Industry Works to put Low Cost Auto Program into Gear

The American Agents Alliance recently conducted a survey of independent insurance producers concerning California’s Low Cost Auto program. The program, enacted by the state Legislature in 2000 and operational since 2003, aims to reduce the problem of uninsured drivers by offering affordable premiums to qualifying San Francisco and Los Angeles residents. Senator Jackie Speier (D-Hillsborough), co-author of the Low Cost Auto program, approached the American Agents Alliance to conduct the survey because target program sales goals were not being met.

“I have had ongoing discussions with various Alliance members and staff over the past three years about the low cost insurance program,” Speier said. “As the pattern of sales emerged, it just made sense to ask the sales people about how to improve sales.”

The number of policies in force is about 7,000. Total number of policies issued in the history of the program is less than 14,000. According to Lorelle Kitzmiller, executive director of the American Agents Alliance, legislators and the Department of Insurance originally attributed the low results of the program to greedy insurance producers.

“When I was attending the agents and brokers advisory committee hearings, it appeared that the DOI and several of the legislators were of the belief that the program was failing because of the producers’ refusal to sell the program,” she said. “And that was one of the reasons why we did this survey. I’m hoping that this survey will educate both the DOI and the legislators that the program failure was not due to the greed of the producers. It was due to the fact that there are some flaws in the program. The producers, when they refused to write it, had valid reasons.”

The Alliance obtained 250 completed surveys. The Alliance concluded that several factors contributed to the low sales figures, including producer awareness of the low cost auto program.

“Basically in the survey that we just completed, we found that a substantial number of the producers are not even aware that the program exists,” Kitzmiller said.

About 14 percent of agents were not aware that the program exists.

Premiums for the program are $347 for Los Angeles residents and $314 for San Francisco residents. Customers’ household income cannot exceed 250 percent of the federal poverty level and they must be considered good drivers and licensed to drive for the past three consecutive years.

The program, which is administered by the California Automobile Assigned Risk Plan (CAARP), is not available online and provides liability only, with limits of $10,000 for bodily injury or death per person, $20,000 maximum per accident and $3,000 for damage to others’ property.

Of those agents surveyed, 82 percent are not actively selling the program and 73 percent had never sold a policy. About 43 percent of the agents were able to sell increased liability coverage limits to the consumer for only a few dollars more than the premium through the low cost auto program.

“Producers found that they could give [qualifying customers] higher coverage, higher limits, for slightly more money,” Kitzmiller said.

“A good number of respondents of the survey felt that $10,000/$20,000/$3,000 was inadequate coverage,” she continued. “Agents were able to give customers at least $15,000/$30,000/$5,000. Producers are able to procure higher limits for almost the same amount of money and we believe that the higher limits will protect the consumer.” Kitzmiller recommended that the program liability limits be increased to motivate producers to sell.

Of those agents who sold low cost auto policies, 56 percent said that the business lapses in less than a year and 49 percent said that fewer than half of low cost auto customers renew their policies.

Agents also expressed concern over the current commission, which is 12 percent. One-third of them said that an acceptable commission is 15 percent, while 31 percent said that 12 percent is enough.

Kitzmiller said that the commissions were too low for producers.

“When you’re looking at $347 and you take 12 percent of that, that’s only $41,” she said. “I think higher commissions would motivate the producers to sell it. They’re not even covering their costs at the current commission of writing the policy.”

Sen. Speier said that increasing the commission was acceptable as long as the premium amounts did not change.

“I’m personally convinced that much of this is about a low commission,” she said. “It should probably be at least $75 instead of the current $40 for the basic policy
without uninsured motorist coverage or med pay. But we have to be aware that the
overall premium must still remain affordable. We may be able to increase commissions but leave the premium the same because actual loss development is lower than was originally expected.”

The Alliance also recommended that commissions be fully earned when the policy is issued, instead of having to return unearned commission if the policy is canceled before the year is over.

Speier agreed with that suggestion. “Making commissions fully earned makes a lot of sense,” she said.

Speier added that it is the insurance commissioner’s responsibility to change commission levels.

“The commissioner should use his legal authority to determine if a higher commission, or some sort of sales promotion that permits a higher commission for a fixed period of time in coordination with an advertising and marketing effort, is appropriate,” she said.

The respondents in the survey also expressed concern over the time it takes to sell a low cost auto policy and the inconveniences of a paper-based system.

“Unfortunately, it is very time-extensive for the producers to complete the application and collect the required financial information to show that the insured qualifies for the program and meets the poverty level,” Kitzmiller said. “One of our recommendations is to make this application available online on the FSC rater or some other type of online program. That would eliminate some of the time spent.”

Speier said that the Alliance’s recommendations were good ideas and that CAARP is in the process of implementing some of them. “They’re rolling out a simplified application form and putting everything online so that a producer can access the application, fill it out, automatically check on the person’s driving record and bind coverage over the Internet. Paperwork will still have to be sent to CAARP, but essentially the entire transaction will be done online. By having everything online and being able to do the entire transaction at one time, the experience should be much better for both the producer and the customer.”

Kitzmiller plans on meeting with Sen. Speier and State Sen. Martha Escutia (D-Whittier), co-author of the program, to discuss the results of the survey and plans for improving the low cost auto program. The program is set to expire in January 2007. Speier plans on working with the Legislature and DOI to make appropriate changes so that the program is renewed.

“The next step is for the Legislature to examine the history of the program and to pull together people who want to see greater success,” Speier said. “We can put those ideas up on a blackboard, including those from the Alliance obviously, and work with the Department of Insurance to implement them and build on what we’ve got.”

One of those ideas is to increase consumer awareness of the program. Nearly 60 percent of agents surveyed never had customers approach them about the program.

California Insurance Commissioner John Garamendi held a press conference in Los Angeles in mid-August to raise consumer awareness of the program.

“We’re going to the heart of L.A.’s communities—working with groups at the grassroots level, unions, local media and insurance agents—to make eligible drivers aware of this affordable auto insurance option,” Garamendi said in a press release.

The DOI and the Alliance agreed that a future advertising campaign is probably necessary to educate consumers about the program.
Speier said that another bill that she is sponsoring, SB 1500, could result in improved sales for the low cost auto program. The bill requires the Department of Motor Vehicles to suspend vehicle registrations if insurance coverage lapses. She said that every San Francisco and Los Angeles driver whose coverage lapses would receive a statement directing him or her to the low cost auto program, thus spurring sales.

Speier also said that the geographic market of the program needs to be re-evaluated. Currently, 98 percent of the low cost auto program sales are from Los Angeles.

Kitzmiller commended Speier for her continued involvement in the low cost auto program.

“I don’t think the Legislature is of the mindset that they want to eliminate this program,” Kitzmiller said. “I think they are committed to finding a way to make it work and I think that’s why Senator Speier approached us from the beginning. She believes in this program and they’d like to fine-tune it so that it does what they were hoping it would do. With a few modifications, the program could be successful.”

Topics California Auto Agencies