BILL ANALYSIS �
SENATE INSURANCE COMMITTEE
Senator William W. Monning, Chair
SB 1173 (Gaines) Hearing Date: April 24, 2014
As April10, 2014
Fiscal: Yes
Urgency: No
2/3 Vote required
SUMMARY Would require the Insurance Commissioner (IC) to
automatically accept rate decrease applications without review
or hearing filed by insurers with the California Department of
Insurance (CDI).
DIGEST
Existing law
1. The Insurance Rate Reduction and Reform Act (Proposition 103,
as approved by the voters in 1988)(Prop. 103), requires
specified insurance rates to be approved by the IC prior to
their use. (1861.01(c)). Prop. 103 specifically:
a. Provides that "no rate shall be approved or remain in
effect which is excessive, inadequate, unfairly
discriminatory or otherwise in violation of [Prop. 103]";
b. Provides that in making the determination in (a), no
consideration be given to the degree of competition, and the
IC shall consider whether the rate mathematically reflects
the insurance company's investment income;
c. Requires an insurer to prove to the IC that the rates of
the company are justified after taking into account the
losses, administrative and sales expenses, investment
earnings and a reasonable return on the surplus of a company;
d. Requires each insurer which desires to change any rate
to file a complete rate application with the IC, and the
insurer shall have the burden of proving that the requested
rate change is justified and meets the statutory
requirements;
e. Requires the IC to notify the public of any application
for a rate change, and would deem the change approved 60 days
after public notice unless:
i. A consumer or consumer representative
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requests a hearing within 45 days of public notice and
the IC grants a hearing, or determines not to grant the
hearing and issues written findings in support of
his/her decision;
ii. The IC on his/her own motion decides to hold
a hearing; or
iii. The proposed rate adjustment exceeds 7% for
personal lines or 15% for commercial lines, in which
case the IC must hold a hearing upon a timely request;
f. Notwithstanding (d), a rate change application is deemed
approved 180 days after the application is received unless it
has disapproved by a final order of the IC, or if
"extraordinary circumstances" exist, as specified;
g. Lines of insurance covered by prior rate approval under
Prop. 103 include auto and homeowners. Reinsurance, life,
marine, title, disability, workers' compensation, and county
mutual fire are not subject to Prop. 103. Health insurance is
also not covered by Prop. 103;
h. Provides that Prop 103 shall not be amended by the
Legislature except to further its purposes by a statute
passed in each house by roll call vote entered in the
journal, two-thirds of the membership concurring, or by a
statute that becomes effective only when approved by the
electorate;
2. For individual and small group health insurance policies,
requires health insurers to file with the CDI all required rate
information at least 60 days prior to implementing any rate
change, and provides that the filing is to be concurrent with
the existing required written notice of a premium change for
individual and small group contracts. (10181.3);
3. For large group health insurance policies, requires all health
insurers to file with the CDI at least 60 days prior to
implementing any "unreasonable rate increases," as defined in
the Patient Protection and Affordable Care Act (Public Law
111-148, known as "PPACA");
4. For purposes of #2 and #3 above, requires a rate filing
submitted under the rate filing provisions to be actuarially
sound. Requires a plan and insurer to contract with an
independent actuary or actuaries, and requires a filing
submitted to include a certification by an independent actuary
or actuarial firm that the rate increase is reasonable or
unreasonable and, if unreasonable, that the justification for
the increase is based on accurate and sound actuarial
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assumptions and methodologies. Requires rate filings submitted
for large employer contracts to include a certification by an
independent actuary that the aggregate or average rate increase
is based on accurate and sound actuarial assumptions and
methodologies, unless PPACA requires a certification of
actuarial soundness for each large group contract;
5. Generally prohibits the rate filing provisions from being
construed to permit CDI to establish the rates charged
subscribers and enrollees for covered health care services, but
CDI-regulated insurers must meet minimum medical loss ratio
standards for individual products.
This bill
1. Would require the IC to approve, without review or hearing,
any rate decrease proposed and submitted to the CDI by an
insurer, including a health insurer;
2. Would not apply if consumers' rates would increase;
3. Because it amends Prop. 103 without a vote of the
electorate, requires a 2/3 vote of each house of the
Legislature.
