BILL ANALYSIS
SENATE JUDICIARY COMMITTEE S
Charles M. Calderon, Chairman B
1995-96 Regular Session
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SB 1433
Senator Peace
As amended on April 23, 1996
Hearing Date: June 4, 1996
Insurance Code
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AUTOMOBILE INSURANCE
-USING ADDITIONAL RATING FACTORS TO SET INSURANCE RATES-
-NO WEIGHTING OF FACTORS-
-PER SE COMPLIANCE WITH PROP. 103-
-AMENDMENT OF PROP. 103-
HISTORY
Source: Mercury Casualty; Zenith Insurance
Related Pending Legislation: None Known
Prior Vote: Senate Insurance Committee Ayes - 5 Noes - 3
KEY ISSUES
1. SHOULD PROPOSITION 103 BE AMENDED TO ALLOW INSURERS TO
USE OTHER SPECIFIED FACTORS, IN ADDITION TO THE THREE
PRIMARY FACTORS LISTED IN PROP. 103 (DRIVING RECORD,
MILES DRIVEN, YEARS OF DRIVING EXPERIENCE) FOR THE
SETTING OF AUTOMOBILE INSURANCE RATES?
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2. SHOULD PROP. 103'S REQUIREMENT FOR PRIMARY WEIGHT TO
BE GIVEN TO THE THREE LISTED FACTORS IN SETTING AUTO
RATES, AND FOR THE INSURANCE COMMISSIONER'S TO ASSIGN THE
WEIGHT GIVEN TO OTHER AUTO RATING FACTORS USED TO SET
RATES, BE REPEALED?
3. SHOULD ANY RATE WHICH IS SET BY USING THE PROPOSED
RATINGS FACTORS OF THIS BILL BE DEEMED TO BE IN
COMPLIANCE WITH PROP. 103 AND NOT "EXCESSIVE, INADEQUATE,
OR UNFAIRLY DISCRIMINATORY"?
4. DOES SB 1433 "FURTHER THE PURPOSES OF PROP. 103"?
PURPOSE
The purpose of this bill is to establish in statute the
factors and methodology to be used by insurers in
determining automobile insurance rates.
1. Under Insurance Code Section 1861.2, enacted by
Proposition 103 in 1988, rates and premiums for private
passenger automobile insurance must be determined by
application, in decreasing order of importance, of the
following factors:
a. The insured's driving safety record;
b. The number of miles the insured drives annually;
c. The insured's number of years driving experience;
and
d. Other factors which have a substantial relationship
to the risk of loss that the Insurance Commissioner, by
regulation, adopts.
Prior to enactment of Proposition 103, insurers were
relatively free to use any rating factors, and any method
of rating analysis, that they chose to adopt. While the
law prohibited rates that were "unfairly discriminatory,"
there were no standards in statute concerning what the
phrase might mean, nor any way to effectively enforce the
provision. Consequently, any system of categorization
for which the industry could provide data to establish
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some degree of statistical correlation between a
classification and losses was allowed.
Upon enactment of Proposition 103, then Commissioner
Gillespie had one year under that initiative to adopt
regulations to implement the "rating factor" provisions
(Section 1861.02). When she offered her regulations for
adoption, they were deemed flawed by both insurer and
consumer groups, and its implementation was promptly
challenged in court by insurers who argued that the
language in Section 1861.05 (prohibiting "excessive,
inadequate, and unfairly discriminatory rates) required
"cost-based rating." (Cost-based rating is the industry
term of art used to refer to the methods historically
used to establish rating factors.) The trial court
agreed and enjoined Commissioner Gillespie from
implementing the rating regulations she had adopted. In
addition, the superior court also directed Gillespie to
adopt regulations consistent with the ruling. Given the
confines of the court ruling, Commissioner Gillespie
adopted "emergency regulations" embracing cost-based
rating, which essentially reflected the practice of the
industry.
In the intervening six years, Commissioners Gillespie,
Garamendi, and Quackenbush have continued the use of
those court-mandated emergency regulations pending
adoption of permanent regulations. On May 22,
Commissioner Quackenbush issued permanent regulations to
implement the rating factor provisions of Proposition
103. These regulations have been filed with the Office
of Administrative Law and, unless challenged, will be
effective on or before June 22. These soon-to-be-adopted
regulations are substantially different from the
emergency regulations, and insurers have voiced
opposition to their adoption. Consumer groups have
generally supported adoption of the Quackenbush
regulations.
Generally, the proposed regulations require the use of
the three mandatory factors and allow insurers to
consider 15 other subordinate factors. (See Comment 1
for list of 15 factors.)
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This bill would revise Section 1861.02 of Prop. 103 and
set forth a list of 23 other co-equal rating factors an
insurer may use to determine premiums for private
passenger automobile insurance. (See Comment 1 for
listing of 23 additional factors.)
