Creating a predictable system for calculating adequate insurance rates is the single most important issue to PIFC. PIFC supports two specific legal changes, outlined below.
California insurance rating law was established in 1988 by a ballot initiative (Proposition 103). The actual text of the initiative provides little guidance on how to set insurance rates, except that rates cannot be “inadequate, excessive or unfairly discriminatory.” Proposition 103 granted the California Department of Insurance (CDI) the power to determine an insurer’s rates under this standard and requires insurers to obtain CDI approval before changing rates. Insurers must receive prior approval for both rate increases and rate decreases.
Below is an example that illustrates the current system’s problems.
GEICO Rate Filing: In June, 2011, the Sacramento Bee reported that GEICO sought a 4% increase in its auto rates and, after a lengthy legal challenge, the CDI ordered GEICO to reduce its rates by 11%.
This 15% swing illustrates the problems with California’s insurance rating system. First, an insurer in this situation must grapple with a basic business question: how to run its business on revenues 15% lower than it believes it needs.
Second, the insurer’s competitors must decide if they want to risk trying to follow the rate decrease. For instance, if another insurer takes a chance and files for a 5% decrease in insurance rates, will the CDI order that company to reduce its rates 15% to 20%, and jeopardize its financial status? If that risk is too great, then an insurer will not file for a rate change and the flawed system will have deprived consumers of another price competitor. And, in fact, after the GEICO rate decrease, there were not rate cuts by competitors like there would be if the rating rules were improved.
Most Actuarially Sound
The CDI rules that grew from Proposition 103 are complicated and subjective, and discourage insurers from filing for rate changes (including rate decreases).
The biggest problem is that an insurer does not know which rules the CDI will use to review a rate request. For key components of calculating insurance rates, the CDI can reject an insurer’s approach and impose its own method. Even if an insurer follows all the rules of actuarial science and proposes a rate that the CDI would agree is “actuarially sound,” that is not good enough. The CDI’s rules allow it to substitute its own approach and say that its way is the “most actuarially sound” – even though that is not a real standard in actuarial science. It is not enough for an insurer to be reasonable, the insurer must be the “most reasonable,” whatever that means. In practice, it means whatever the CDI says it means – which is no standard at all. It is simply arbitrary.
Arbitrary rating rules discourage rate filings and price competition. PIFC supports a legal change that would 1) eliminate the false standard of “most actuarially sound” and 2) permit an insurer to change its rates as long as it bears the burden of proving that its rates are actuarially sound under modern, scientific rating rules.
“Public Interest” Intervenors
If this unfair rating system were not bad enough, another factor discouraging insurers to make rate filings and compete is the “intervenor” process. Under Proposition 103, members of the public are able to challenge an insurer’s rate requests as being inadequate or excessive. This is an express part of Proposition 103 and PIFC member companies are not advocating its elimination.
However, lawyers have taken this provision written in the public interest and distorted it into a money-making venture. Even the lawyers who wrote Proposition 103 have made millions of dollars from the intervenor system. The current rules allow intervenors to challenge rate requests even if the CDI rate analysts do not want or need their help, to intervene whenever they want, to advance arguments without limitation, and to get paid even when an insurer agrees to a slightly lower rate just to get a final approval.
Public participation that aids CDI decision-making makes sense, but not the current system which enriches a handful of lawyers and actuaries. PIFC supports a legal change that would require intervenors to demonstrate that 1) consumers would be harmed without their involvement and 2) they would provide non-duplicative value to CDI staff, before being granted the right to participate in insurer rate review.
PIFC believes consumers will benefit from the price competition that is possible under improved rating rules. They need a system allowing them to better predict the result of their rate change requests in advance of a filing, instead of being fearful of an adverse outcome – whether through an unfair rating process or a shakedown intervenor system. An insurer should not be forced to “roll the dice” each time it makes a filing with the CDI.
PIFC supports legal change to create predictable, fair rates that will increase insurer competition and deliver benefits to California consumers.