Egalitarians Target Car Insurance
If you’re a member of AARP, the Service Employees International Union, or other unions or professional organizations, you most likely have qualified for a group discount for your auto insurance policy. These discounts benefit consumers by lowering rates by as much as 26 percent. It’s good for insurers also, given that it enables them to sell more policies. This is, as the cliché goes, a win-win situation. It’s hard for any normal person to envision a problem with these deals.
But California Insurance Commissioner Ricardo Lara is trying to eliminate these discounts and, as a result, significantly raise Californians’ auto-insurance rates. He’s doing so in the name of promoting “fairness,” but it’s a great example of making everyone more equal by making almost everyone poorer. This campaign also shows a woeful ignorance about the nature of insurance, not that I’d ever expect the state’s top insurance official to have a clue about insurance markets.
The California Department of Insurance recently conducted a survey finding that customers in “affinity groups” — insurance jargon for members of the kinds of groups listed above — tend to live in higher-income neighborhoods and have higher educational attainment than most Californians. “This disturbing data confirms what we have heard for years, that auto group discounts do not apply equally across California,” Lara harrumphed in a recent statement. He vowed to investigate whether these discounts violate state law.
It’s not surprising if people who join trade groups and unions have a somewhat higher overall income. But who would argue that members of the military or public-school teachers are among the state’s financial elite? There are plenty of low-cost, affinity groups that Californians can easily join to reap an insurance-premium discount. AARP, formerly known as the American Association of Retired Persons, is one of the least exclusive organizations in existence. Anyone can join at any age. The current annual fee is a whopping $12.50. AAA is another example.
The anti-discounters argue that by lowering rates for some groups, insurers must then raise rates for everyone else. But that’s not how business works, even in California’s distorted, government-controlled insurance market. Even with the state’s system, which requires prior government approval for any rate changes, insurers are trying to compete with one another. These discounts allow them to market their policies to large pools of buyers.
In fact, these discounts are actuarily sound, given that insurers offer them because members have an overall lower risk than the general driving population. Members of large groups can, quite obviously, secure lower prices thanks to group-purchasing arrangements. There’s nothing wrong with pooling resources to boost buying power. Financial experts recommend that people shop this way.
Eliminating group discounts will raise rates for many people without offering tangible benefits for anyone else. If Lara succeeds, insurance companies likely will respond by eliminating those lower rates and raising prices. Instead of fighting the policy, perhaps insurers should take a more cynical approach and support it — and pocket the additional profits.
The idea that these discounts may be improper is hard to fathom. Insurance companies are working within the framework established by Proposition 103, the 1988 ballot initiative that gives the insurance commissioner the power to tightly regulate insurance rates. Under that initiative, insurers must base their rating decisions mainly on drivers’ record of accidents and tickets, the number of years they’ve been driving, and the annual mileage that they drive.
The resulting system is illogical and complex. It replaces the normal workings of the marketplace — companies offer products or services, competition keeps prices down, consumers choose among the offerings — with total government control. Traditionally, insurance regulation is designed to ensure that insurers have the resources to make good on any claims and referee disputes.
But Prop. 103, as I wrote for The American Spectator, “gave a single official incredible power to set private insurance rates. It gave outside ‘consumer’ groups a vested financial interest in challenging rate hikes” given that they may receive legal fees and expenses for their efforts. That system has actually made it tougher for insurance companies to lower rates because any rate change triggers an excruciating hearing process that opens up their entire rate structure to examination and even mandated rollbacks. It has also discouraged companies from offering innovative new products, but Prop. 103’s distortions are a subject for another day.
In this context, Prop. 103 references discounts for members of voluntary, nonprofit organizations. One consumer group, Consumer Watchdog, claims that insurance companies are “forcing the middle class to pay for auto insurance discounts given to a select few.” That’s ironic given that its founder wrote Proposition 103.
This is just another misguided social-justice campaign. In its editorial supporting Lara’s actions, the Los Angeles Times argues that the insurance commissioner “needs to make sure the discounts aren’t violating the spirit and anti-discriminatory letter of Proposition 103 by giving some Californians a break on premiums that those with less education or less esteemed occupations simply can’t get.” But discounting auto policies is not discriminatory, nor does it violate the spirit or letter of the law.
California’s insurance officials would better serve lower-income consumers by explaining the many ways they can take advantage of group discounts or by making the system more competitive, rather than haranguing insurance companies to raise rates on others. But in the social-justice world, egalitarianism is the only thing that matters — even if we’re all equally miserable.
