It’s been more than a quarter-century since California voters passed Proposition 103. Spurred on by questionable analysis of the causes of high auto insurance premiums, five competing insurance-regulation referenda were placed on 1988’s general election ballot. Prop 103, with 51.13 percent approval, was the only one of the five to be ratified by the voters.
The initiative has served as the basis of a wave of new laws that have proven as problematic in practice as they are philosophically. Thus, decades later, some provisions of Prop 103 remain flashpoints of conflict between insurers, plaintiffs’ attorneys, “rate intervenors” and the state Department of Insurance. Today, there are four cardinal infirmities that continue to impact California deleteriously.
Infirmity number one is the election, rather than the appointment, of the state’s insurance commissioner. Though perhaps not apparent to many voters, the regulatory good and the public good do not always coincide. This is even more true when the regulator is a politician, primarily concerned with personal political survival and ambition. The public good arguably pales in comparison to a politician’s selfish interest in personal survival and power.
Even worse, the politician-commissioner often will demonize the insurance industry and ignore insurance realities in order to create the illusion of himself or herself as the aggressive savior of the public. Given the essential, esoteric and complex realities of insurance, one can hardly imagine a worse scenario for efficient and sensible regulation. Expertise is required to regulate coherently. While not every appointed expert is perfect, it’s hard to imagine a worse system than the one brought about by Prop 103. Voters and insurers alike would do well to work to see the commissioner’s office again filled by appointment.
Infirmity number two is the requirement that insurers submit rate-filings to the Department of Insurance for approval prior to their use. This system, known as “prior approval,” has proven slow, costly and cumbersome. Part of the problem with regulatory vetting of insurance rates in California is that the process is subjective and political. The language of Prop 103 and other insurance-rating laws is artfully vague about what constitutes an “appropriate” rate. Could there be a better lever for a meddlesome politician or social engineer than to have the power to determine whether a rate is “inadequate, excessive or unfairly discriminatory”? In the immediate aftermath of Prop 103, to turn the referendum into something workable, insurers filed lawsuit after lawsuit to clarify how they should operate in this new rating environment.
Yet, the struggle to resolve what those five words mean is ongoing. In April this year, a coalition of insurers petitioned a Sacramento court to intervene in a case brought by Mercury Insurance in which the insurance commissioner transformed a filing for a rate increase of 7.3 percent into a rate decrease of 8.2 percent. The unmistakable message from the regulator to the industry is that, if you have the gall to request a rate increase, you will be punished…and severely. Presumably, the hope of the intervening insurers is to regain some control over the pricing of their products. If that hope is dashed by the court, the department will continue to revel in rate-approval ambiguity.
Infirmity number three is the bureaucratic bloat needed to accommodate the rate-filing process. In a bureaucratic dream come true, the department has more than doubled its workforce, from 600 to 1,300 employees, and has seen its budget increase by $130 million, to $237 million. Slyly, the department touts that little of its budget comes from the state’s general fund. This is true, but only because its budget comes from the state’s “Insurance Fund,” financed almost entirely by fees and assessments on insurance companies. This is a bizarre brag, since those costs are necessarily passed along to insurance-buying Californians.
Infirmity number four, and perhaps the worst from a personal greed standpoint, has been Prop 103’s creation of a private right to intervene in the rate-making process. Suffice it to say that, in California, it pays to get in the way. Intervenors are individuals or groups allowed to participate in the rate-making process who are entitled to recover the cost of their activities from the filing insurer. (Would you be shocked to discover that the drafter of Prop 103 is a frequent intervenor?) Intervenor costs borne by insurers in the rate-making process are passed on to their policyholders. In addition, while consumers, insurance companies and the department benefit from an efficient and quick rate consideration process, intervenors do not, since they are able to bill more hours and make more money by dragging out the process.
An intervenor-driven delay would be understandable if it was necessary, but it is not. Given the department’s politically driven obsession with rates, the participation of intervenors is redundant. Heroically, unnecessary intervenors usurp the department’s unnecessary role. Clearly, insurers and the department should actively seek to curtail the damage caused by the inevitable “for-profit” intervenors by reevaluating the administrative processes and standards to which intervenors are subject.
In short: Proposition 103 has frustrated its stated purpose, which was to save Californians money. It has led to explosive growth in both regulatory bureaucracy and associated costs of doing business in California, while doing nothing to impact such cost drivers as insurance fraud or other fundamental factors that determine insurance rates. Just as troubling, as a result of affordability problems caused by the higher costs it has driven, Prop 103 may have led to an increase in uninsured drivers on California roads.
It would be of great benefit for California to eliminate election as the method of selecting the insurance commissioner, to return to an open rating system and to dump intervenors. The effort required would be Herculean, but it would be worth it.