Proposition 33: Initiative Statute — Changes Law to Allow Auto Insurance Companies to Set Prices Based on a Driver’s History of Insurance Coverage. Initiative Statute.
Insurance is an important economic tool that helps defray the cost of serious harm (like accidents, fire, etc) into manageable smaller costs and then spreads those smaller costs across a larger number of people. Our State’s insurance industry is heavily regulated. It is regulated because, the insurance industry necessarily has an economic incentive to insure those least likely to need insurance (i.e. to suffer a claim) while the state has an economic (and policy) incentive to force insurers to insure all Californians willing to pay for insurance (to ensure that those suffering harm do not become a burden on the state).
In 1988, California voters passed Proposition 103, which requires the Insurance Commissioner to review and approve rate changes for certain types of insurance, including automobile insurance, before changes to the rates can take effect. Proposition 103 also requires that rates and premiums for automobile insurance policies be set by applying the following rating factors in decreasing order of importance: (1) the insured’s driving safety record, (2) the number of miles they drive each year, and (3) the number of years they have been driving.
The Insurance Commissioner may adopt additional rating factors to determine automobile rates and premiums. Currently, 16 optional rating factors may be used for these purposes. For example, insurance companies may provide discounts to individuals for maintaining coverage with them. Insurance companies are prohibited, however, from offering this kind of discount to new customers who switch to them from other insurers.
This proposition proposes to circumvent the Insurance Commissioner and changes current law to permit insurance companies to set prices based on whether the driver previously carried auto insurance with any insurance company, it allows insurance companies to give proportional discounts to drivers with some prior insurance coverage, and will allow insurance companies to increase cost of insurance to drivers who have not maintained continuous coverage. The insurance industry unsuccessfully tried to pass substantially the same proposition in 2010 (Proposition 17). In an apparent effort to remove one of their opponents best “talking points” from the last time this initiative was defeated, this version of the proposition ignores any lapse in coverage lasting less than 90 days, caused by military service, or caused by a loss of employment. We, however, remain unconvinced.
The Good the Bad and The Ugly:
We’ll start with “The Ugly:” The money tells the real story here. Insurance interests have pumped well over $8,000,000.00 into the “yes” campaign for this proposition, compared with less than $100,000 by the “no” campaign, put up by a few consumer groups. The reason the insurance interests want this to pass should be obvious: it allows them to compete amongst each other (not a bad thing for consumers) and allows them to charge more for consumers who have not been previously insured (a bad thing for some consumers). That second part is the problem with the proposal.
Understandably, insurance companies do not care why insurance lapses. Having lost this argument before, they have now included some types of “acceptable lapses” like military service, loss of employment etc. But we can think of many other types of lapses that make this a less than positive policy. For example, urban dwellers may choose to use public transit for a time and then their conditions may change requiring them to become car owners/drivers again – do we really want to create disincentives for their initial decision to stop using their cars? Probably not. Long-term illness or simple poverty commonly causes individuals to garage their vehicle and forgo the expenses associated with car usage. It probably doesn’t make sense to penalize those individuals the moment they start to get back on their feet (literally or figuratively).
Beyond these policy considerations, we also have our normal prejudice against propositions, which, we find even more compelling here. We see no reason to allow an insurance industry to circumvent the Insurance Commissioner whose sole purpose in being is to regulate that industry. We feel the Insurance Commissioner is in a much better position to balance these competing interests than are we lay voters.