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California Proposition 103 Actually Harms Consumers

California Proposition 103

In 1988 voters passed California Proposition 103 by a vote of 51.1% to 48.9%. Proposition 103 was a populist movement led by Harvey Rosenfield and endorsed by Ralph Nader in response to rising California auto insurance rates.  At the time of passage, auto insurance rates were among the highest in the nation, and there were mounting perceptions rising prices were simply abuse on the part of insurance companies.

If the intent was to restrain the insurance carriers to reform the market and help consumers, the measure has failed. Alternatively, California Proposition 103 has simply led to fewer choices, fewer options, and a less responsive regulatory body.

California Proposition 103 creates dramatic auto insurance changes

Before we can assess the ways proposition 103 changed the California auto insurance market, let’s first summarize what changed.

  • Prescribed how California auto insurance rates could be developed
  • Prescribed the variables that would predict risk and their order of impact on premiums
  • Created a concept called the ‘Good Driver’ who will always get a 20% discount
  • Provided for an elected insurance commissioner
  • Made rates subject to prior government approval before they can be used
  • Forced insurance companies to roll back rates by 20%

What are the effects on the California auto insurance market?

Since the passage of this California Proposition 103, there has been much debate about the effect these changes have had on the California auto insurance market. What cannot be disputed, however, is that the changes that took place were some of the most aggressive changes to the industry in history, and it’s had a consequential impact on insurance companies and consumers.

The question is, “was the impact positive or negative?

If you ask the advocates at they’ll say that it was positive because California auto insurance rates have decreased since the passage of the bill. But their research is flawed on many levels:

  • It doesn’t account for coverage mix shifts (Do people now buy or get less insurance?)
  • Changes in claims economics (Did claims frequency change? Did the Severity Change?)
  • Changes in agent compensation (Is CA a lower commission state or high?)
  • Operational efficiency changes in the industry generally (How did companies change operations, and are fewer people employed as a result?)
  • Premium trend associated with one of their mandatory new rating factors (annual miles driven)

The industry argues that the changes in the regulations have restricted insurance companies’ underwriting profits, reduced the number of competitors willing to sell insurance in the state, providing less choice for consumers and that it prevents innovation which also provides less choice for consumers.

It also increased subsidization, where the better drivers are paying for the worse drivers.

The insurance industry can present good science to show that the lack of innovation, and the lack of competition, is hurting the California consumer.

This article represents just the first in a series of articles we are going to prepare in an attempt to better inform consumers about the effect of Proposition 103 on the California auto insurance market, but for the sake of this article, and simplicity, we will first simply discuss the impact that the mandatory classification factors and prescribed rate development have had on the industry…and why this isn’t a positive effect to the consumer.

Proposition 103 was a form of price control

A major change mandated by the bill was that insurance premiums would be priced using three “mandatory” rating variables, and an approved set of “optional” rating variables. Additionally, the “mandatory” variables had to be proven to have a descending impact on the developed premium in the following order (with the impact of all “optional” variables always being less than the last “mandatory” variable). The mandatory factors used are below, in order:

  • Driving Record (Accidents and Violations)
  • Annual Miles Driven
  • Years of Driving Experience

The optional factors include Geography (Relative Claims Frequency and Severity Zones), Model Year, Academic Performance, Vehicle Performance and Characteristics, Vehicle Use, Percent of Use of a Vehicle, Gender, Marital Status, Persistency (Renewal Discount), Multi-Policy, and a few others.

So there it is, without any real study regarding the predictive nature of these variables, these were determined to be the set of risk predictors for the entire state, for every insurance company, and for every consumer. With a few modifications, we still use this same forced rating methodology despite 25 years of R&D, improved pricing techniques, data mining capabilities, and technological advancements. While the rest of the nation is seeing new products, new discounts, and new ways to save good drivers money, we are still stuck in 1988…and it wasn’t good then

Science can tell us the real predictors of California auto insurance loss, we don’t need lawyers and activists

Since the majority of states have adopted open competition regulations for California auto insurance, companies have been allowed to develop new, innovative rating classification plans. And with the development of cheaper memory and better desktop computing processing speeds, the insurance industry has also been able to use sophisticated multivariate pricing techniques. These techniques allow the statistician or actuary to run regression models to determine the driver, household, vehicle, or environmental variables that should be considered in rating an auto insurance policy, and the order of importance toward predicting claims frequency. Additionally, these newer multivariate pricing structures remove inaccuracies in the rating variables (to the extent it possible), removing the effect predicted by one variable when another variable is also present.

