BILL ANALYSIS
SB 527
Page 1
Date of Hearing: July 14, 1999
ASSEMBLY COMMITTEE ON INSURANCE
Jack Scott, Chair
SB 527 (Speier) - As Amended: May 28, 1999
SENATE VOTE : 26-12
SUBJECT : Automobile insurance: low-cost policies.
SUMMARY : Establishes a low-cost automobile insurance plan
administered through the California Automobile Assigned Risk
Plan (CAARP). Specifically, this bill :
1)Establishes a low-cost automobile liability insurance plan
within CAARP and requires insurers that participate in CAARP
to also participate in the low-cost insurance plan.
2)Requires the Insurance Commissioner (IC) to approve a
reasonable plan for equitable apportionment among CAARP
insurers of persons eligible for the low-cost auto insurance
policy.
3)Creates a two-tiered policy plan: "AA" and "A", depending on
the driving record of the insured.
4)Establishes general eligibility criteria for the low-cost
policy: family income at 200% of the federal poverty level,
licensed driver for 5 years and no misdemeanor or felony
convictions for Vehicle Code violations. In addition,
establishes "A" and "AA" policy eligibility criteria as
follows:
a) "AA" Policy eligibility: no at-fault accidents for 5
years and no point violations for 3 years.
b) " A" Policy eligibility: no more than one, but not
both, of an at-fault property-damage accident in the past 5
years or a point for a moving violation during the past 3
years.
3)Provides for minimum liability coverage limits of $10,000,
bodily injury for one person; $20,000, bodily injury for all
injured parties; $3,000 for property damage (10/20/3).
Specifies that a policy provided under the provisions of this
bill satisfies the state's financial responsibility
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requirements.
4)Sets additional limits for the low-cost policy: a) vehicle
driven less than 14,000 miles per year,
b) covers only named insured(s) and excludes other persons.
5)Sets forth an unspecified annual premium for each of the "A"
and the "AA" policies to be revised every 2 years to reflect
changes in the consumer price index and patterns of risk.
Requires rating plans to calculate risk based on actual loss
experience and earned premium years for the covered driver.
EXISTING LAW :
1)Requires motorists to demonstrate financial responsibility for
losses caused by automobile accidents in one of several ways,
including proof of automobile liability insurance coverage.
2)Specifies minimum liability insurance coverage limits:
$15,000 for bodily injury for one person; $30,000 bodily
injury for all injured parties; $5,000 for property damage
(15/30/5).
3)Requires automobile insurers to participate in CAARP, which is
established to provide automobile liability insurance to those
unable to obtain it otherwise.
4)Defines "good driver" under Proposition 103 as a licensed
driver with 3 years driving experience who in the past three
years has not accumulated more than one driving point, as
defined.
FISCAL EFFECT : According to the Senate Appropriations
Committee analysis, a first-year cost of $250,000 and an ongoing
cost of $500,000 per year to the Department of Insurance to
administer the program (Insurance Fund).
PURPOSE OF THE BILL. The author introduced this bill to ensure
the availability of auto insurance given the financial
responsibility law. Since the mid-1970's, California law has
required that motorists buy minimum limits liability auto
insurance in order to drive on public roads. Current law,
however, does not provide for "affordable" automobile insurance.
While Proposition 103 was adopted by the voters in 1988 to
reduce auto insurance rates and eliminate territorial rating,
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current Proposition 103 regulations still permit "zip code"
rating. These rating regulations have been challenged in court,
but it is not clear that the ultimate resolution of this case
will result in a prompt reduction in insurance rates in areas
currently experiencing relatively high costs of insurance.
Current industry rating practices place persons living in
low-income, urban areas, in particular, at a great disadvantage
when seeking to purchase affordable auto insurance. For
example, the same 43 year old male driver, with 26 years of
driving experience, with no at-fault accidents or points on his
record pays 150% or more for basic coverage by moving from San
Mateo to South Central Los Angeles. The author believes that a
driver with an excellent driving history should not have to pay
double or triple what he or she pays in one zip code versus
another, when basic coverage should be based on the risk that
the safe driver will be at-fault in an accident.
The author cites statistics produced by the Department of
Insurance (DOI) on auto insurance pricing in the top 40
uninsured zip codes in California. Even among zip codes in Los
Angeles with high uninsured rates, the average premiums vary
dramatically. If the risk of litigation, population density
and auto fraud are constant throughout the low-income
neighborhoods in Los Angeles county, it is difficult to explain
these large variations in price strictly according to the
traditional explanations offered by insurers. The author
concludes therefore that SB 527 is needed to provide an
actuarially-sound policy that can be offered in areas where the
evidence suggests that there are large numbers of good drivers
denied a fair chance to obtain affordable insurance.
