Thursday, June 10, 2010

Why Did Proposition 17 Fail?

This past Tuesday's primary election in California, in addition to setting the field for November's general election (see yesterday's post for a look at the candidates for insurance commissioner), also had a few propositions to be decided. One of them, Proposition 17 i.e. "The Continuous Coverage Auto Insurance Discount Act," lost by a bit over 150,000 votes.

But why?

The proposition, had it been passed, would have allowed insurers to offer a persistency discount to those insureds who had maintained continuous coverage with a different carrier. On the surface, this would appear to be a slam dunk for the consumer. Proponents of the proposition stated that its passage would lead to lower rates for many insureds, as providers would need to more actively compete for not only obtaining new business, but keeping current business on the books. The argument went that, as an example, should an insured be receiving a 5% persistency discount from their current provider, a provider competing for that customer would be at an immediate disadvantage price-wise due to being unable to offer the same discount. Should they be able to offer the same discount, the competition between companies for that customer would now be based on the base rate, along with all other features of the products being offered, such as different discounts, amount of coverage, what is covered, and the like.

Again, this at least sounds like a terrific deal for the consumer. Say they looked at Company A and decided they liked its product more than what their current provider Company B offered. However, they were inclined to stay with Company B due to the persistency discount they alone were able to offer, thus making Company B's price sufficiently lower than what Company A could offer. Price always has a major impact on the consumer's decision. Who doesn't want to save money? Therefore, Company B had an advantage over Company A that Company A could never match.

So why was this rejected?

Short of individually polling everyone who voted against the proposition, the probable major reason for it losing can be found in, somewhat ironically, a neutral outlining of the proposition by the California Department of Insurance. It reads (emphasis mine):

California automobile rating is unique in many ways. However, the nature of applying discounts and surcharges is not unique and reflects a basic principle of insurance ratemaking. This basic ratemaking principle is "zero-sum" in the following sense: Every automobile insurer must have an approved "rate plan" that establishes its average premium. Within that rate plan, every "discount" requires a corresponding "surcharge" so that every factor influencing a rate will balance evenly over an insurer's book of business...

The Continuous Coverage Auto Insurance Discount Act, as revised and submitted on September 2, 2009, is subject to this principle. That is, if an insurer offers a continuous coverage discount for some drivers it will result in a surcharge for other drivers. This is because automobile insurance discounts and surcharges must offset one another so that each rating factor applied by an insurer is evenly balanced within the insurer's rating plan. This assumes that the insurer chooses to offer a continuous coverage discount and does not submit a new rate plan that would change its average premium.

Automobile rating is extremely complicated, and there is no way of predicting the precise impact a specific factor (in this case, continuous prior insurance) will have on each of the insurer's customers until the insurer submits specific data to the Department of Insurance. Insurers periodically file new rate plans which may reduce or increase the average premium for their customers and/or new class plans which apply specific rating factors to their customers and may reduce or increase individual premiums.

The highlighted factor was seized upon by those opposed to the proposition. Their argument was insurance providers would, should the proposition had become law, raise rates on insureds not eligible for the persistency discount in order to balance their rating plan. Unfair, came the cry.

The flaw in this line of reasoning is how it is rooted in a belief that everyone should be eligible for the same price of insurance regardless of any and all factors related to the insured -- driving record, years of experience, type of vehicle, and so on. It can be argued that the reason for opposing Proposition 17 was not an insistence that all discounts should be barred, but that it was not wishing to see the rates for others ineligible for the discount rise from their present level. However, the net effect is the same. The proposition's defeat forces insureds wishing to change carriers into choosing between accepting a higher rate or remaining with their present carrier.

What do you think? Was the defeat of Proposition 17 good or bad for consumers? What effect will the current system remaining in place have on insurance agents and providers? We want to hear from you. Thanks!

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  1. The defeat of Prop 17 is a win for the consumer. I haven't driven for years and if I do decide to buy the new 2011 Ford Mustang GT 5.0, I would like to receive same rate my neighbor will receive if he decides to compete with me.

  2. Auto Liability rating was probably never fair, but when it became a political issue to fight over, insurers lost all control. With the freedom of "file and use" rating, came an inherent social repsonsibility to provide a market which some insurers felt they could not honor. Now we are stuck with a set of rules
    that largely ignore the facts of life and losses
    in favor of limiting the pain of higher rates for
    urban drivers.

    The insurance industry has lost enough consumer
    confidence to make it the butt of a joke ala
    "How can you tell when an insurance company is
    lying to you." That's really sad, because I
    think the vast majority of people working in
    insurance feel that they are performing a valuable service to the public through taking
    care of the needs of their customers.

    As long as the "zero-sum" rating factor is in
    play, any insurance backed legislation that is
    not co-sponsored by the consumer advocates will
    be labeled as a trick, not a treat regardless of
    it's merits.

  3. It *was* a trick, not a treat to consumers. If any of you had happened to actually watch the hearings on this proposition, you too would most likely come to the same conclusion that I did, in that Prop 17 was not going to effect the change that Mercury Ins told us it would.

    It's always very worrisome when Mercury is the strongest proponent for something. That usually means that it will make them tons of money while screwing the consumer.

  4. California voters got what they wanted...a continuation of the current penalty for switching carriers.