California often serves as the nation’s laboratory for new public policy initiatives. Some of the initiatives have been disasters. This is particularly true in the area of regulation where California has bounced from pro-consumer initiatives to “free-market” solutions favored by the state’s corporate powers.
In 1996, California’s Republican Governor Pete Wilson led a successful bi-partisan campaign to support the demands of the state’s electric utilities for deregulation. That was one of California’s disasters, and today, as a result of deregulation, the state faces record high energy costs, rolling blackouts, poorer service and taxpayer financed bailouts.
Other initiatives have provided significant benefits as with automobile insurance reforms. Here the state’s voters seized the initiative in 1988 and passed Proposition 103 which has led to the strongest pro-consumer insurance regulations in the nation.
“California regulations are the state-of-the-art regulations in the nation — far and away the best,” says J. Robert Hunter, Director of Insurance for the Consumer Federation of America and former Commissioner of Insurance for the State of Texas. Hunter’s findings were based on a study of the results of regulation of automobile insurance in the 50 states.
The numbers lend support to Hunter’s words. Under Proposition 103’s rate rollback requirement, refunds totaling $1.3 billion were paid to consumers. During the decade after Proposition 103 was adopted by the people of California, automobile insurance rates in the state went down four percent while rates nationally rose by more than 25 percent.
The consumer savings under Proposition 103 did not come at the expense of the insurance companies. In fact, profits of the California insurers actually were higher than those enjoyed by their colleagues in other
From 1990 to 1999, California insurers, for example, amassed profits (return on net worth) of 15.40 percent on personal automobile liability compared to a return of 8.80 percent for insurers nationwide. On personal automobile physical damage, the rate of return on net worth was 18.70 percent for California companies; 17.20 percent nationwide.
In addition to the premium savings, Hunter points to other consumer benefits flowing from Proposition 103. These include fairness requirements, regulation of rating factors such as large good driver discounts, full disclosure, the availability of data by Zip Code to help determine if redlining is present, public scrutiny of filings,
accountability through consumer participation in the process and an end to the industry’s exemption from state antitrust laws.
Under Proposition 103, regulations were adopted to disallow unnecessary costs, such as excessive expenses, fines, bad-faith lawsuit costs, bloated executive salaries and related outlays.
“Proposition 103 was a shot across the bow of the insurance industry,” Hunter says. “Prior to 103 the industry saw itself as a pass through’
The old system created what Hunter calls a “perverse incentive” in the rate making process by allowing the companies to pass through unjustified and excessive costs to the consumers. It also provided no incentive to aggressively combat fraud or to promote highway safety.
Proposition 103 required insurers to open their books to justify rate increases before they were imposed. For the first time, insurers were provided with financial incentives for efficient performance, rather than simply being able to pass on costs (justified or not) to consumers.
The study found that Proposition 103’s Good Driver Protections” provided strong incentives for driver safety. “Clean” drivers with good records receive a 20 percent discount and the right to buy insurance from the company of their choice through the program.
The success of California’s Proposition 103 haunts the insurance industry nationwide. If rates can be slashed while insurers continue to enjoy healthy profits, why can’t this be duplicated in other states? If full disclosure, prior approval, and consumer-participation work in California, why won’t they work in other states? If companies can compete while adhering to state antitrust laws, why can’t they do so in other states?
These questions may soon be front and center at the federal level. In the wake of the co-called financial modernization bill of 1999, some elements of the insurance industry, for the first time, have begun talking about seeking federal charters. If this becomes a reality, Congress has an excellent model in California to provide the basic structure for a federal charter and federal regulatory agency. Congress should accept nothing less.