COMMENTS
1. Purpose of the bill. According to the author, to ensure
that consumers get the benefits of rate decreases without
having to wait for the normal rate review process required
by Prop. 103 or the PPACA. This bill could save consumers up
to 60 days' worth of higher prices because of rate
adjustments they are waiting for the Insurance Commissioner
to approve.
2. Background. The Legislature may only amend Prop. 103 upon
its own vote if a bill passes with a 2/3 majority, and if
the amendment furthers the purpose of the initiative.
Alternatively, the Legislature may submit proposed changes
to the electorate upon a majority vote of the Legislature.
At least some bills passed by the Legislature without going
to the voters have been found by the courts to be contrary
to the intent of Prop. 103, and have been struck down, while
other, generally technical and clarifying, changes have been
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successfully enacted by the Legislature. It is highly
unlikely the change proposed by this bill would be viewed as
technical or clarifying in nature. It is also highly
questionable that this change would be viewed as furthering
the purposes of Prop. 103, as spelled out below.
Adequacy standard: Prop. 103 explicitly states that a rate
may not be approved if it is "inadequate." One of the key
functions of the CDI is to ensure the solvency of insurance
companies and their ability to pay all claims. This bill
would preclude the CDI from determining if the rates are
adequate to pay claims and ensure the solvency of the
insurer.
Case study: Workers' compensation. California's workers'
compensation market became chaotic in 1995, the first year
of "open rating". When the minimum rating system was
eliminated, insurers engaged in price-cutting and expansion
by acquisition of weaker competitors to try and gain market
share. Rates plunged nearly 50% between 1993 and 1999. At
the same time, a growing workforce and higher payroll meant
that there were higher potential losses. Many large
carriers underpriced their insurance policies, experienced
high loss ratios, faced rising health costs and benefits
increases and became insolvent between 2000 and 2003.
Approximately 25% of the private workers' compensation
carriers failed, creating further stress on the entire
system. The surviving insurers ended the price war by
sharply increasing rates. The California Insurance Guarantee
Association (CIGA), responsible for paying the claims of
insolvent insurance companies, projected total liability for
claims from just two of the larger companies alone at more
than $3.5 billion. CIGA would also be responsible for
claims resulting from the insolvency of a property/casualty
insurance company.
Unfairly Discriminatory: Prop 103 prohibits rates that are
"unfairly discriminatory." This standard looks at how rates
and rating factors are applied to consumers in different
situations. It is possible that an insurer could file an
over-all rate decrease, but within that rate filing apply
rate reductions differently to different customers, without
a justification of the different treatment. It would also
allow circumvention of other rating requirements of Prop.
103 by deeming the application including a rate decrease
approved.
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Health Insurance: The requirement that health insurance rate
changes be submitted to the CDI and the Department of
Managed Health Care (DMHC) was enacted in 2010 in response
to provisions contained in the PPACA health reform
legislation requiring California regulatory agencies to
provide detailed information regarding premium trends and to
identify inappropriate premium increases. In addition,
public furor over annual premium rate hikes as high as 39
percent led policymakers, DMHC, CDI and the Attorney
General, to seek detailed information justifying the rate
increases. These provisions also increase the amount of time
consumers have to research and shop for comparable products
to 60 days.
3. Support . The American Insurance Association supports SB
1331 because it simplifies rate review under Prop. 103, and
will speed the provision of lower rates to consumers.
Independent Agents and Brokers of California supports SB
1173 because it supports the preservation of rate review for
increased insurance rate changes, but as an advocate of
lower rates for consumers, this measure would save consumers
valuable financial assets.
4. Opposition. The CDI opposes SB 1173 because it would
significantly alter the rate protections provided by Prop.
103. The Prop. 103 prior approval regulation processes
establish a formula by which each rate change application is
measured in order to determine whether a rate is either
"excessive" or "inadequate" and therefore must be rejected.
As written, SB 1173 would permit insurers to disregard
statutory mandates governing rate determinations if filed
with an application for a rate decrease. For example, it
would permit insurers to use unapproved rating factors to
determine rates, including rating factors that may be
considered "unfairly discriminatory."
