Prop 103

Thirty years and three days ago, California voters narrowly sanctioned a major overhaul of how certain lines of insurance were regulated and who was responsible, creating a prior-approval system of rates and making insurance commissioner an elected post. Since the passage of Proposition 103 and thanks to its rigid mandates, the state’s private-passenger auto insurance market and what carriers can offer have been largely stuck in 1988.

While drivers and insurers in the vast majority of other states enjoy such benefits and advancements as accident forgiveness and rate optimization, respectively, what auto-insurance customers in California pay is mostly due to 19 and soon to be 18 factors, with a plurality of rate determination tied to safety record, annual miles driven and years of driving experience, as mandated by Prop 103.

The market is also hamstrung by the initiative’s creation of an intervener program, which enables entities such as Consumer Watchdog (for the most part) to challenge rates they deem excessive and create a costly quasi-legal procedure. Perhaps the most enduring impacts of this program, other than cost for carriers, is it often stifles aggressive rate reductions because insurers fear they won’t be able to get approval subsequently for increases if losses prove to be greater than anticipated by the rate cut.

Given these realities, it was shocking and disheartening for the industry to see a publication such as the Orange County Register run an article citing a report by the Consumer Federation of America that Prop 103 had saved California drivers $154 billion in premium. (Insurance Commissioner Dave Jones did as well, but that is to be expected.) The CFA claimed the savings figure was based on what premiums would have been since 1989 when the initiative took effect if they had followed the average growth rate nationwide. The consumer group asserted that average auto-liability premium in California has decreased 7% since 1989 compared with a 58.5% rise nationally.

That is a simplistic analysis at best. When Prop 103 passed, liability coverages, including auto, were beginning a slow recovery from the mid-1980s rock-hard market. California had the highest auto rates in the country. While that’s no longer true, drivers in the state still pay rates dwarfing those of all but a few states. CFA and other Prop 103 proponents also conveniently ignore the havoc the initiative caused in the years after its approval.

Unsure of Prop 103’s impacts and how it would be enforced by a newly elected commissioner, virtually every auto insurer stopped writing new business. The new commissioner, John Garamendi, took a hard line, bashing carriers practically on a daily basis as the Department of Insurance pumped out several anti-industry press releases a day.

With the auto market essentially shut down, unscrupulous business persons formed phony nonadmitted carriers with purported Caribbean headquarters and took over the market. These companies paid claims until losses mounted and then claimed to be bankrupt. The same owners then returned with another suspect insurer, often an alleged reinsurer of the company that had exited. These criminals took advantage of a since-closed loophole in state law that allowed surplus-line insurers to write business while the department verified their financial soundness.

From 1989 to 1993, these sham operators wrote hundreds of millions of dollars in premium and pocketed most of that money while an untold number of California drivers were left with no compensation for injuries and damaged vehicles. Garamendi shut down scores of these companies after they had written millions in premium and left many insureds with unpaid claims. The commissioner’s actions amounted to whack-a-mole given how swiftly new entities popped up to replace the ones that had been banned.

In addition to the massive fraud, well over a decade passed before the CDI drafted auto-rating regulations that adhered to Prop 103 requirements. Far from saving drivers $154 billion, Prop 103 created unprecedented market turmoil. The savings since its passage are, for the most part, a result of improved auto safety, a crackdown on drunk drivers, a market that finally stabilized and insurer willingness to put up with the initiative’s red tape to write business in a state with one-eighth the U.S. population. Motorists would have benefited from lower insurance costs if not for the hundreds of millions paid to lawyers intervening in proceedings for disputed rate filings.