BILL ANALYSIS
SENATE COMMITTEE ON INSURANCE
Senator Jackie Speier, Chair
AB 1488 (Chavez) Hearing Date: June 20,
As Introduced: February 23, 2001
Fiscal: No
Urgency: No
VOTES:Asm. Insurance (4/4/01): 14-0
Asm. Floor (4/19/01): 72-0
SUMMARY
Authorizes an automobile insurer to offer a discount to
policyholders who are claims-free.
DIGEST
Existing law
1. Prohibits the rating plan of a motor vehicle liability
insurer from increasing the premium of an insured based upon
an accident in which the insured was not at fault.
2. Requires insurers to offer a "good driver discount" priced
at least 20% below the rate the insured would have been
charged for the same coverage.
3. Mandates that rates and premiums for automobile insurance
policies be determined by application of the following
factors in decreasing order of importance:
a) The insured's driving safety record;
b) The number of miles driven annually by the
insured;
c) The number of years of driving experience of
the
insured; and,
AB 1488, Page 2
d) Such other factors as the Insurance
Commissioner
(Commissioner) may adopt by regulation that have
a
substantial relationship to the risk of loss.
4. Includes 16 optional rating factors promulgated by the
Commissioner. These factors are: type of vehicle, vehicle
performance, type of use, percentage of use by rated driver,
multi-vehicle household, academic standing of rated driver,
driver training/defensive driving course completion, vehicle
characteristics, gender of rated driver, marital status of
rated driver, persistency, non-smoker, secondary driver
characteristics, multi-policies, claims frequency, and
claims severity.
This bill
1. Would authorize an automobile insurer to offer a discount
to policyholders who are claim free.
COMMENTS
1. Vote . On May 25, 2001, after the bill had passed the
Assembly Floor and after the bill was assigned to Senate
Insurance, Legislative Counsel corrected the digest and the
vote key. The digest now indicates that because the bill
would authorize the use of an additional factor in the
determination of premiums for automobile insurance policies,
it would amend Proposition 103 and would require a 2/3 vote.
The bill was originally keyed "majority" vote.
2. Background . Proposition 103, passed by Californian voters
in November 1988, required, among other things, the
following:
a) Insurers to rollback existing rates by 20% and refund
excess premiums to consumers.
b) Insurers desiring rate changes to file a rate
application with the Commissioner.
AB 1488, Page 3
c) Notification of the public by the Commissioner of any
application by an insurer for a rate change. Such
application is deemed approved 60-days after the public
notice unless specified conditions satisfied.
d) Mandated that a Good Driver Discount be made available
to all eligible insureds.
3. Author's Statement. According to the author, a no-claim
discount is justified for the following reasons:
a) Discounts are authorized under Proposition 103 .
Although Proposition 103 mandated that its Good Driver
Discount be made available to all eligible insureds, the
Legislature soon decided that the good driver discount may
be conditioned on membership in a motor club group. Since
Proposition 103's passage, the Legislature has also
reaffirmed that insurers are authorized to limit their
issuance and renewal of automobile insurance to active and
former military personnel. Thus, according to the author,
"the restrictions on permissible rating factors are not
understood as existing without regard to other provisions of
the Insurance Code."
Furthermore, the author asserts that at least one of the 16
approved optional factors - non-smoker status - has a very
dubious relationship to risk of loss.
Finally, the author asserts that at least two other approved
optional factors - multi-vehicle households, and multiple
policies with the same, or an affiliated company - would
seem to have at least as much relationship to reduced
marketing and administrative costs as to a lower risk of
loss.
b) Discounts are authorized under Rate Regulation Theory -
both within and outside the Insurance Industry . According
to the author, approvals of group automobile insurance
plans, although not litigated in California, have been
based, in decisions elsewhere in the country, on the ground
that lowered expenses provide a legitimate and fair means of
discriminating premium allocations to insureds. The author
cites an opinion by the Michigan Attorney General and two
AB 1488, Page 4
out-of-state court cases to support this assertion.
The author cites precedent outside the insurance industry to
buttress his assertion that a no-claim discount is
authorized in California. The author asserts that the
Public Utilities Commission, for example, regularly
recognizes that different expense elements justify different
rating classifications despite an anti-discrimination
statute that is similar to Proposition 103's.
4. Support . Mercury Insurance Company, the sponsor of the
bill, notes that existing law offers a number of statutorily
created optional rating factors/discounts in setting
insurance rates, including ones for members of auto clubs,
the military, senior drivers, students, and owners of
multiple autos. In addition, the California Department of
Insurance, by regulation, has allowed a number of other
discounts including ones for non-smokers and for insureds
who have completed courses in defensive driving. The
sponsor notes, however, that no new optional factors have
been approved by the Commissioner in the last five years.
The sponsor asserts that expense savings are an accepted
means of rate discrimination in "every rate regulation
regime of which we are aware, including Prop 103?"
According to the sponsor, a claim-free discount properly
rewards and returns premiums to insureds who do not make
claims and who, therefore, do not impose an additional
expense burden on the insurer. According to the sponsor,
the processing of a claim, exclusive of loss payments, costs
an average of $246. The sponsor believes that insurers
should be able to pass along these savings when the expense
is not imposed upon them.
Finally, the sponsor notes that a claims-free discount will
have the socio-economic effect of offsetting the persistency
discount. According to the sponsor, the persistency
discount (which rewards policyholders based on the number of
policies, i.e. home and auto, and the duration of these
policies) is biased towards higher-income individuals with
more years of continuous coverage.