Backgound.
Low-cost auto insurance measures have been introduced throughout
the past decade. Starting in the early 1990's a number of the
bills attempted systemic reforms to control costs in the system,
such as litigation and medical utilization. Several "low-cost"
measures proposed no-fault solutions. In 1992, Senator Torres
introduced a "Pay at the Pump" measure, which would have
financed basic automobile insurance for California motorists
through adding a charge for auto insurance to the cost of
gasoline. Others, such as SB 49 (Lockyer, 1996), which was tied
to AB 650, the measure requiring proof of financial
responsibility, proposed a comprehensive reform of the system,
including features to facilitate settlements and avoid
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litigation, establish a fee schedule for medical treatment,
reduce contingency fees. No consensus was reached and AB 49
ultimately became a bill of legislative intent. With most of
these measures, the goal has been to make available a policy
price of $200 to $300. This bill and its current alternate
legislative proposal, SB 171 (Escutia), derive savings by
downsizing required coverage.
Uninsured motorists.
DOI recently published a report on uninsured, Calfiornia's
Uninsured , documenting the percentage of uninsured motorist by
zip code. The report identified an uninsured rate in the state
of 22.6%, somewhat lower than previous estimates. Unlike
previous estimates based on aggregate Department of Motor
Vehicles (DMV) data, this research matched insured vehicles with
DMV files. The report pinpointed areas of the state where the
problem is the greatest. Los Angeles, for example, has 39 zip
codes where the majority of motorists are uninsured, including
14 where less than 20% of the population is insured. The report
also identified two groups of uninsured: the "pure" uninsured,
vehicle owners who have no insurance coverage, and the "hybrid"
uninsured, owners who have multiple vehicles, one or more of
which is uninsured. As the "pure" uninsured identified cost as
the primary factor for not buying insurance, this bill would
focus on making available low-cost auto insurance to this group
of uninsured. It is also important to note that the DOI
research identified this group as being good drivers, based on
Proposition 103 standards, therefore likely to be eligible to
the "A" or "AA" policies.
California Automobile Assigned Risk Plan (CAARP).
This bill sets up the low-cost auto insurance program as part of
CAARP. The purpose of CAARP is to ensure availability of auto
insurance to drivers who cannot obtain it otherwise, such as
persons with poor driving records. Under CAARP, the Insurance
Commissioner designs and implements a plan to equitably
apportion the assigned risks among insurers. Motorists seeking
insurance through CAARP must demonstrate that they were unable
to obtain insurance in the "voluntary" market. Until 1993,
low-income drivers who could not afford insurance in the
voluntary market were eligible for CAARP coverage. In 1993, the
Legislature required CAARP rates to be "actuarially sound" in
order to return CAARP to its original role as the insurer of
last resort.
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Named insured.
One of the cost saving provisions is to limit coverage to the
"named insured(s)." Industry data show that this provision
could save 8%. Historically, however, courts have been quite
reluctant to allow insurance policies to limit coverage for
permissive users. Courts in many jurisdictions and in
California have invalidated statutes restricting permissive use
from insurance coverage. (See Wildman v. GEICO (1957) 48 Cal.2d
31 [violation of public policy to issue an automobile policy not
covering permissive users of name insured's auto] or Farmers
Insurance Exchange v. Teachers Insurance Co .(1980) [against
public policy to permit insurance company to exclude coverage
for bodily injury to relatives of the insured who are not named
under the policy]).
Rating the current low-cost auto insurance proposals.
This bill does not yet propose a rate. Both SB 171 and this
bill propose a statewide flat rate for low-income drivers. The
Escutia measure proposes $300 or $400 depending on whether the
insured is a good or a very good driver. At the request of the
author, Senate Rules Committee has hired an actuary to analyze
low-cost policy options. According to the scope of work, the
actuary will prepare an analysis of the cost of low-cost
policies based on various options that limit coverage and or
eligibility. According to the author, the actuary will not
complete his report until next month. The actuary's report is
designed to guide the final negotiations of the rate to be
adopted for the low-cost auto insurance proposal. The author
tentatively estimates that the cost for the "AA" policy would be
$377 per year and for the "A" policy, $484 per year.
SUPPORT. The Consumer Attorneys of California support this bill
in concept. It vigorously supports the idea of a low cost
policy and states that such a policy offers some relief to those
members of our society that are good drivers but economically
disadvantaged. Consumers Union (CU) also supports the concept
of creating an affordable insurance policy that will enable
low-income drivers to comply with mandatory insurance laws.
They did oppose this bill in the Senate Insurance Committee in
favor of SB 171 because the latter bill provided a concrete
proposal establishing a $300 premium for its Lifeline Policy.
