As is by now obvious to everyone, Americans are driving less these days amid the COVID-19 pandemic. Across the country, schools and businesses are shut down. Many areas have curfews and stay-at-home orders that ask citizens to limit any nonessential driving.
This sudden and radical reduction in driving has predictably led to a commensurate reduction in auto insurance claims. Recognizing the difficult times many of their customers now face, and no doubt wanting to avoid the poor optics of sitting on hundreds of millions of premium dollars for a product many just don’t need very much at the moment, a spate of major auto insurers this week announced they would begin offering rebates, generally in the range of 15 to 20 percent of premium.
This is an example of the market working as it should. Except in explicit pay-per-mile arrangements, where the discount would be realized immediately, it isn’t typically required that an insurer re-underwrite a policy in the middle of a term simply because of a change in expected miles driven. When a change in jobs causes an insured to have a longer or shorter commute, or no commute at all, that change generally would be reflected in the rate assessed at renewal. Insurers are offering these rebates not because they have to, but because they see a competitive advantage in demonstrating good customer service, particularly in a time of crisis.
For some, that’s not good enough. Consumer advocates have called for mandatory rebates, not just these voluntary ones, and for regulators to investigate whether the size of the rebates issued to date matches the reduction in claims experience. And some regulators agree. In a statement to the Mercury-News, California Insurance Commissioner Ricardo Lara pledged the California Department of Insurance would “be reviewing all insurance company actions to make sure money is returned to consumers, drivers and businesses in a manner that is not unfairly discriminatory, is transparent, and which follows the spirit of California’s strong consumer protections, including under Proposition 103.”
One problem, though, is that that same law may not allow these sorts of rebates at all.
Passed in 1988, the Insurance Rate Reduction and Reform Act, better known as Prop 103, establishes a rigid regulatory structure for the filing and approval of property and casualty insurance rates in California. Among its provisions are rules governing what rating factors may be used in auto insurance policies. It is mandated under the law that premiums be based on an insured’s driving safety record, annual mileage and years of driving experience, and that those factors be weighted in that precise order. There are other optional rating factors that may be approved by the insurance commissioner via regulation, provided they are given less weight than the mandatory factors and that they have a “substantial relationship to the risk of loss.”
But when one looks at the California Code of Regulations, one discovers a bit of text that’s rather inconvenient to the plan to require insurers to rebate auto insurance premiums based on actual miles driven. The rebates, themselves, appear to be illegal under Prop 103.
To wit, 10 CCR sec. 2632.5(c)(2):
Except as provided in section (c)(2)(F) this factor means the estimated annual mileage for the insured vehicle during the 12 month period following the inception of the policy. Insurers may not retroactively or prospectively adjust premiums based on actual miles driven unless notice is provided to the policyholder prior to the effective date of the policy.
The exception to this rule, spelled out in 10 CCR sec. 2632.5(c)(2)(F), is for pay-per-mile and similar products that ask for an insured to report, sometimes with the use of a telematics device, precisely how many miles they have driven. Current regulations permit an insurer offering such a product to use verified actual mileage, rather than estimated mileage, to satisfy Prop 103’s mandatory annual mileage rating factor.
But that is the only exception and such policies are relatively rare. The intent may have been to prevent mid-term premium increases, but the facial meaning of the text is pretty clear. Not only can’t the rebates be required, but rebating premiums in the middle of a policy term based on reduced miles driven is just as much a violation of the rules as assessing premium surcharges on insureds who drove more miles than originally estimated.
The result is absurd. It’s a bug in the text. But because it was passed by the people of California as a ballot proposition, these sorts of bugs can’t simply be fixed by the Legislature. Any changes to the law require two-thirds majorities in both chambers, and even then, they must be found to “substantially further” the goal of the proposition.
It is yet another example of ways that the structures of Prop 103, well-intended though they may be, have come to be a straightjacket on both insurers and their customers.
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