Proposed changes to the way California allows insurers to compute auto insurance rates will result in a return to a confusing system that generates arbitrary rates, to the ultimate detriment of consumers, according to the Alliance of American Insurers.
“The proposed changes will impose rating methods that have been rejected by most serious students of ratemaking and by the courts,” wrote Roger Kenney, Alliance associate vice president of research in testimony submitted to the department Feb. 25.
The California Department of Insurance has proposed three new possible methods of calculating the weight of automobile rating factors, and the Alliance feels that the adoption of any of them would be a major step backward for rating auto insurance. The genesis of the problem is that Proposition 103 mandated three primary factors to be considered in auto ratemaking: miles driven, years of experience and driving record. It also required them to be weighted, along with other “optional” factors in decreasing order of importance. However, it didn’t make clear how the weights must be applied.
An appellate court ruling, Spanish Speaking Citizen’s Foundation v. Low, upheld insurance department regulations issued in 1998 that permitted the optional factors to be aggregated to have a cumulative effect that could exceed the mandatory factors, a method that the current insurance commissioner wants to change.
The basic tenet of any rating method “should be to generate rates that aren’t arbitrary and, to the best degree possible, reflect the potential losses of the insured,” Kenney wrote. “To accomplish this goal, rates need to be based on the experience of the risk characteristics known to be the best predictors of loss.
“The current regulations are the best than can be developed in the judgment of the appellate court,” Kenney noted. The department’s proposed changes would impose rating methods that unjustifiably limit the importance of the predictive power of the optional factors.
“By using averages instead of actual detailed experience, all three of the proposed changes increase the weights of the three mandatory factors that are known to have lower predictive values. All three proposed methods will result in flattening of rates. This will cause many drivers to pay more for auto insurance than their experience warrants, while others will pay less. This results in arbitrary rates and is contrary to the appeals court ruling,” he concluded.
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