2. Under Prop. 103, the use of the three listed factors
(driving record, miles driven, and years of experience,
must be considered in decreasing order of importance in
setting a person's auto insurance rate. In addition to
these three factors, an insurer may use any other
optional ratings factors adopted by regulation which has
a substantial relationship to the risk of loss. Existing
law requires the commissioner to establish the weight to
be assigned to rating factors adopted by regulation, and
provides that any factor which is used by an insurer but
which has not been adopted by regulation is by definition
unfair discrimination.
Under the proposed regulations, "four factor weights
shall be calculated, one weight for each of the three
mandatory factors ... and one for all the optional
factors taken together as a single factor weight."
This bill would repeal provisions of Prop. 103 giving
primary weight to the three listed factors and requiring
the weighting of other optional factors which are adopted
by regulation. It would also define the phrase
"decreasing order of importance" to mean use of a
sequential analysis of all of the factors which an
insurer has elected to utilize. The bill does not
specify what "sequential analysis" means.
3. Existing law provides that property/casualty insurance
rates shall not be "excessive, inadequate, unfairly
discriminatory," or otherwise in violation of Chapter 9
of the Insurance Code.
This bill would provide that any rate established
pursuant to the amended rating factor provisions of this
bill would not violate subdivision (a) of section 1861.05
(the requirement that rates not be excessive, inadequate
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or unfairly discriminatory).
4. Existing law provides that Proposition 103 can be
amended only by a 2/3 vote of the Legislature, and only
to further its purposes.
This bill would state that it furthers the purposes of
Proposition 103 because, "without this act, rates would
be in violation of subdivision (a) of Section 1861.05"
(the requirement that rates not be excessive, inadequate
or unfairly discriminatory).
COMMENT
1. Should Prop. 103 be amended to allow insurers to use
other specified factors, in addition to the three factors
listed in Prop. 103 (driving record, miles driven, years
of driving experience), in setting automobile insurance
rates?
According to the sponsors of SB 1433, the Mercury
Insurance Group and Zenith Insurance, SB 1433 is intended
to codify the rating factors which have been used
historically by the insurance industry and which were
adopted as part of emergency regulations in 1989 by the
Insurance Commissioner Gillespie pursuant to court order.
These regulations, with modest changes, were renewed by
Insurance Commissioner Garamendi during his term in
office, and renewed by Insurance Commissioner Quackenbush
when he first assumed office in January, 1994.
On May 22, 1996, however, Commissioner Quackenbush
announced the filing of permanent regulations (replacing
the emergency regulations) to implement Prop. 103. In
general, the regulations require the consideration of the
three listed factors (driver's record, number of miles
driven per year, and years of driving experience) as
mandatory factors. The regulations then allow the
consideration of the following optional ratings factors:
(a) Type of Vehicle;
(b) Vehicle performance capabilities, including
alterations made subsequent to original manufacture;
(c) Type of use of vehicle (pleasure only, commute,
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business, farm, commute mileage, etc.);
(d) Percentage use of the vehicle by the rated driver;
(e) Multi-vehicle household
(f) Academic standing of the rated driver;
(g) Completion of driver training or defensive driving
courses by the rated driver.
(h) Vehicle characteristics, including engine size,
safety and protective devices, damageability,
repairability and theft deterrent devices.
(i) Gender of the rated driver.
(j) Marital status of the rated driver.
(k) Persistency.
(l) Non-smoker.
(m) Secondary Driver Characteristics.
(n) Factors which the insurer can demonstrate bear a
substantial relationship to the risk of loss.
(o) Relative claims frequency. This factor can reflect
factors such as where the car is garaged, zip codes,
and bands.
(p) Relative claims severity. This factor can also
reflect where the car is garaged, zip codes, and
bands.
Insurers have vocally opposed the proposed regulations,
stating that "it will totally disrupt and artificially
change the rules (on how) drivers pay for their
insurance." Proponents contend that the rating factor
regulations will actually disadvantage the majority of
drivers by raising their rates. They assert that good
drivers will subsidize bad drivers, inexperienced drivers
will subside experienced drivers, and rural geographic
area will subsidize urban areas such as Beverly Hills
under the proposed regulations. (Please note that the
objections are also based on the regulation's retention
of Prop. 103's weighted factors requirement - see Comment
2.)
In lieu of Prop. 103 and the proposed regulations, SB
1433 would instead allow an insurer to use any of the
following additional, optional rating factors in addition
to the main three factors listed in Prop. 103. Those
factors which are also included in the Commissioner's
regulation are noted in bold text.
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(a) Type of vehicle.
