BILL ANALYSIS AB 341 Date of Hearing: July 11, 1995 ASSEMBLY COMMITTEE ON INSURANCE David Knowles, Chairman AB 341 (Knowles) - As to be amended SUBJECT Rating Plans VOTE: 2/3 (Proposition 103) DIGEST Existing law: 1) Proposition 103 specifies that premiums for auto insurance policies shall be determined by the application of the following factors in decreasing order. a) The insured's driving safety record. b) The number of miles he or she drives annually. c) The number of years of driving experience the insured has had. d) Such other factors that the commissioner may adopt by regulation that have a substantial relationship to the risk of loss. Specifies that the regulations shall set forth the respective weight to be given each factor in determining rates and premiums. Specifies that the use of any criterion without approval of the commissioner shall constitute unfair discrimination. - continued - AB 341 Page 1 AB 341 2) The Department of Insurance has promulgated a series of Emergency Regulations (ER 10A and ER 10B) that have been in effect since December 15, 1989. ER 10A and 10B define: a) "Insured's driving safety record" to mean specified traffic violations and at-fault accidents experienced by the named insured and by any other principal or occasional driver of the insured vehicle. b) "Number of Miles driven annually" to mean the estimated miles driven in the 12 months following the inception of the policy. c) "Insured's number of years of driving experience" means the lowest number of years experience that any principal or occasional driver of the insured vehicle has been licensed to drive in any jurisdiction. 3) ER 10A and ER 10B specify any rating plan used by an insurer shall be established by sequential analysis of all rating factors selected for use by the insurer. The sequential analysis shall analyze the rating factors in existing law 1(a)(b) and (c) in that order. 4) Under ER 10A and ER 10B, the other factors referred to in 1(d) of existing law contains the following other factors. The order of analysis of the optional factors shall be determined by the insurer subject to the approval of the commissioner. a) Type of vehicle b) Vehicle characteristics c) Vehicle performance capabilities d) Type of use of the vehicle e) Use patterns of the vehicle f) Multi-car households g) Completion of driver training or defensive driving courses h) Persistency - continued - AB 341 Page 2 AB 341 i) Primary or occasional usage of the vehicle j) Theft rates k) Average repair garage labor rates l) Average medical and hospital costs m) Average wage and income levels n) Litigation rates a) Population density p) Vehicle density q) Accident or claims frequency r) Number of uninsured vehicles s) Average claims cost t) Age u) Gender v) Marital status w) Academic standing x) Factors which the insurer can demonstrate bear a substantial relationship to the risk of loss. 5) ER 10A and ER 10B specify that no insurer shall use a rating factor which does not bear a substantial relationship to the risk of loss. "Further, no insurer may adopt any rating factor based in whole or in part upon race, language, color, religion, national origin, ancestry or political affiliation." 6) Under Proposition 103, specifies that drivers who meet certain criteria are eligible for a Good Driver Discount: a) Specifies the discount shall be at least 20 percent below the rate the insured would otherwise have been charged for the same coverage. b) Generally qualifies a driver for a Good Driver Discount if they have driven for three years without an injury accident or 2 points on their driving record. 7) Under ER 10A and ER 10B, makes the following qualifications for the Good Driver Discount. - continued - AB 341 Page 3 AB 341 a) Eligibility to purchase a good driver discount policy shall be determined by reference to the driving safety record and three years driving experience of the insured and each principal and occasional driver of the insured vehicle. b) Every auto insured shall be charged a rate that is a least 20 percent less than the lowest rate available to a comparable driver who is not a good driver. c) If a Good Driver is not eligible to purchase a Good Driver Discount policy because of the record of any other person, the Good Driver shall be eligible for a Good Driver policy that excludes other persons from coverage. d) In setting rates and premiums for auto insurance policies for non-Good Drivers, an insurer may consider the effect of the rate discount offered to Good Drivers on the insurer's projected rate of return. 8) ER 10A and ER 10B require the commissioner to designate an organization to act as a data bank to compile loss data and for providing an actuarial analysis of the data to insurers. Provides that an insurer's participation in the data bank is voluntary. 9) Specifies that Proposition 103 becomes operative November 8, 1989. Specifies that the commissioner shall adopt regulations implementing it and insurers may submit applications which comply with those regulations prior to that date, provided that no such application shall be approved prior to that date. 10)Proposition 103 states that "No rate shall be approved or remain in effect which is excessive, inadequate, unfairly discriminatory or otherwise in violation of this chapter." 11)Requires that any change to Proposition 103 be approved by a 2/3 vote and be in furtherance of that act. - continued - AB 341 Page 4 AB 341 This bill: 1) Places into statute portions of ER 10A, 10B (as described in #2, #3, #5, and #8) of existing law and makes conforming changes in statute. 2) Deletes language pertaining to the commissioner's regulations on optional rating factors (as described in #1 (d),paragraph 2 of existing law) and replaces it with the enumerated factors from ER 10A and ER 10B (as described in #4 of existing law). 3) Deletes definition of Good Driver Discount of Proposition 103 (as described in existing law #6(a)). Replaces it with Good Driver discount language from ER 10A and ER 10B (as described in existing law #7). 