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.  


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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

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    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.


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    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.

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                                                          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.

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 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  

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                                                          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  

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   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

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                                                          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


   




























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