State Farm Sets 9.6% Increase in Auto Rates
State Farm, the largest seller of auto insurance in California, Monday announced a general statewide auto policy rate increase averaging 9.6%. It thus became the first big company since the passage of Proposition 103 in November to raise its premiums across the board.
The action was challenged by state Insurance Commissioner Roxani Gillespie, who said she would call a public hearing to determine whether the increase is excessive and to find out precisely how State Farm is disbursing the dollars it collects from premiums.
Company Cites Costs
The company cited the rising cost of paying claims, saying it lost $124 for each car it insured in California in the 12 months that ended Nov. 30.
Gillespie said she has the authority under the state insurance code to order State Farm to reduce its premiums “by the excessive amount” if it is determined that the company is charging too much.
The insurance commissioner expressed concern that State Farm’s action, which affects 2.7 million vehicles, might be the first of many by the more than 400 companies that sell auto insurance in California.
“Right now, we are facing an uncertain market,” she said in an interview, “and State Farm is the industry leader that many insurance companies tend to follow in raising their prices.”
State Farm said it would welcome a hearing. The company’s vice president and general counsel, Pete Ingham, termed the rate increase fully justified by escalating claims since the company’s last general auto insurance rate hike of 7.9% in December, 1987. He said that opening the company’s books “certainly is not troublesome to us.”
Ingham questioned, however, whether Gillespie actually has the authority to order a reduction of the announced rate increase.
Along with its announcement, State Farm provided statistics asserting that total claims payments and claims expenses per policy increased from $478.77 in 1987 to $535.02 in 1988, that bodily-injury liability claims per 1,000 cars increased from 16.3 to 17.5 in a year and that average bodily-injury liability claims and uninsured-motorist claims also have continued to rise.
Gillespie said one purpose of the hearing would be to seek verification of such claims.
“I am delighted in a way that State Farm is providing us with this opportunity,” she said. “It’s a very large carrier. This is an excellent opportunity to go through this process. And Harvey Rosenfield (chairman of the Proposition 103 campaign) has been saying he wants the books open.”
Provisions in Proposition 103 giving the insurance commissioner power to approve or reject insurance rate increases are not supposed to go into effect until Nov. 8, 1989, but Gillespie claims the authority to order a reduction of “excessive” premiums under existing insurance code provisions.
In the past, however, the Insurance Department hearing process has been a slow one, often with months elapsing before a decision is reached.
When the state Supreme Court stayed Proposition 103’s rate-rollback and rate-freeze provisions for a year, it created a loophole permitting companies to increase rates in the interim.
It is this loophole that State Farm used Monday. Legislation has been proposed in Sacramento to freeze rates, but last week it was delayed in the Assembly Insurance Committee. In order to take effect immediately, the bill would have to be passed on an urgency basis, which requires a two-thirds majority. Faced with vigorous opposition from the insurance lobby, the bill’s authors have expressed doubt that they have the necessary votes.
A call for the Legislature to impose a freeze came Monday night in Costa Mesa from Proposition 103 backer Ralph Nader, who also criticized State Farm’s rate increase.
Nader, making his first visit to the state since the election, said State Farm was behaving as “the leading hound dog for the rest of the industry to test the waters and see if they can resume business as usual--arbitrary, unjustified rate increases.” It is up to Gillespie, Gov. George Deukmejian and the Legislature, Nader said, to stick up for consumers and stop the increases.
An official spokeswoman for the Proposition 103 campaign Monday called State Farm’s announced rate increase outrageous.
“We think all rates ought to be justified to the insurance commissioner,” Carmen Gonzalez said. “We think they ought to go through the review process set down in 103.”
A State Farm spokesman said, meanwhile, that should the state Supreme Court allow the 20% rollbacks from 1987 levels called for under Proposition 103 to go into effect, the company would be forced to refund all additional money it will collect from the new rate increase, plus granting the mandated rollbacks. The Supreme Court has accepted legal briefs but has yet to call for oral arguments in its review of Proposition 103’s constitutionality.
While disclosing the higher premiums, State Farm said it is discontinuing its post-election policy of selling to new customers at 20% higher rates than old ones.
The two-tier rate structure had been challenged by Gillespie, who, after weeks of delays, last week called a public hearing on the matter for March 9 and 10.
State Farm said Monday that when policies expire for new customers who have come in at the higher rates since November, they will be able to renew at the same rates as old customers.
But it did not say it would refund the extra money it has collected, and Gillespie said the March hearing would go forward, at least on the question of whether those refunds should be made.
State Farm spokesmen said the new 9.6% rate increase will apply across territorial lines to all neighborhoods equally, but that some customers will get more than a 9.6% increase while others may get less.
The reason, they explained, is that the rate increases are being posted only for coverages that pay for personal injury--the liability and uninsured-motorist components of policies.
Thus, if a policyholder does not carry collision and comprehensive coverage, as is the case with many owners of older cars, he may get a rate increase of as much as 17%, one State Farm spokesman indicated.
The new rates announced by State Farm are effective for all renewal notices mailed beginning Jan. 30 and for new customers beginning with the same date, the company said.