(b) Vehicle characteristics, including engine size,
safety and protective devices, damageability,
repairability, and theft deterrent devices.
(c) Vehicle performance capabilities, including
alterations made subsequent to original manufacture.
(d) Type of use of vehicle, including, but not limited
to, personal, business, farm, or commercial use.
(e) Usage patterns of the vehicle, including daily or
weekly commuting.
(f) Multicar households.
(g) Completion of driver training or defensive driving
courses.
(h) Persistency.
(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.
(o) Population density.
(p) Vehicle density.
(q) Accident or claims frequency, or both, including
injury and fatality
rates.
(r) Number of uninsured vehicles.
(s) Average claims cost.
(t) Age.
(u) Gender.
(v) Marital status.
(w) Academic standing.
Proponents, the auto insurance industry, argue that the
bill is necessary to resolve "a contradiction in the
statute" between Sections 1861.02 and 1861.05. They
argue that analysis of insurer loss experience shows a
"strong statistical correlation" between risk of loss and
the factors listed in the bill, and that the pending
regulations being promulgated by the Insurance
Commissioner are not based on actual costs. Proponents
contend that the two provisions are "potentially in
conflict if Section 1861.02 is interpreted to require or
allow rates which are not based on the actual cost of
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providing the insurance."
A number of consumer groups and others, oppose SB 1433.
They contend that use of the numerous proposed factors,
and leaving its weighting to the industry, would revert
the law back to "traditional cost-based pricing" (which
had been the practice prior to Proposition 103, and which
has been employed under the emergency regulations).
Opponents contend that the insurance industry is using
scare tactics by erroneously asserting that the
Quackenbush regulations would cause rate increases for
over 70% of drivers (which has been denied by a
representative of the Commissioner ). Instead, opponents
assert that the proposed regulations would, in general,
help good drivers throughout the state, and would, in
particular reduce auto insurance costs for good drivers
in the Los Angeles area.
Opponents also contend that SB 1433 is intended to
further delay implementation of Proposition 103. They
point out that the insurance industry has spent the last
seven years contesting this issue in the courts, and is
now resorting to the Legislature to further delay
implementation.
Objections are also raised to some specific factors
included in the bill. Some opponents object to specific
individual factors, such as wage levels and income
levels. Other opponents note that the combination of
factors can be a problem, as when population density as
well as vehicle density are used as separate factors from
accident frequency, or when average claims cost is used
as a separate item from factors which already account for
costs of all of the various loss components. Opponents
also question whether some of the proposed optional
factors have a substantial relationship to the risk of
loss, as the initiative requires.
Finally, opponents rejection the contention that the bill
is needed to resolve a conflict within the statutes.
(See Comment 4 for further discussion.)
2. Should Prop. 103's requirement for primary weight to be
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given to the three listed factors in setting auto rates,
and for the insurance commissioner's to assign the weight
given to other auto rating factors used to set rates, be
repealed?
Under existing law, the three listed factors and then
any other optional ratings factors adopted by regulation
are considered in decreasing order of importance in
setting a person's auto insurance rate. Under Prop.
103, the Commissioner is authorized to establish the
weight to be assigned to any rating factors which are
adopted by regulation. Under the proposed regulations,
"four factor weights shall be calculated, one weight for
each of the three mandatory factors ... and one for all
the optional factors taken together as a single factor
weight."
This bill would repeal provisions of Prop. 103 giving
primary weight to the three listed factors and requiring
the weighting of other optional factors which are adopted
by regulation. It would also define the phrase
"decreasing order of importance" to mean use of a
sequential analysis of all of the factors which an
insurer has elected to utilize. The bill does not
specify what "sequential analysis" means.
Proponents contend that Prop. 103 and the proposed
regulations require more weight to be given to the three
factors listed in Prop. 103 than is actuarially
justified, based on historical risk data. They assert
that SB 1433 would correct that imbalance.
Opponents contend that this provision would effectively
"gut" Proposition 103's main requirement that a person's
driving record be the primary determinant of auto rates.
It does so by eliminating the Commissioner's authority
and responsibility to establish the weight of the various
factors, and by redefining "decreasing order of
importance" to be "sequential analysis" in a manner which
has little to do with the weight a particular factor is
given. (The bill does not define "sequential analysis"
but a December, 1994, Department of Insurance report
noted that sequential analysis simply describes the order
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in which factors are considered, not the weight to be
assigned the factors.)
Opponents point out that the use of so many factors, and
not limiting them in how they are weighted, can and will
overwhelm the initiative's primary factors, as listed in
Section 1861.02. The result, opponents argue, is that
the bill will provide insurers with virtually absolute
discretion to rate any way they wish, including precisely
as they did prior to Proposition 103, and eliminate the
focus of Prop. 103 on factors under the control of the
driver, such as driving record.
