California Supreme Court '103' decision raises more questions than answers.
For example, there are already reports that consumer activists, encouraged by the court's ruling that the mandated rollback of rates to 20 percent below 1987 levels is constitutional, are flexing their muscles in other states, most notably in Illinois where proposed legislation to roll back rates by 15 percent is currently before the Legislature. Furthermore, news of the court decision sent insurance company stocks downward, especially those insurers which have a strong California base.
But this initial impact notwithstanding, the insurance industry could be in for a series of long-term changes because of the myriad questions that the court decision has raised.
ALL PARTS UPHELD
Basically, the court upheld the constitutionality of virtually every section of the proposition. Territorial rating has been eliminated. The state's antitrust exemption for insurers is eliminated. Banks are now allowed into insurance and the Commissioner's post in the state is now an elected position.
The court's backing of the mandated rate rollback was conditional upon whether insurers can demonstrate that the rollback will prevent them from obtaining a "fair return." rather than on the potential involvency test that was called for under the initial proposition. So here, the court has, in effect, rewritten law rather than interpreted it. This, in itself, could lead to further industry challenges down the line although at present there are no indications that this is being considered.
One of the first questions that has been raised is, will insurers learn to live with the variety of laws encompassed within Proposition 103, or will they begin leaving the state? The answer to this question depends very much, it would seem, on the actions of the Department of Insurance in the state. The court has ruled that the determination as to whether an insurer will be exempt from effecting the rollback rests with the Department of Insurance. Insurers must, and several have already, filed for relief from the rate rollback. Insurance Commissioner Roxani Gillespie, according to early reports, has said that the department will be studying those requests diligently.
However, it is not clear what criteria will be used to determine what is a fair return. Obviously, the court did not intend the mere question of solvency to be the benchmark, or it would have let the rollback provision stand as it was. It would seem safe to assume, therefore, that some profit motive would be involved and would come into play, but it is not clear to what degree.
Another question which has been raised by the decision is how the industry will function now that territorial rating and the antitrust exemption have been taken away.
Presumably, the lifting of the state antitrust exemption will mean there will no rating organizations acting on behalf of the insurers to make rates or even to collect data and provide raw statistics. There is the possibility that additional legal tests will have to be mounted in subsequent years to define parameters.
The elimination of territorial rating raises another question. Now that the concept has been removed, does that mean that the current territorial divisions will have to be scrapped? The chances are that the sponsors of Proposition 103, the state attorney general--who has already voiced support for the proposition--and others may demand that each insurer justify any attempt at territorial breakdown on its own statistics. In addition, insurers will have to change their rating methods because auto rates now have to be based on individual driving records.
This would mean a reshuffling of rate levels, which will take some time to work out, and it is not certain that the public will be all that pleased with the results.
Finally, the future make-up of the Department of Insurance is open to question. The proposition calls for the Commissioner's office to be an elected post, rather than an appointed one. Does that mean that the present Commissioner's rulings regarding rate approvals can be challenged by an elected Commissioner should Roxani Gillespie decide not to seek the office (or be defeated if she does seek it)? If so, would insurers again face the possibility of a new round of severe rate rollbacks?
Moreover, where will the potential candidates come from for the post of Insurance Commissioner? There have already been reports in California papers that as many as 10 candidates are considering vying for the job. The candidates, the reports suggest, are for the most part not particularly well-known and their qualifications for running an Insurance Department in such a key state as California have yet to be determined.
However, these are all long-term questions. According to an analysis by the Independent Insurance Agents and Brokers of California, the following regulatory issues demand immediate attention:
--"To the extent that insurers' rates have been 'excessive,' rate rollbacks may, at some point, be required. IIABC is prepared to vigorously oppose any attempt to include agents' commissions within the definition of the rate analyzed for rollback purposes.
--"The laws prohibiting rebates in property and liability insurance are repealed. What remains are significant questions concerning how agents can, or must, rebate in a manner that is not unfairly discriminatory."
Other matters that need immediate attention, according to the HABC, include bank entry into insurance and cancellation or non-renewal of policies--now forbidden by law unless for nonpayment of premium and fraud.
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|Title Annotation:||LOOKING BACK ... Insurance Advocate, 25 years ago: Analysis|
|Author:||Levy, Emanuel; Zinkewicz, Phil|
|Date:||Sep 29, 2014|
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