4) Defines "Rating Factor" as any factor used by an insurer that establishes or affects the rates or premiums chargeable for a policy of auto insurance; defines "Rating Plan" as the schedule of rating factors and their order of analysis applicable in the development of the premium charged for a policy of auto insurance. 5) Deletes the section of Proposition 103 relating to the adoption of regulations phasing in the enforcement of the initiative (as described in existing law #9). Replaces it with language requiring the commissioner to adopt regulations if the commissioner determines to make optional factors available. 6) Contains findings and declarations that this change furthers the purpose of Proposition 103. 7) Contains an urgency clause. FISCAL EFFECT Unknown. - continued - AB 341 Page 5 AB 341 COMMENTS 1) Sponsor. The bill is sponsored by Mercury Casualty. The intent is to place in statute the rating regulations that have been in effect since December 1989. The sponsor argues that insurers should not have to be subjected to new rating factors every time a new commissioner is elected. 2) Why Now? ER 10A and ER 10B are emergency regulations. Originally they were promulgated at the time Roxanni Gillespie was commissioner. Her successor, John Garamendi, regularly resubmitted the emergency regulations when they expired (emergency regulations only last 120 days). Insurers say that Garamendi kept resubmitting the regulations because he didn't want to tackle the problems in coming up with rating factors that make everybody happy. Commissioner Quackenbush resubmitted those regulations (with minor exceptions). However, the Office of Administrative Law recently put its foot down and made it clear that there would be no more emergency regulations. Commissioner Quackenbush and his staff are struggling with a new set of rating factors. 3) Cost Based Rating. These regulations, through the use of sequential analysis, allow for auto insurance rates that are, generally speaking, "cost based." This means that factors such as the type of vehicle covered and location of residence can be used in setting rates. 4) ZIP Code Controversy. The opposition generally opposes this bill because it will allow insurers to continue to set rates by territory. Insurers argue that where somebody lives is an actuarially valid factor -- if there is plenty of traffic in a neighborhood, that means more accidents, and more likelihood that those who live in that area will get in more accidents. Opponents, such the Proposition 103 Project, disputes that notion, quoting former Commissioner John Garamendi saying that "the insurance industry's own data negates - continued - AB 341 Page 6 AB 341 their claim that enforcing [Proposition 103] would lead to unfair consequences." 5) Zero Sum Economics. Under Proposition 103, an insurer is limited to what they can charge and what they can keep. Theoretically, the amount they bring in should be enough to pay claims, expenses, commissions and a reasonable rate of return. Changing the rating factors reorders how that same amount of money is to be collected. If the factors are changed and somebody is going to pay less, then somebody else will have to pay more. For example, removal of gender as a factor will, according to insurers, raise rates for women and lower them for young men. Removal of territory as a factor will lower rates in the inner city, but the rates will have to be raised elsewhere. 6) Overturning Proposition 103? Proposition 103 lists three factors (driving record, years driven, and miles driven) that are supposed to be used in decreasing order of importance when setting rates. ER 10A and ER 10B both use sequential analysis as a way to rate the factors. The Proposition 103 Enforcement Project and the other opponents of this bill argue that sequential analysis completely eliminates the requirement that the factors be used in decreasing order of importance. But insurers argue that if the decreasing order mandate was interpreted literally, the rates would be excessive, inadequate and unfairly discriminatory -- which is also a violation of Proposition 103. 7) Changes in ER 10A and ER 10B. ER 10A and ER 10B are not identical. ER 10A includes "Age" and "Marital Status" as optional factors. They were removed by Commissioner Quackenbush in ER 10B. However, ER 10B includes as an optional factor, "factors which the insurer can demonstrate bear a substantial relationship to the risk of loss." This bill includes all three factors. 8) Not All ER 10A and ER 10B Included. The sponsor is only - continued - AB 341 Page 7 AB 341 amending the most salient parts of the regulations into statute. For example, the regulations include guidelines for determination of fault, and they are not reflected in this bill. The sponsor argues that they have narrowly crafted the bill to address only the area of rating factors, while leaving the other issues at the discretion of the commissioner. 9) Other Opposition. Consumers Union argues that by deleting the language pertaining to the Good Driver Discount and replacing it with ER 10A and ER 10B language, "eviscerate's the initiative's 20% discount requirement." The Spectrum Institute is specifically opposed to the provision that allows use of marital status. 10) Amendments. The author plans to offer an amendment to include the urgency clause and insert under optional factors, "factors which the insurer can demonstrate bear a substantial relationship to the risk of loss." This was inadvertently left out when the bill was drafted. SUPPORT Alliance of American Insurers (AIA) Association of California Insurance Companies (ACIC) Mercury Insurance Group Zenith Insurance National Association of Independent Insurers (NAII) Personal Insurance Federation of California (PIFC) OPPOSITION Proposition 103 Enforcement Project California Coalition of Hispanic Organizations California Democratic Council Center of Public Interest Law Consumer Action Consumer's Coalition of California Consumers Union - continued - AB 341 Page 8 AB 341 The Greelining Institute L.A. City Councilman Mark Ridley-Thomas One Stop Immigration & Educational Center Spectrum Institute Southern California Organizing Committee Utility Consumers' Action Network (UCAN) United Policyholders - continued - AB 341 Page 9