According to Consumer Watchdog, this bill circumvents the
established rate process and provides insurers the
opportunity to avoid the scrutiny necessary to prevent
consumers from being charged excessive home, auto and
business insurance premiums. The rate approval formula
determines a fair rate by limiting profits to reasonable
levels, preventing insurers from inflating loss projections,
restricting the expenses that insurance companies can pass
through to consumers, and barring insurance companies from
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requiring their customers to pay for lobbying and political
contributions, among other items. They believe that SB 1173
would enable insurance companies to implement inadequate
rate decreases, precluding the full analysis required by
law. They cite one request for a rate decrease in which the
initial request was for a decrease of 3.2%, but the final
approved rate decrease was 8%, saving consumers more than
$131 million. Consumer Watchdog also believes that SB 1173
is unconstitutional because Prop 103 may only be altered by
the legislature if the amendment "furthers the purposes of"
Prop 103 and if it is passed by a 2/3 vote of both houses of
the legislature. Consumer Watchdog believes this bill in
fact undermines the rate review protections enacted by the
voters, and that taxpayer resources should not be spent
defending anti-consumer legislation that will be struck down
by the courts.
AFSCME opposes the bill because it would essentially put the
CDI on autopilot and open it up to massive abuse by
insurers.
Health Access opposes SB 1173 simply because an insurer
proposes a rate decrease is no guarantee that it is the
right amount. Reversing the trend of massive rate increases
in health care requires more than simply slowing the rate of
increase, it requires scrutiny of rate cuts to see if more
could be done to cut premiums.
Consumer Attorneys of California opposes SB 1173 because
insurance rates that are too low is just as dangerous to
consumers as excessive rates. In the 1980s, prior to Prop.
103, many insurance companies engaged in the reckless
practice of charging consumers too little in order to gain
more customers. As a result of this practice, insurance
companies did not have enough funds to pay out claims and
insurance rates soared.
Consumer Federation of California opposes SB 1173 because it
allows insurance companies to implement inadequate rate
decreases without completing the required review process,
which includes inspection by from the Department of
Insurance and public. Excessive rates aren't the only
problem in the insurance marketplace.
5. Questions. The author's stated intent is to allow consumers
to save on their premiums as soon as possible. By deeming
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any rate decrease approved without review or a hearing, it
precludes the possibility that the appropriate rate that
would be approved by the CDI is even lower than the
insurer's proposed rate reduction. According to the CDI,
over the past 10 years, consumers have actually saved $1.8
billion in rate reductions above the rate reduction
originally requested by the insurer. This figure does not
include requests for rate increases that ultimately resulted
in a rate reduction or smaller rate increase. Could
insurers game the process by proposing a very small
reduction of a fraction of a percent to avoid having to
justify their rates? Could insurers file a small rate
decrease in order to utilize rating factors disallowed in
California, such as credit scores or zip codes?
Would the elimination of rate review under these
circumstances be viewed by the courts as furthering the
purpose of Prop. 103?
6. Prior and Related Legislation
AB 2406 (Ch. 100, Statutes of 2012) required the IC to
publish on the CDI Web site all requests for a finding of
eligibility to seek compensation, and all findings of
eligibility to be compensated, with respect to parties
intervening in rate change request proceedings.
SB 841 (Ch. 169, Statutes of 2003), which allowed insurers
to use persistency of automobile coverage as an optional
rating factor was found to be invalid in the case of
Foundation for Taxpayer and Consumer Rights v. Garamendi
(App.2 Dist 2005). The legislation was not determined to be
in furtherance of the purposes of Prop. 103.
Initiative 1541. (11-0070) Qualified for the November 2014
Statewide Ballot:
Requires health insurance rate changes to be approved by the
IC before taking effect. Requires a sworn statement by
health insurer as to accuracy of information submitted to
the IC to justify rate changes. Provides for public notice,
disclosure and hearing on health insurance rate changes, and
subsequent judicial review. Does not apply to employer
large group health plans. Prohibits health, auto and
homeowners insurers from determining policy eligibility or
rates based on lack of prior coverage or credit history.
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POSITIONS
Support
American Insurance Association
Independent Agents and Brokers of California
Oppose
California Department of Insurance
AFSCME
Consumer Attorneys of California
Consumer Federation of California
Consumer Watchdog
Health Access
Consultant: Erin Ryan (916) 651-4110