R Street Institute

Analysis

Consumer Watchdog should want a more dynamic, competitive market for California insureds

by Ian Adams
Oct 29, 2015
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issues: Insurance

Yesterday, I published a paper about, and titled, “The troublesome legacy of Prop 103.” Shortly thereafter, an organization called Consumer Watchdog published a startlingly quick response.

The speed of their response, while impressive, is no surprise. Consumer Watchdog owes its very existence to Prop 103. That initiative was its genesis and, as a frequent intervenor, continues to be the one of the primary sources from which it draws its monetary support (which is to say, from the pockets of Californians).

In its haste to read, digest and respond to the study, Consumer Watchdog trotted out some of its favorite well-used talking points. So, for edification, enlightenment and entertainment, I present the top three mischaracterizations of Consumer Watchdog’s response…

“The law has saved drivers $100 billion on their insurance since 1988…”

This is the most common, and perhaps the least accurate, claim offered by Prop 103’s defenders. To come to that number, the Consumer Federation of America compared and totaled the difference between initial rates filed and eventual rates approved by the California Department of Insurance. That rather wanting calculus is good for shock value, but doesn’t shed much light on what is actually going on. In fact, by the logic of the CFA calculus, any rate-review mechanism that ever results in a rate reduction in any state is responsible for “saving” consumers money.

Of course, that’s a mischaracterization of what’s happening. Following the CFA’s logic leads to the rather amusing conclusion that when Prop 103 allows for rate increases to ensure rate adequacy and insurer solvency, it must be costing consumers money. Gasp!

Both statements are absurd. Cost drivers dictate rates; systems like Prop 103 simply confuse price signals.

“Consumers save under Proposition 103 because insurance companies are required to justify and get approval for rate increases before they take effect.”

Here Consumer Watchdog describes what is commonly known as a “prior-approval” process. The system is not unique to California. However, unlike other states in which insurers file and the insurance department in question gives a relatively straightforward thumbs up or down to the rate, California’s system has become so convoluted (largely because of intervenors like Consumer Watchdog) that rate filings have, by necessity, become rate negotiations. Rate negotiations demand that insurers, much like any party proposing a price at the start of a negotiation, treat their initial filing as a first offer.

For this reason, particularly when compared to other states, Prop 103 wastes time, slows the speed-to-market of rates, and costs consumers money.

“Proposition 103 allows the public to participate in the rate-making process.”

I encourage anybody who reads this piece to visit the Department of Insurance to register as an intervenor. It’s an “easy” process.

That’s all! No wonder the public is so eager to participate in the process. In fact, since 2013 there have been a grand total of five findings of eligibility to seek compensation. Five.

Consumer Watchdog’s defensiveness is natural, but counterproductive. With the arrival of autonomous vehicles, the rigid rate-approval process that Consumer Watchdog currently trumpets will violate the law’s putative purpose sooner rather than later. When that happens, Prop 103 reform is becoming a virtual inevitability.

Moving forward, we at R Street hope that Consumer Watchdog will champion efforts to shape the future of California’s insurance market. As the current system’s progenitors, they are well-positioned to contribute meaningfully to the next system’s creation. Let’s hope that the old system doesn’t hold them back.

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