In light of the current process to develop a rate based on the
report issued by the actuary hired by Senate Rules Committee, CU
indicates it would support this bill if amended to establish an
affordable premium rate.
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CONCERNS. The Personal Insurance Federation of California
(PIFC) supports the goal of SB 527, but indicates it has serious
concerns with the part of the bill that calls for one statewide
rate. PIFC argues that setting a statewide flat rate means that
over time the pool will not be actuarially sound and will result
in unfair subsidies being paid by other insured drivers. While
PIFC acknowledges that the author has recognized the importance
of ensuring the price for the low-cost policy be actuarially
sound, the inability to adjust rates based on factors of age,
years of driving experience, gender will result in the
possibility of adverse selection. Further, PIFC points out that
few drivers outside the Los Angeles area will have an interest
in purchasing the policy, since they could already purchase
minimum coverage at a lower rate. It also questions how many
drivers bill "buy down" to the low cost policy versus the number
of currently uninsured motorists who bill purchase this
coverage. PIFC cites overwhelming evidence that loss costs
differ by region and, therefore, suggests that the bill be
amended to provide for geographical differences in loss costs.
The Association of California Insurance Companies (ACIC) also
indicates great concern with the flat rate provision of this
bill and supports the use of rating zones similar to the CAARP.
It also expressed concerns with the bill's approach to cutting
costs. First, it estimates that the real savings will be
derived from the "named insured" feature, which causes concern
because courts have been traditionally reluctant to limit
coverage for permissive users. Second, it indicates there is
virtually no savings by dropping property damage from $5,000 to
$3,000. Third, it believes little savings can be achieved by
limiting mileage to 14,000 per year, and suggests greater
savings could be derived by a much narrower limitation, for
instance by limiting mileage to 5,000 miles per year. Finally,
it notes that the requirement of 12 equal monthly premium
installments adds administrative cost to the policy and suggests
the bill mirror CAARP's payment plan or allow the insurer to
offer payment plans similar to those offered the company's other
policyholders.
OPPOSITION. The Alliance of American Insurers (AAI) opposes
this bill for several reasons. First, it is concerned about
placing a dollar amount in statute. By placing this provision
in CAARP, if it is underpriced, other drivers must subsidize the
drivers in this plan. Second, it is concerned that the number
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of miles driven annually is unverifiable and unenforceable.
Third, AAI is concerned that the proposed reduction in minimum
mandatory personal liability limits do not adequately protect
the public from accidents caused by participants in the plan.
ISSUES.
Will the proposed statewide flat rate policy be actuarially
sound?
The author has indicated the intent that this low-cost policy be
actuarially sound. This bill includes a provision requiring
that the annual premiums be revised to reflect changes in both
the Consumer Price Index and risk and loss patterns. If
geographic considerations are not taken into account, this
bill's low-cost policy may result in eventual subsidization by
policyholders outside of the Los Angeles region. The author may
wish to amend this bill to permit some form of geographic rating
in order to ensure that the
low-cost policy can be sustained an actuarially sound basis.
Is the proposed low-cost policy the optimal design to meet the
needs of the low-income consumer?
The low cost policy proposed in this bill is structured to
derive savings on several fronts, including reduced minimum
coverage, maximum mileage, named insured. One policy design,
however, may not meet the diverse needs of low-income consumers.
For example, some consumers may drive few miles per year, but
have difficulty complying with the "named insured" provision.
The actuary hired by the Senate Rules Committee will be looking
at a number of variables that can cut auto insurance premium
costs. Rather than adopting a set policy design, the author may
wish to amend this bill to permit a variety of cost-saving
features that may be used to construct a low cost policy
appropriate to the individual consumer's circumstances.
Is the eligibility standard in this bill too liberal?
This bill sets a standard of 200% of federal poverty level or
$35,000 per year for a family of four. SB 171 (Escutia) sets
the standard at 150% of the federal poverty level. According to
DOI statistics, average annual per capita income in the zip
codes with the highest levels of uninsured motorists is $17,776.
The target population, therefore, has an average income close
to the federal poverty level. By setting the eligibility
standard too liberally, insured motorists would be encouraged to
"buy down" to the special low-cost policy. A more restrictive
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standard would appear to strike the appropriate balance between
encouraging the uninsured to buy auto insurance and creating an
incentive to "buy down" to the low-cost coverage. The author may
wish to consider lowering the income eligibility standard. In
addition, the author may wish to consider adding proof of
receipt of public assistance to the list of documents that serve
to prove eligibility.
REGISTERED SUPPORT / OPPOSITION :
Support
Consumer Federation of California
Opposition
Alliance of American Insurers
Analysis Prepared by : Beverly Hunter / INS. / (916) 319-2086