BILL ANALYSIS
AB 1054
Page 1
ASSEMBLY THIRD READING
AB 1054 (Coto)
As Amended January 11, 2010
2/3 vote
INSURANCE 9-1 APPROPRIATIONS 17-0
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|Ayes:|Coto, Garrick, Blakeslee, |Ayes:|De Leon, Conway, Ammiano, |
| | | |Bradford, Charles |
| |Charles Calderon, Carter, | |Calderon, Coto, Davis, |
| |Hayashi, Nava, Niello, | |Fuentes, Hall, Harkey, |
| |Torres | |Miller, Nielsen, John A. |
| | | |Perez, Skinner, Solorio, |
| | | |Audra Strickland, |
| | | |Torlakson |
|-----+--------------------------+-----+--------------------------|
|Nays:|Feuer | | |
| | | | |
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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.
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)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 statute adopted by the
voters at the November 1988 General Election (Proposition
103), a comprehensive system of rate regulation for
property-casualty insurance rates.
Provides that any legislative amendment to the initiative
statute must be passed by a vote of 2/3 of each House, and
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additionally must further the purposes of the initiative.
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.
4)Empowers the IC to adopt regulations to implement the rate
regulation program. In this regard, the IC has adopted
regulations that specify: a) the information an insurer must
file in order to obtain approval of a rate; and, b) the rules
that govern the IC's 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.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, minor absorbable workload for the Department of
Insurance to perform different calculations in the existing rate
regulation system.
COMMENTS :
1)Purpose . The author introduced this bill to address an issue
relating to Proposition 103. 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.
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
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
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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)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.
4)Opposition . Consumer Watchdog (CW), the successor
organization to the original sponsors of Proposition 103, is
opposed to the bill on a number of grounds. 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
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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; and,
b) 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
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.
Analysis Prepared by : Mark Rakich / INS. / (916) 319-2086
FN: 0003621