Calif. insurance commissioner announces new regulations for auto insurance rates

California Insurance Commissioner John Garamendi has announced he is introducing new regulations that require insurers to base auto rates primarily on a driver’s record and not on ZIP code.

According to the commissioner, he wants to fulfill the intent of voter-enacted Proposition 103 that took effect in 1988.

“When Proposition 103 was approved, it dealt with the basic fairness of how automobile insurance rates are set in California,” Garamendi said. The proposition created three mandatory factors on which auto rates had to be set: driving record; how many miles driven; and how long the person has been driving.

However, after the proposition passed, the next insurance commissioner, Chuck Quackenbush, allowed 16 optional factors including where a driver lives to also be used when setting auto insurance rates. Whether or not it was the intent, those optional factors were allowed to have more weight than the mandatory factors, Garamendi said. That lead to “irrational rates in all areas across the state,” he said.

“For 17 years there have been competing interests fighting over the use of ZIP codes in the pricing of auto insurance in our state,” Garamendi added. For example, in the Rockbridge area of Oakland, someone living on the west side of Broadway could pay rates 50 percent higher than a driver living on the east side of Broadway, he provided as an example. Similar examples can be found all across the state. “There’s no logic and no fairness to that,” he said.

Thus, Garamendi said he is proposing draft regulations so that the 16 optional rating factors cannot have more weight than the three mandatory factors put forth in Proposition 103.

An informal workshop on the draft regulations will be held Jan. 12, and a formal hearing is scheduled for Feb. 24. The regulation process should be completed by July 2006, with implementation by insurers in 2006.

“We’re not changing any of the optional factors. We’re simply saying that their weight cannot be more than the three mandatory factors,” Garamendi emphasized.

Michael Gunning, vice president of the Personal Insurance Federation of California, said he has not seen the official regulations since they have not yet been published. But some of his group’s members have met with Garamendi, where he explained his intent and they could discuss concerns.

“Everything is a guess at this point because we haven’t seen the regulations,” Gunning said, “we’ll be in a better position to say how this will affect rates in a couple of weeks.”

Gunning said PIFC’s members, as well as members of the Association of California Insurance Companies (ACIC), and the American Insurance Association (AIA), which combined represent more than 75 percent of the auto insurance market, do have concerns about the new regulations. They noted that the proposal will likely raise rates for most California drivers.

“When you try to suppress rates in urban areas, insurers have to raise rate in rural areas, so this could have the effect of raising rates in some areas,” Gunning explained.

“We remain concerned that this proposal could impose unfair rate increases for seniors on fixed incomes and Californians living in rural areas,” added Ken Gibson, AIA vice president,

“We have a strong conviction that whatever the rules are, they should be fair, and they should be based on fact and objectively quantifiable or provable factors related to loss,” said Steve Young, general counsel for IBA West. Young indicated he could not provide perspective on the regulations until they are published, but he did have concerns that “there could be very serious [rate] dislocation … The insurance agent and broker will get saddled with explaining why rates have gone up or down,” he said.

Alliance of Insurance Agents and Brokers’ outside counsel Robert Hogeboom said, “The commissioner’s regulations will be scrutinized very carefully to determine whether they discriminate against non-inner city drivers. A proper rating scheme should not be based on subsidization by any geographic area. If the frequency and severity of accidents are more likely to occur in one area, they should not be artificially lowered and paid for by other drivers,” he said.

Alliance Executive Director Ken Nigohosian predicted as much as 60 percent of California’s drivers in 52 counties could see rate increases.

Garamendi said the impetus for the regulations came from several proposals by the cities of Oakland, Los Angeles and San Francisco, consumer groups, and a two-year study the department took to evaluate the issue.

In late December, Consumers Union, the non-profit publisher of Consumer Reports magazine, issued a report charging insurers with charging good drivers living in California’s predominantly African-American and Latino ZIP codes substantially more for automobile insurance than good drivers in predominantly white communities. In some majority African-American communities, one major insurer charges good drivers an average $974 or 83 percent more for auto insurance than non minority communities, the report indicated.

ACIC said Consumer Union’s report was flawed. “Insurers use several factors to develop rates that are based on a driver’s risk of having a loss. This way one group of policyholders does not subsidize another group,” said Sam Sorich, ACIC president.

“Insurers, when establishing rates, do not know the racial makeup of their policyholders,” he continued. “Insurers never receive information about their customers’ race, ethnicity, religion or income. It is irresponsible, therefore, to charge that insurers establish rates based on race. It is equally absurd to think that the insurance commissioner would approve rates based on race.”

Topics California Carriers Auto Legislation New Markets