Calif. Auto Insurance Down over Quarter-Century, Groups Debate Why

June 14, 2013

The average California auto insurance expenditure fell from 1989 to 2010, while every other state in the nation saw substantial increases over that same period, according to a Consumer Federation of America analysis auto insurance expenditures.

The group attributes the decline to California’s oversight of the insurance industry put in place by 1988 ballot initiative Proposition 103.

An insurer group agrees about declining costs in California, but took exception with CFA crediting those declines to Prop. 103, which the group said has hurt and not helped the state of auto insurance in California.

According to the Association of California Insurance Companies, court decisions, highway safety and auto manufacturing advancements, as well as high rates of seat belt usage in California, are why the state has lower costs. And declining costs are definitely not a result of Prop. 103, ACIC asserted.

“CFA credits California’s Proposition 103 for reducing auto insurance losses in the state and causing insurance expenditures to decrease,” according to an ACIC statement. “This is not the case at all. Although the intent of this initiative was to make coverage more affordable for safe drivers throughout the state, while instituting a system of rigid price regulation, it did nothing more than cause a number of lawsuits expending much time and money.”

Nationally, Americans spent $791 for auto insurance coverage in 2010, which is $240 (43 percent) more than they did in 1989, according to the CFA analysis based on data collected by the National Association of Insurance Commissioners. Californians spent an average of $746 per year for auto insurance coverage in 2010, which is $2, (0.3 percent) less per year was spent in 1989 without adjusting for inflation, according to the analysis.

Between 1989 and 2010, average insurance expenditures rose by 43 percent nationwide. During that period 37 states saw larger increases than the national average, eight states and the District of Columbia saw increases smaller than the national average but still over 25 percent. Only four states saw increases less than 20 percent.

“The analysis shows that, more than two decades later, California insurance costs are lower than twenty states and six percent lower than the national average, with California the only state to post a decline in auto insurance expenditures,” a CFA release states. “State changes in expenditures between 1989 and 2010 are available in the appendix.”

According to CFA’s Director of Insurance J. Robert Hunter, the savings in California are directly linked to the regulatory reforms of Prop. 103. When the initiative passed, California insurance rates were the third highest in the nation and 36 percent higher than the national average, Hunter, a former insurance commissioner of Texas, noted.

“No other state has put in place the kind of strong oversight that California voters created in 1988, and no other state has seen auto insurance prices decline,” Hunter said in a statement. “In California, as a result, Proposition 103 drivers are paying less for car insurance today than they were 25 years ago.”

Prop. 103, which took effect in 1989, created a “prior approval” system of regulation for most lines of insurance in California, including auto, homeowners, commercial and medical malpractice insurance. Under the system insurers must present rate change plans to the California Department of Insurance and cannot implement any rate hikes or other changes without authorization from the insurance commissioner.

ACIC stated the effect of Prop. 103 has been rather the opposite, it has hampered competitive insurance prices in California.

Additionally, the group cited a 2004 study by Milliman Inc. that states during the 1980s insurance costs rose dramatically in California, prompting a number of different reforms to go into effect.

ACIC issued a list of initiatives implemented prior to Prop. 103, which the group stated “are the true reasons” behind the consumer savings:

  • The end of the bad faith doctrine with the Moradi-Shalal decision, which put the brakes on fraud, attorney involvement and excessive claiming/overpaying of claims to avoid bad faith;
  • Aggressive and coordinated fraud fighting by insurers and state-local law enforcement;
  • Proposition 213, where uninsured drivers were prohibited from suing for pain and suffering;
  • Comprehensive reform of the residual market to eliminate disincentives for cost control;
  • Vehicle and highway safety improvements which worked in concert with the above factors;
  • A strong seatbelt law that resulted in the highest seatbelt usage of any state in the nation;
  • More vigorous enforcement of DUI laws, and a reduced blood alcohol standard.

“Proposition 103 did nothing to solve the underlying problem, but rather took attention away from rising costs and offered a quick fix in the form of premium reductions,” ACIC stated. “Fortunately the passage of the Proposition did not prevent the reforms from taking effect.”

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