Soon We’ll See Where, if Anywhere, Insurance Surplus Will Come From

The people have spoken, and they have cheaper insurance--which may be as good as a 10,000-year guarantee that comes with kitchenware purchased from a street vendor if the insurance company isn’t there when you need it.

The people said “. . . Enormous increases in the cost of insurance have made it both unaffordable and unavailable to millions of Californians . . .” and “. . . existing laws inadequately protect consumers and allow insurance companies to charge excessive, unjustified and arbitrary rates . . . .” If these words seem unfamiliar, check your ballot pamphlet from the Nov. 8 election, because we the people enacted them as the preamble to Proposition 103.

Although Proposition 103 is in limbo pending the California Supreme Court’s study of its constitutionality, it’s worthwhile to examine its other features not evident in pre-campaign publicity.

Proposition 103’s claim to fame is the roll-back of property casualty insurance rates to November, 1987, levels and then an additional cut of 20%. Further cuts are available for “good drivers”--which, of course, we all are.

For all of us who are about to purchase or renew our property casualty insurance, there would have been an immediate and perhaps obvious reduction in the cost, which would have helped with our Christmas bills except for the court’s intervention. Still, a markdown of 30% or more is a hefty drop for anyone. Simultaneously, Proposition 103 imposes cost increases on insurance companies: more fees for state administration, higher premium tax rates, paying opponents’ costs when rate change requests are challenged. Faced with this change in the money pot, what are insurance companies likely to do?

The easiest course would be to quit business in California. Historically, we have been an attractive plum for insurers, especially auto insurers, because of our unmatched reservoir of cars. But if you’re losing money on every policy you write, the plum starts looking more like a prune.

I believe that the insurance companies will remain in the Golden State, but that they will cut expenses like claims-payment and -processing and customer services. So, if you or someone you know ever has had a problem with a claim or had the telephone at the insurer ring 20 to 30 times and, when answered, you were put on interminable hold, you’ve had a foretaste of life under Proposition 103.

It’s also possible that your policies will change. Deductibles may rise, limits may drop and some coverages may not be available. That warm security blanket of insurance will not cover as much, and it will be thinner.

I believe that we’ll also see a tightening of the industry’s willingness to insure us. Although Proposition 103’s language limits companies’ options to cancel or not renew policies, an allowable ground is “. . . a substantial increase in the hazard insured against . . .”. Look for an expansion of that ground as today’s fender benders are tomorrow’s substantially increased hazards. Policyholders costing companies even small amounts in claims are well on their way to becoming risks to be avoided.

Proposition 103 also calls for the election of the state insurance commissioner, probably on the assumption that it would make both the commissioner and the industry more accountable. This is hard to understand in light of what the proponents of the proposition sold to the electorate in this instance.

What proponents didn’t say and voters failed to ask is where the money was coming from if the assumptions about “excessive, unjustified and arbitrary rates” were not totally true. The emphasis was on the consumer, and implicitly on the commissioner for not being a consumer advocate. Regulators historically have been concerned with solvency. Things like statutory accounting and premium-to-surplus ratios are apparatuses to make sure that the company is around when claims arrive.

Proposition 103 collides with some of these solvency mechanisms like the premium-to-surplus ratio. If you have to start looking for a source of money because of a drop in income, one place might be “surplus” because that might be the only thing available. But if you decrease surplus you change the ratio and limit your ability to write new insurance policies. Keep in mind that the initiative affects much more than auto policies. Some of you may not have had trouble with your homeowners’ policies or your business policies, but when you voted for the proposition you said that you did.

So what do we do? For starters, we may pay some high tuition to learn that initiative proponents want to satisfy individual appetites more than societal needs. Aside from that, if the court concludes that the findings made in the initiative could not reasonably be conceived to be true by the electorate and tosses out the proposition, we’re back to square one. If the court doesn’t resolve all of the problems, the Legislature can, by a two-thirds vote of each house, amend the law “. . . to further its purposes . . . .”

If the Legislature does have a chance to act, it should have a full exposition of all the relevant evidence so that any act will recognize and balance the legitimate needs of the affected parties while satisfying society’s necessities. This is a great goal, but is it realistic? The only way to tell is to take both sides of the insurance equation and examine each constituent income-and-expense element to see which can be reduced or eliminated while still satisfying the bona fide purposes of insurance. We should also see if there is a more economical way to meet the ends of insurance. When we’re done, we’ll at least know whether reductions are warranted and, if so, how much.