The Association of California Insurance Companies (ACIC)
AB 1488, Page 5
asserts that the rising cost of claims adjustment and
settlement have forced many insurance companies to increase
their rates. ACIC believes that a customer who has remained
claims-free deserves to be rewarded through a reduced
premium.
5. Opposition . The Foundation for Taxpayer and Consumer Rights
(Foundation) opposes the bill because it believes that the
bill contradicts the purpose of insurance and offends the
millions of California consumers who regularly pay insurance
premiums to ensure that they are covered if they are in an
accident.
Furthermore, the Foundation states that this bill creates a
perverse incentive to not file a legitimate claim. The
Foundation asserts that insurance is designed to cover
accidents, yet this bill appears to offer a financial
disincentive to file claims. According to the Foundation's
logic, if not filing a claim results in a discount, filing a
claim must result in an increase. The Foundation asks "why
would anyone purchase insurance if they were going to get a
rate increase simply for filing a claim?"
The Foundation also asserts that this bill will particularly
harm low and moderate income drivers who, already stretched
by their current premium, may choose not to get proper
medical attention or fix their car for fear that their
insurance will become unaffordable if they file a claim.
The Foundation asserts that this bill amends Proposition 103
and does not further its purpose. As a result, the
Foundation believes that this proposed law is "illegal."
According to the Foundation, this bill violates Proposition
103 by mandating new rating factors - a variable used by
insurers to set insurance rates - in statute. According to
the Foundation, Insurance Code Section 1861.02(a)(4) places
the responsibility to approve new rating factors into the
hands of the Commissioner. Furthermore, according to the
Foundation, Proposition 103 requires that those rating
factors have a substantial relationship to the risk of loss.
The Foundation states that being claim-free does not have
such a relationship.
AB 1488, Page 6
In conclusion, the Foundation declares that the insurance
company sponsor of this legislation would prefer to reap all
the benefits of selling insurance, while bearing no
responsibility for the product and its promises.
TECHNICAL ISSUES
1. Does this law apply to comprehensive, collision, and
uninsured motorist policies as well as to liability
insurance? According to the sponsor, the discount is meant
to apply to the entire premium. Should the bill be amended
to clarify the precise types of insurance included in the
bill?
2. The language of the bill (page 2, lines 7-9 ) is ambiguous.
Does the discount apply to policyholders who are "at
fault" in an accident, as well as to those not at fault?
According to the sponsor, this discount is not intended to
apply to "at fault" motorists. If so, the author should
propose an amendment that will clarify the intent of the
sponsor and author.
QUESTIONS
1. The analysis in the Assembly states that "[t]he bill
contains no provisions that guarantees the "discount"
offered policyholders who are claims-free will not be
folded into a higher deductible for those same claims-free
policyholders." Should the bill be amended to clarify this
point?
2. Should the bill declare how the "discount" will operate in
practice? Specifically: How will the discount be
calculated? What is the basis under which the discount
will be offered? (i.e. percentage of cost of claim avoided
or flat rate per month) According to the sponsor, the
intent is that the discount will be offered at time of
renewal. In addition, the sponsor indicated that it would
be willing to amend the bill to state that this discount is
subject to Section 1861.05 of the Insurance Code relating
to "Approval of Insurance Rates." Should the bill be
amended accordingly?
AB 1488, Page 7
3. Should the bill declare the procedure by which a
policyholder who initially chooses to not file a claim may
subsequently do so? What impact will this have on the
policyholder premium?
4. Current law declares that an insurance carrier may not
raise rates on a motorist involved in an accident so long
as the motorist was not at fault. This bill would allow
for a discount to a motorist who chooses to not file a
claim. By extension, does this bill, in effect, allow for
an increase in the policy of the not-at-fault driver who
chooses to make a claim? If so, is this proposed law
inconsistent with current law?
5. Is it good public policy to encourage policyholders to be
claims-free? Will this lead to increased lawsuits by
policyholders who feel that they are being treated poorly
by the other party's claim settlement team?
6. This discount authorized by this bill is premised on the
assertion that an insurer could save money ($246 on average
for Mercury) if a policyholder does not report a claim. If
two policyholders with the same insurance company are
involved in an accident, and only one of the policyholders
is at fault, is the other policyholder able to receive the
proposed discount even though that policyholder must
contact the insurer and even though the insurer cannot
avoid incurring the ($246 average?) cost that it takes to
process a claim?
7. How can an insurer verify that a motorist was claims-free?
Stated another way, almost any owner of a motor vehicle
could claim to have been involved in an accident in which
they were not at fault and that was not reported to their
insurer. What evidence will an insurer require in order to
prove such a claim? If the evidence also demonstrates to
the insurance company that the policyholder failed to
report an accident to the state as required by law, should
the policyholder still be eligible for the discount? Will
this bill create even greater economic incentives to
violate the law that mandates that certain accidents be
reported to the state?
AB 1488, Page 8
8. Should a sunset clause be included in the bill in order to
give the industry and consumers an opportunity to review,
at a later time, the efficacy of this policy change?
POSITIONS
Support
Mercury Insurance Company (Sponsor)
Association of California Insurance Companies (ACIC)
Oppose
The Foundation for Taxpayer and Consumer Rights
Consultant:Michael A. Paiva