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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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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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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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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