California Evaluates Continuous Coverage Discount

By | February 3, 2010

A California voter initiative that will appear on the June 8, 2010, ballot aimed at rewarding drivers who have had insurance for some time to be eligible for a “persistency discount,” even if they change carriers could result in a discount for some drivers and a surcharge for other drivers — but only if an insurer offering a continuous coverage discount does not submit a new rate plan to change its average premium, the California Department of Insurance stated.

In its analysis of Proposition 17, the “Continuous Discount Initiative,” CDI said, “there is no way of predicting the precise impact a specific factor (in this case continuous prior insurance) will have on each of the insurer’s customers until the insurer submits specific data to the Department of Insurance.”

Yet it noted that in California, “every automobile insurer must have an approved ‘rate plan’ that establishes its average premium. Within that rate plan, every ‘discount’ requires a corresponding ‘surcharge’ so that every factor influencing a rate will balance evenly over an insurer’s book of business.”

The analysis states, “The Continuous Coverage Auto Insurance Discount Act is subject to this principle. That is, if an insurer offers a continuous coverage discount for some drivers it will result in a surcharge for other drivers. This is because automobile insurance discounts and surcharges must offset one another so that each rating factor applied by an insurer is evenly balanced within the insurer’s rating plan.”

The DOI noted that this assumes that the insurer chooses to offer a continuous coverage discount and does not submit a new rate plan that would change its average premium.

Campaign for Consumer Rights, a consumer advocacy group that opposes the initiative, said the CDI analysis supports its argument that if passed, the initiative will allow insurance companies to raise premiums for many drivers in California.

“Insurance Commissioner Poizner has provided the Attorney General with the definitive analysis he needs to accurately summarize the Mercury Insurance initiative and the price hikes that will be allowed if its passes,” said consumer advocate Harvey Rosenfield.

The Campaign predicts that the initiative would lead to surcharges of between 40 percent to 227 percent for soldiers, seniors, students, and the unemployed who did not have insurance, even if they did not own a car or who were forced to drop insurance coverage for financial or personal reasons and then tried to restart coverage.

However, Kathy Fairbanks of CalFAIR, which gathered the signatures to place the voter initiative on the ballot, said the measure should result in lower rates for most consumers because there will be more competition. Proposition 17 will allow drivers to take their persistency discount with them to shop around for better coverage and lower prices from competing insurance companies, she explained.

“Eighty percent of drivers in California maintain auto insurance and already get this discount today,” Fairbanks added. “Under current law, people are already getting this discount from their incumbent carriers. All our measure does is allow these drivers to take that discount with them if they want to shop around for better prices.” Proposition 17 would just make the persistency discount portable, allowowing the majority of drivers who are already receiving this discount to take this discount with them when they explore rates from other carriers.

She also noted that price variations are common in automobile insurance, such as someone who drives a sports car would pay more than someone who drives a four-door sedan. “These are price variations that exist today under Prop 103 and will continue to exist.”

To view the CDI’s analysis of the voter proposition, visit http://www.insurance.ca.gov/0100-consumers/ContinCovDisc.cfm.

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