Portable persistency and the Prop 103 roadblock
The emerging need to develop new insurance products to cover California’s Transportation Network Company operators has spurred a reexamination of the nature of Proposition 103’s quasi-constitutional status. In the name of populism, 1988’s Prop. 103 inserted unwieldy, naïve and vague underwriting rules into California insurance law. As the TNC industry is discovering to its regret, even a cursory inspection reveals that Prop. 103 has a stultifying impact on market flexibility and innovation.
The trouble is that, even with a two-thirds vote of the Legislature, legislation that does not “further the purposes” of Prop. 103 is likely to be held invalid. Thus, before considering any legislative fix, it is necessary to grasp what furthering the purposes of Prop. 103 must entail.
Should existing industries, or disruptive start-ups like the TNCs, be inclined to seek guidance about how best to change Prop. 103 while furthering its purpose, they should start by examining the history of California’s “portable persistency” automobile insurance discount battles.
Prop. 103 lays out with great specificity a list of rating factors that insurers are to use as they develop auto insurance rates. The list of rating factors is divided between mandatory and optional factors. Currently, there are three mandatory factors and 16 optional factors. Additional rating factors may be adopted via regulation by the insurance commissioner, so long as those factors have a “substantial relationship to the risk of loss” (See CIC 1861.02(e)).
Insurers know for a fact that customer “persistency” – that is, how long a customer has maintained insurance without interruption – is predictive. Ignoring this reality, as originally drafted, Prop. 103 proscribed the use of some rating factors. For instance, subsection (c) of Section 1861.02 is a provision that prevents insurers from charging increased rates on the basis of a lack of prior coverage. The rationale for the prohibition is founded on the notion that reducing the number of uninsured drivers depends on preventing insurers from underwriting in a manner that reflects the scientifically determined risk.
In an effort to allow insurers to reap the benefits of underwriting certainty, Insurance Commissioner Chuck Quackenbush promulgated a regulation to increase rating flexibility, in spite of the prohibition articulated in 1861.02. The new regulation allowed insurers to use persistency as an optional rating factor, though only in an affirmative manner. Through this lens, persistency pertains to the amount of time an insured has continuously had coverage. Applied in this way, insurers did not “punish” customers for not having insurance. Rather, insurers rewarded those that did have insurance.
The regulation did not explicitly define persistency and, as a result, different insurers interpreted the optional factor differently. While some insurers chose to interpret persistency as the number of years of continuous coverage the insured enjoyed with a single insurer, others interpreted persistency to entail continuous coverage with any insurer. Subsequently, in 2002, Insurance Commissioner Harry Low sought to clarify what was meant by persistency by promulgating a regulation to make clear that only the length of time that a driver had been with a single company (or an affiliate) counted toward the discount. This meant that persistency was not “portable” for the customer and thus retarded company-to-company movement of insurance buyers. It made it difficult for companies to lure customers from other insurers.
Insurers were unhappy about the elimination of “portable persistency” discounts, so they went to the Legislature seeking a remedy. S.B. 841 of 2003, which ensconced portable persistency discounts in statute, was drafted and passed based on Section 1862.02’s prohibition against making rates on the basis of a lack of previous coverage. The bill’s sponsors ensured that it included intent language making clear that the bill “furthers the purpose of Proposition 103 to encourage competition among carriers so that coverage overall will be priced competitively.”
Upon the predictable challenge, the California Court of Appeal struck down the bill.
The court ruled that the thinking behind 1861.02(c) was that, between rating factors, cost distribution is a zero-sum game. For example, previously uninsured drivers will face higher rates if insured drivers are offered portable persistency discounts, because one factor will need to be adjusted to cover the cost of the other (for an interesting discussion on how rating factors are weighed, i.e.: “pumping” and “tempering,” see Spanish Speaking Citizens’ Found. v. Low 85 Cal.App.4th 1179). By adjusting the rate, the previously uninsured will be made to subsidize the persistently insured. For this reason, S.B. 841 was found not to “further” Prop. 103’s purpose which, ultimately, the court decided is to expand access to auto insurance.
Suffering additional beatings on the matter, since the elimination of portable persistency discounts, two attempts have been made by insurers outside of the Legislature to reinstate their use. Two initiatives, Prop. 17 and Prop. 33, failed.
While there is another persistency discount skirmish in the offing with the appearance of a Trojan horse, in the form of Prop. 45, will there ever be a way around the courts’ unfortunate readings of what furthers the purposes of the resiliently malignant Prop. 103?
