premiums based on a driver’s ZIP code leads to some pricing
anomalies when considering other factors, as illustrated by these three scenarios:
Factor: Mileage
In Carlsbad, an experienced male who drives as much as 15,000 miles per year would pay $590 in premiums from Coast National Insurance.
In National City, an experienced male who drives as little as 7,600 miles per year would pay $654 at Coast National Insurance.
Factor: Accident
In Del Mar, an experienced male driver that has caused a car crash would pay
$742 in annual premiums at Fireman’s Fund.
In City Heights, an experienced driver with a perfectly clean record would pay $793 at Fireman’s Fund.
Factor: Marital Status
A 49-year-old married male driver in an unspecified neighborhood in San Diego with a clean driving record would pay roughly $1,100 a year for an auto insurance policy from Geico, according to a study by the Consumers Union.
If the same driver in the same neighborhood were widowed, the price would go up to $1,400.
Rural rate hikes
According to two scenarios being touted by the insurance industry, auto insurance rates would rise dramatically in rural counties if the state reduces the importance of ZIP codes in setting premuims. Rates in San Diego County would rise 9 percent in the high-impact scenario and 4 percent in the low-impact scenario. The California Department of Insurance maintains that there are many other scenarios in which rural counties will not be dramatically affected.
LARGEST INCREASES
County — Low-impact scenario — High-impact scenario
Imperial — 19% — 37%
Mono — 11% — 32%
Siskiyou — 11% — 29%
San Luis Obispo — 10% — 25%
Sierra — 10% — 22%
LARGEST DECREASES
County — Low-impact scenario — High-impact scenario
Orange — No change — -2%
Stanislaus — -1% — -3%
Sacramento — -3% — -5%
Los Angeles — -5% — -11%
San Francisco — -6% — -12%
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Contact the author Dean Calbreath at: (619) 293-1891 or [email protected]