As you can imagine, the study to understand which variables are predictive has already been done. It’s been done by individual companies, actuarial consultants, research groups, and industry organizations. The three most predictive variables are consistently the following:

Coverage#1 Factor#2 Factor#3 Factor
Bodily Injury LiabilityAge/GenderInsurance Score*Geography
Property Damage LiabilityAge/GenderInsurance Score*Geography
Medical PaymentsInsurance Score*LimitAge/Gender
ComprehensiveModel YearAge/GenderInsurance Score*
CollisionModel YearAge/GenderInsurance Score*

*Insurance Score is the use of the consumer credit record to determine claims frequency and impact on insurance rates. This variable is expressly prohibited by California Proposition 103 but is widely used throughout the rest of the United States and all other consumer financial products.

You can see from this list that none of the three (3) mandatory variables are included in this list. Even if we say that Year of Driving Experience is in some way relatable to Age/Gender, the California mandatories are not an accurate representation of the needed variables by insurance companies to segment risk and charge the appropriate rate for the risk insured.

What discounts do others states get that California cannot have because of Proposition 103?

Outside of California, there are many unique discount opportunities, and ways to rate auto insurance policies that make insurance more affordable for the majority of consumers. Here are some rating variables and discounts that are allowed in other states, but not allowed in California:

  • Advanced Purchase Discounts
  • Homeownership Discount
  • Occupation Discounts
  • Education Discounts
  • Volunteering Discounts
  • Non-Drinker Discounts
  • Portable Renewal Discounts or Discounts for Having Insurance
  • Discounts if you buy Increased Limits
  • Discounts for being responsible with your consumer credit
  • Discounts if you Pay-in-Full
  • Discounts if you pay using electronic funds Transfer

This is just a quick list, there are many others used by insurerOutsideide of California, insurers are allowed to use a discount or rating variables as long as they can establish that it meets the actuarial principles that it is reasonable, not excessive or inadequate, or unfairly discriminatory. This means consumers outside California are always being marketed to new pricing ideas, new options, and new ways for insurance companies to earn their business.

Rate leakage, soft premium fraud, and subsidization

If you go back and study the “mandatory” rating variables one stands out as being impossibly difficult to validate. This is the annual miles driven. Today we are getting closer to having real technology that can transmit vehicle data directly from your car to your insurance company using telematics devices. The best example of this today is Progressive Snapshot (also not available in California). But back in 1998, there was no way to determine how many miles a consumer drove their vehicle. Who knows how the authors thought this was going to be monitored effectively? The reason I bring this one up is that agents, consumers, and in some cases insurance companies themselves use this rating variable as a way to either collect more rates or reduce rates to get competitive. The table of factors used by insurance companies to rate annual miles might have differences in rate, from low to high of 60% – 40%. So, if you want to sell a policy as an agent you simply set the annual miles lower, or if you’re a consumer and you want to pay less, you tell your insurance company I only drive 4,000 miles annually. What are they going to do? It costs an insurance company a lot of money to call out every month to take odometer readings, and the regulations say that the value is whatever the insured says it is…no arguments. There are examples in the market where an insurance company writes a policy at 12,000 annual miles and at renewal another agent quotes them, but to earn the business they set the rate at 10,000 annual miles to get a lower rate. Upon renewal of the 2nd term, another agent quotes the same insured with the original company, but at 8,500 to earn the business and it comes back to the original insurance company 2 terms later, all things are the same, but the miles are now 8,500 and a lower rate than ly deserves.

These types of rating inaccuracies are the most problematic, normally this happens when there is a flaw in the company’s rating plan, in this case, it’s a flaw in the regulations to fix this problem insurance companies increase the base rates they charge, and pass the premium loss to everyone.

Annual miles driven is only one of many rate subsidies in the classification rating plans we are all subsidizing those who don’t represent their miles accurately, rural and suburban markets subsidize metro markets, those with good credit histories are subsidizing those who are less responsible, consumers who don’t maintain their insurance continuously are being subsidized by consumers who do, and the list goes on, and on, and on.

What can we do?

Right now we have to live with the situation we have, but people are trying to reverse the problem. Those who do try to introduce change are normally vilified by But there are those of us who would like to see a change, who will work toward getting this change, so consumers have an opportunity for innovative new insurance companies, products, and pricing techniques that open up options and choices in the California auto insurance market.

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