State Farm still tops a fragmented world.

State Farm still tops a fragmented world

Proposition 103 foments uncertainty for auto insurers

There is little change in the lineup of The List of top insurance companies in California from two years ago, when the Business Journal last published its ranking of property/casualty insurers.

The industry continues to be highly fragmented, with no single insurer receiving more than State Farm Group's 10.6 percent share of the market.

The top five insurance companies all have maintained their rankings. Bloomington, Ill.-based State Farm Group had premiums of $3.5 billion; Los Angeles-based Farmers Insurance, $2.8 billion; Northbrook, Ill.-based Allstate Insurance Group, $2.1 billion; New York-based American Insurance Group, $1.3 billion; and Novato, Calif.-based Fireman's Fund Cos., $982 million.

The biggest question mark for insurers in the state is how Proposition 103 -- approved by the voters in 1988 and still being interpreted by the California Department of Insurance and fought by insurers -- will be implemented.

California Department of Insurance Commissioner John Garamendi has said he intends to implement rate rollback provisions of the law and limit insurers to only a fair rate of return.

Many companies, including Woodland Hills-based Transamerica Insurance Co., Hartford, Conn.-based Travelers Corp. and Cleveland, Ohio-based Progressive, fear the final Proposition 103 guidelines will make the auto insurance market unprofitable and have scaled back their underwriting in the state.

Other auto insurance specialists, such as Los Angeles-based Mercury General Corp. and Woodland Hills-based Twentieth Century Industries, have dramatically increased their California auto underwriting. That leaves them highly exposed if Proposition 103 is decided unfavorably to insurers.

Perhaps the only good news on the auto insurance front is that the state in September 1990 increased premiums for drivers covered under the assigned risk program by 85 percent and required good drivers to stop using the program, a fact that should increase profit margins for the program and the insurers that back it, according to William Bitterli, an analyst with stock brokerage Northington Partners in Avon, Conn.

Contrasting with the uncertain auto business is the workers compensation market, which Bitterli said is one of the healthiest in the country.

Unlike many states where insurers are withdrawing from workers compensation, Bitterli said, the California workers comp market is strong because state law prevents insurance companies from underpricing. Insurers in the state cannot offer lower costs up front but are given discretion to determine the amount of dividend they will refund to companies with low losses. Companies also compete on service.

The state-run Workers Compensation State Fund, which insures hard-to-place companies, is also required to charge rates that allow it to support itself, which avoids sapping the insurers' strength to support the program.

Southern California, however, is less profitable for insurers in workers comp as well as other insurance lines because of high litigation costs. That was dramatized by the decision of San Francisco-based Industrial Indemnity, a leading workers comp insurer, to withdraw from the Southern California market earlier this year.

As for other property/casualty insurance lines' health, analysts said that they mirror national trends of red ink, caused largely by premium rates which have stayed level or declined over the last five years.

But that means a rapid escalation of prices like that seen in 1984 and 1985 appears likely, Bitterli said.

"We simply cannot afford to charge this level of prices because we will go out of business," he said.