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Why Didn't Car Insurance Rate Regulation Catch On Outside California?

By Aaron Crowe
Californians have saved more than $100 billion since auto insurance rate regulations were approved by voters 25 years ago, according to a recent report by the Consumer Federation of America.
Auto insurance expenditures have increased 43% on average across the country during the past 25 years, according to the CFA study. Nebraska had the highest increase, at 108%, and California was the only state to see its rates fall — a 0.3% drop that equated to $102 billion in savings for the 25 years. That’s an average annual savings of $345 per household, or $8,625 per family over the entire period, says J. Robert Hunter, director of insurance for CFA.
California voters approved Proposition 103 in November 1988, putting in place regulations on insurers. These include requiring insurers to apply for rate changes with the state, roll back of insurance rates by 20%, good driver discounts of 20%, and removing anti-trust exemptions. Companies were permitted from basing rates on credit reports and prior coverage, and could base them on a driver’s safety record, miles driven annually, and years of driving experience.
If every state enacted such regulations, Americans would save more than $350 billion over the next decade, according to the CFA.
Then why is California the only state with such regulation?
A strong lobby by auto insurance companies, and legislators who aren’t willing to pass such legislation that’s opposed by their political campaign donors, Hunter says. California’s approval required getting the vote to the people through a ballot initiative.
“The insurers can’t control the people,” Hunter says.
The successes of Prop. 103 are greatly over-rated, says Michael Barry, spokesman for the Insurance Information Institute, or I.I.I., a nonprofit organization supported by the insurance industry.
“How many other things that were passed in 1988 look good in 2013?” Barry asks.
Calculations by I.I.I. show that annual auto insurance expenditures for the typical U.S. driver rose 4.2% from 2002 to 2012, while the Consumer Price Index grew by 27.6% during the same time.
There’s not a direct line from Prop. 103 to now, Barry says, with other factors leading to auto insurance rates dropping in California. Among them, according to I.I.I.:

  • Fewer auto-related lawsuits in California, thanks to a state Supreme Court decision in 1988 stopping third parties from suing auto insurers directly for bad faith.
  • Lower fatality rate on California’s highways, dropping from two people per every 100 million miles driven in 1990 to an all-time low of 1.1 persons.
  • Approval of Prop. 213 in 1996 in California. The law only allows uninsured motorists to receive actual damages such as medical expenses and lost wages, and not to get money for pain and suffering for injuries in an auto accident caused by an insured drivers.
  • Safety advances such as airbags, and tougher enforcement of drunken driving and insurance fraud, resulting in lower claim costs.

Prop. 103 doesn’t allow credit scores to be used in setting auto insurance rates, even though links have been found between low credit scores and filing insurance claims, Barry says. The law limits auto insurers, he says, which isn’t always good.
“They’d prefer not to have to abide by rating criteria that were set in stone 25 years ago,” he says.
In 1984, four years before Prop. 103 was passed, California adopted mandatory auto insurance, but there wasn’t any rate regulation, Hunter says. Insurance companies colluded on prices, eventually leading to the ballot initiative by angry voters, he says.
“They had deregulated car insurance prices and you had to buy it,” Hunter says of the 1984 requirement to have auto insurance.
Car insurance companies still make money under Prop. 103, Hunter says. The CFA study found that deregulated states had the highest profits, with insurers in California earning above average profits during the study period.
The CFA suggests that state policymakers adopt auto insurance reforms, including setting standardized and transparent ratemaking standards, and guidelines for projecting future rate increases.
A driving record should be the most important factor in setting rates, it says, followed by miles driven and years of experience. Rating factors such as occupation, education and prior purchase of insurance coverage are unfair and discriminatory, it says.
“Consumers across the country would be better served with a more robust, prior-approval system of auto insurance regulation than the system currently in place in most states,” says Tom Feltner, CFA’s director of financial services, in a statement. “When drivers, particularly low- and moderate-income drivers, are required to purchase auto insurance, states have a responsibility to address the high cost of coverage.”
Aaron Crowe is a journalist who covers the auto industry for

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