BILL ANALYSIS
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Date of Hearing: April 22, 2009
ASSEMBLY COMMITTEE ON INSURANCE
Joe Coto, Chair
AB 1054 (Coto) - As Amended: April 13, 2009
SUBJECT : Insurance: Proposition 103
SUMMARY : Provides that credit card expenses incurred by an
insurer are not part of an "efficiency standard" adopted by the
Insurance Commissioner (IC) for rate making purposes, and
specifies that no retrospective adjustment of an approved rate
may be ordered by a court if the insurer has complied with the
rate approval order of the IC. Specifically, this bill :
1)Specifies that in calculating an insurer's expenses for
rate-making purposes, the efficiency standard adopted by the
IC shall not include the costs paid by an insurer to a credit
card issuer for premiums paid by a policyholder by credit
card.
2)Provides that, if a rate approval by the IC is challenged, no
retrospective adjustment of an approved rate may be awarded
unless the challenger establishes that the insurer violated
the approval order.
3)States findings and declarations that the amendments to
Proposition 103 contained in the bill further the purposes of
the initiative.
EXISTING LAW :
1)Establishes, based upon an initiative statue adopted by the
voters at the November 1988 General Election (Proposition
103), a comprehensive system of rate regulation for
property-casualty insurance rates.
2)Provides that no rate may be approved, or remain in effect, if
it is excessive, inadequate, unfairly discriminatory, or
otherwise in violation of certain insurance laws.
3)Provides that an insurer shall not charge a rate unless it has
been approved by the IC - a "prior approval" system of rate
regulation.
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4)Requires an insurer to comply with a rate approval order of
the IC, until such time as there is a new decision by the IC.
5)Provides, by regulation, that the IC may require a homeowners
or auto insurer to file a new rate application if it has been
at least 3 years since the insurer's rates have been approved.
6)Empowers the IC to adopt regulations to implement the rate
regulation program. In this regard, the IC has adopted
regulations that specify 1) the information an insurer must
file in order to obtain approval of a rate, and 2) the rules
that govern the ICs consideration of the application. In
particular, the IC adopted "efficiency standards" that cap the
amount of an insurer's actual expenses that can be built into
the rate and passed along to policyholders.
7)Authorizes any person to sue to enforce the provisions of
Proposition 103.
8)Provides that any Legislative amendment to the initiative
statute must be passed by a vote of 2/3 of each house, and
additionally must further the purposes of the initiative.
FISCAL EFFECT : Undetermined.
COMMENTS :
1)Purpose . The author introduced this bill to address two
issues relating to Proposition 103. First, especially in the
current economic crisis, the bill is designed to encourage
insurers to allow policyholders to pay their premiums by
credit card. While this payment method may not be ideal, it
is far preferable to allow credit card payments than for
policyholders to allow their coverage - especially auto
insurance coverage - to lapse. As explained in more detail
below, the IC's efficiency standards discourage insurers from
allowing credit card payments.
Second, the bill is designed to ensure that insurers that comply
with an approval order of the IC are not penalized if a court
later second guesses the decision of the IC.
2)Efficiency standards . As part of the rate regulation process,
the IC has adopted "efficiency standards." These standards
cap the amount of an insurer's actual expenses that can be
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built into the rate that the IC approves. For example, assume
the efficiency standard for a group of expenses is 30%. That
means that no matter what an insurer's actual costs are for
these expense items as a percentage of its requested rate, the
most it can get credit for is 30%. Thus, if an insurer that
already has actual costs of 32% wants to allow its
policyholders to use credit cards to pay premiums, it cannot
recoup the extra 2% that the credit card company will charge
for the use of the card. This disincentive also holds true
for an insurer that is below the efficiency standard. The
regulations allow the insurer to build the full 30% into its
rates, even if its actual costs are lower. Thus, if the
insurer wants to allow use of credit cards, it can do so only
by reducing profitability, and cannot build the added actual
costs into its rates. This disincentive reduces the
competition in the marketplace among carriers willing to allow
policyholders to use credit cards to pay premium.
Particularly in the auto insurance market, where the law
mandates liability insurance for the benefit of the
third-party, and not for the benefit of the insured, this lack
of competition is contrary to established public policy.
3)Retrospective rate adjustments . The law requires an insurer
to comply with the IC's rate approval order. The insurer does
not have the discretion to charge a different rate or use a
different rating plan than what was approved by the IC.
Further, the IC has the authority at any time to issue an
order to an insurer requiring rates to be reduced if the IC
believes that its approved rate is excessive - indeed, the IC
has done this in the past. The issue posed by the bill is
whether a court should be able to order an insurer to refund
premiums that were not only properly charged, but in fact were
legally obligated to be charged. The author maintains that,
while it is appropriate for a court to order the IC to change
his or her rate approval order, it is not reasonable to
require an insurer to refund amounts that it was legally
obligated to charge. In this regard, it should be noted that
the insurer is required to have complied with the rate
approval order to obtain this protection. If the IC's order
was not complied with, then the bill's provisions are not
designed to apply. However, it has been suggested (see
discussion of opposition issues, below) that the actual
language in the bill could be read to immunize an insurer for
illegalities that are outside of what the IC approved. To the
extent that this is a valid criticism of the language, the
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author has indicated a willingness to amend the bill with
clarifying language.
