Initiative to Change Calif. Auto Insurance Rating Factor Proposed, Faces Criticism

By | August 3, 2009

Californians for Fair Auto Insurance Rates is working on gaining support for a voter initiative aimed at the 2010 ballot that reward drivers who have had insurance for some time to be eligible for a “persistency discount,” even if they change carriers. Yet the “Continuous Coverage Auto Insurance Discount Act,” for which support is being funded in part by Mercury Chairman George Joseph and other company executives, is facing criticism by a consumer watchdog group that says the measure “would legalize surcharges of hundreds of dollars for automobile insurance, penalize good drivers for accidents that are not their fault, and lead to more uninsured motorists.”

According to California law, insurance rates must be based on three factors: the insured’s driving record, number of miles driven annually, and number of years of driving experience. Following those three factors, insurers may also use 16 optional rating factors to determine automobile insurance rates. Included among those 16 optional rating factors is “persistency,” which allows an insurer to reward individuals for being long-term customers of theirs. Insurers are prohibited, however, from offering a persistency discount to new customers. In addition, under current law, the fact that someone did not previously have automobile insurance may not be used as a criterion for determining automobile rates and premiums, according to the Department of Insurance.

CalFAIR aims to allow consumers to take their “persistency” discount with them to other carriers when shopping for insurance. Under the measure, the state’s current prohibition against using the absence of prior automobile insurance as a criterion for determining automobile rates and premiums would be eliminated.

Consequently, Consumer Watchdog is criticizing the proposal because it said people who stop driving for more than three months or were previously uninsured would be forced to pay more when they restart their insurance.

In a letter to Mercury’s Chairman George Joseph, Consumer Watchdog said the proposal would be “a declaration of war on millions of Californians whose plight you clearly do not understand,” and called on him to withdraw it. (A copy of the letter can be downloaded at:

“This measure hurts middle- and working-class Californians because it allows insurance companies to increase auto insurance rates, raising costs for struggling families during an economic crisis,” said Harvey Rosenfield, founder of Consumer Watchdog and the author of Proposition 103. “If people opt not to drive for a while and instead take mass transit or carpool, they would be charged a penalty once they start driving again. That’s unfair.”

The Watchdog group also predicted that the measure will also cause the number of uninsured motorists to rise, leading to higher premiums across the board. With more uninsured motorists on the road, the cost of auto insurance for everyone will go up because insurers will charge higher premiums to cover the expense of an accident where the driver at fault does not have insurance. When uninsured drivers get into an accident and visit the emergency room, taxpayers also end up paying the tab, the group said. Furthermore, the group anticipates the proposal would allow insurers to drop customers when they file claims.

“This deceptively worded attempt to fool the voters is just another example of why Mercury cannot be trusted,” Rosenfield said.

Kathy Fairbanks of CalFAIR, however, said the Watchdog’s interpretation of the proposal is incorrect, and that the proposal will benefit consumers by increasing competition. The proposal addresses just one of the 16 optional rating factors insurers can use when setting rates, and extends a discount that insurers already give to their customers — not any of the three mandatory rate factors, she explained. “All the proposal says is that if customers want to leave their current insurer and go to another company, they can also take their length of insurance to another carrier that can offer the same discount and lower price, reducing auto premiums for most people in California.”

Fairbanks believes Mercury Insurance supports the proposal because it would allow the company to better compete against other insurers for customers. “For proponents of the measure, insurers will be able to compete and gain more consumers,” she said, “and if consumers have more choices and there’s more competition among insurers in the marketplace, that’s a great benefit for consumers.”

In its analysis, the state Legislative Analyst Office predicted the measure could result in a change in the total amount of insurance premiums, but said the impact is “probably minor”. “This is because overall premiums are largely determined by other factors — such as driver safety, the number of miles driven, and years of driving experience — which are largely unaffected by the measure. The measure would have no significant fiscal impact on state and local governments,” wrote Mac Taylor, legislative analyst.

Sources: Californians for Fair Auto Insurance Rates, Consumer Watchdog, LAO

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