SHOULD PROP. 103'S WEIGHTING REQUIREMENTS (PRIORITY TO
THE THREE LISTED FACTORS AND THEN ANY OTHER FACTORS, AS
DETERMINED BY THE COMMISSIONER), BE REPEALED?
SHOULD PROP. 103 BE AMENDED TO ALLOW THE CONSIDERATION OF
OTHER RATING FACTORS ON AN EQUAL OR GREATER BASIS AS A
PERSON'S DRIVING RECORD AND EXPERIENCE?
3. Should any rate which is set by using the proposed
ratings factors of this bill be deemed to be in
compliance with Prop. 103 and not "excessive, inadequate,
or unfairly discriminatory"?
Proposed new subdivision (f) to Section 1861.02 would
provide:
"No rate established pursuant to this section shall be in
violation of subdivision (a) of Section 1861.05 (which
prohibits rates that are "inadequate, excessive, or
unfairly discriminatory").
Proponents contend that a rate which is set in accordance
with the provisions of this bill should be deemed to be a
legal rate per se.
Opponents object to this provision, contending that the
list of proposed factors and the lack of weighting
between the factors would allow an insurer to "redline"
legally.
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4. Does SB 1433 "further the purposes of Prop. 103"?
As noted above, Proposition 103 can be amended by the
Legislature on a 2/3 vote, and only to further its
purposes. In Amwest Surety Insurance Company v. Wilson,
the California Supreme Court invalidated a statute which
was enacted by the Legislature as an amendment to
Proposition 103. The Court held that Legislative
pronouncements that an amendment furthers the purposes of
an initiative have little effect, and that the judiciary
has the duty to assure that legislative enactments comply
with the restrictions placed by the voters on legislative
discretion. Specifically, the Court held that since the
initiative by its own terms applies to surety insurance,
the legislation which exempted surety insurance from
certain provisions of the initiative was invalid.
Proponents contend the bill resolves a contradiction in
the statute between Sections 1861.02 and 1861.05, and
therefore further the purposes of Prop. 103.
Opponents of SB 1433 question whether the bill is a
lawful amendment of Proposition 103, pursuant to the
"further the purposes" provision as construed in Amwest.
First, they point out that the effect of SB 1433 will be
to allow insurers to rate policies in virtually the same
manner as they did prior to enactment of the initiative.
Since one of the stated key purposes of the initiative
was to change the way insurers rated automobile insurance
policies, an amendment to the initiative which results in
virtually no change cannot further its purposes.
Second, opponent contest the assertion that there is an
ambiguity between two provisions of the initiative which
require legislative clarification. They point to the
long-standing rule of statutory construction which
provides that a specific provision of law controls over a
general provision, even if both appear to apply to a
particular situation. Thus, they make the case that
there is not any ambiguity as between Section 1861.02 and
Section 1861.05 to be clarified by legislation. They
point to language in the Supreme Court's decisions
upholding Proposition 103 to support the conclusion that
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the two provisions are fully reconcilable, and assert
that it is irrational to suggest that the initiative
adopted specific criteria in Section 1861.02 which would
violate another provision of the initiative, rendering
the criteria irrelevant.
Third, they point out that the bill repeals certain key
components of the initiative, and therefore cannot
survive under the Amwest decision. Eliminating the
Commissioner's authority to decide what optional factors
shall be used, and the weight to be given those factors,
usurps a role that the initiative gave to the elected
Commissioner, not to the Legislature. Finally,
re-defining "decreasing order of importance" by reference
to "sequential analysis," an approach which has nothing
to do with "weight" or "importance" of the factor, also
defeats a key purpose of the initiative -- to protect the
status or significance of the factors specified in
Section 1861.02.
Fourth, the proposed use of optional factors which have
not been determined to have a substantial relationship to
the risk of loss, as the initiative requires, also runs
contrary to the purposes of Prop. 103. Under the bill,
the insurer's free use of factors in a duplicative manner
or potentially unrelated manner can undermine the
protections of Prop. 103.
DOES SB 1433 "FURTHER THE PURPOSES OF PROP. 103"?
Related legislation: None Known
Support: Association of California Insurance Companies;
Zenith Insurance Company; National Association of
Independent Insurers; Personal Insurance
Federation; Alliance of American Insurers;
Automobile Club of Southern California
Opposition: Prop. 103 Enforcement Project; Consumers Union;
Consumer Attorneys of California; California
Democratic Council; Congress of California Seniors;
Americans for Democratic Action; Consumer Action;
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Consumer Coalition of California; The Greenlining
Institute; Center for Public Interest Law; Utility
Consumers Action Network; Southern California
Organizing Committee
Prior Legislation: None Known
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