4)Support . Mercury Insurance Company argues in support of the
bill that the fees a credit card issuer charges have nothing
to do with insurer efficiency. Rather, it is a service to
policyholders who might not otherwise have access to
insurance, and that it furthers Proposition 103's stated
purpose to "ensure that insurance is fair, available and
affordable. Mercury also argues that an insurer would be in
an impossible "Catch-22" situation if it could be sued to
disgorge premiums it is legally mandated to charge, and that
it could be penalized up to losing its license to sell
insurance for failure to charge premiums as approved. Mercury
points out in this regard that Insurance Code Section 1858.07,
subdivision (b), already precludes the IC from penalizing an
insurer for use of a rate, rating plan, or rating system that
the IC has approved. The bill's retrospective adjustment
provision is merely establishing consistency with this
existing statutory rule.
5)Opposition . Consumer Watchdog (CW), the successor
organization to the original sponsors of Proposition 103, is
opposed to the bill on a number of grounds. Each of its
points are summarized below:
a) With respect to the credit card provision, CW initially
notes that it is difficult to understand exactly what the
bill does. It recognizes that the proponents intend to
obtain a price advantage in the event that the insurer opts
to allow use of credit cards for premium payments, but CW
does not believe the language makes sense in context of how
the efficiency standards actually work. In addition, CW
argues that there are insurers that already allow use of
credit cards for premium payments, and therefore
competition in the marketplace is working. Thus, it does
not make sense to use a pricing mechanism that might result
in higher premiums to provide an incentive to insurers to
allow credit card use. CW argues in fact that use of
credit cards saves an insurer money in other ways that
offset the credit card issuer's charges. Finally, CW
argues that the proposal's interference with the IC's
authority to establish the rules governing rate regulation
does not further the purposes of Proposition 103.
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b) With respect to the provision that limits retrospective
rate adjustments, CW has several objections. Its primary
argument has to do with a provision of Proposition 103 that
has had little judicial review - the provision that states
that a rate shall not "remain in effect" if it is
excessive, inadequate, unfairly discriminatory, or
otherwise in violation of the rate regulation chapter. In
CW's view, even where a rate was properly approved, there
was no questionable provision snuck into the rate that
resulted in illegal charges, and the IC has not issued an
order to the insurer to reduce rates, the rate being
charged may still be illegal if it can be characterized in
a lawsuit as "excessive" based on changes in the economics
subsequent to the time the rate was initially approved. It
is not clear that the courts have actually upheld this
theory, because the cases that have gone forward have
alleged either that there was an illegal application of
factors outside of the approval, or that there was
something approved that was vague and subject to improper
implementation. Nonetheless, CW believes the bill's
provisions restrict this type of lawsuit, and therefore do
not further the purposes of Proposition 103.
CW also believes that the IC's office is understaffed, and
therefore it is possible for an insurer to sneak a
questionable provision into its rate application, garner
approval, and thereafter be protected from a lawsuit that
seeks to challenge that illegal element of the application
that was approved by the IC.
c) Aside from the specifics of CW's objections, it raises
at least two broad arguments. First, it asserts that
Proposition 103 delegated to the IC the responsibility of
ratemaking precisely because it is extremely complex, and
that the Legislature is not equipped to perform the
rate-making functions. But this is not a policy argument;
rather, it is a legal argument. CW maintains that one of
the purposes of Proposition 103 was to delegate the complex
issues associated with rate-making to the IC, because the
IC is uniquely qualified to make those determinations.
Because the bill seeks to legislate in an area that the
initiative reserved to the IC, CW argues it necessarily
fails to further the purposes of the initiative.
CW makes a fiscal argument in connection with its position
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that the bill does not further the purposes of Proposition
103. In the past, legislative enactments amending
Proposition 103 have been challenged in court. To this
point in time, no challenged legislative amendment has
survived. CW points out that the most recent challenge to
a legislative amendment - challenging SB 841 of 2003
(Statutes 2003, Chapter 169) - overturned the enactment,
yet cost the state somewhere between $850,000 and more than
a million dollars. It argues that this bill would fail the
"further the purposes" test, thus wasting taxpayer money
defending it.
The Consumer Attorneys of California raise some of these same
issues. They argue that ratemaking is based on projections of
what the costs are going to be in the future, and if it turns
out that costs were much lower than anticipated, a rate that
looked appropriate when approved may well end up being
excessive. A lawsuit seeking return of the excessive premium,
they argue, is appropriate. Consumer Attorneys are also
concerned that insurers are increasingly using systems and
methodologies that affect the rate but are not included in the
rate filing, and that the language in the bill would cover
these practices and immunize the insurer even though the IC
did not actually approve the challenged practice. The author
has represented to the opposition that this latter point is
not the intent of the legislation, and is open to proposed
language that would cure this potential defect.
REGISTERED SUPPORT / OPPOSITION :
Support
Mercury Insurance Company (Sponsor)
Opposition
Consumer Attorneys of California
Consumer Federation of California
Consumer Watchdog
Consumers for Auto Reliability and Safety
Consumer Action
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086