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Commissioner implements plans after court ruling.

Commissioner Implements Plans After Court Ruling

By a unanimous decision on May 4, the California Supreme Court, in substantial part, upheld Proposition 103, which requires insurers in the state to roll back their rates to November 8, 1987, levels and to reduce them an additional 20 percent. The court, however, struck down Proposition 103's freeze provision, thereby allowing insurers to file immediately for rate increases and to use the increased rates until the commissioner disapproves them.

In effect, the court allowed insurers the opportunity to avoid the rollback and 20 percent reduction as long as the commissioner finds that the rates they file and use prior to November 8, 1989, are not "excessive, inadequate or unfairly discriminatory." Effective that date, the prior rule of the commissioner is required for all rate changes subject to Proposition 103.

One week after the court's decision, State Insurance Commissioner Roxanni Gillespie held a press conference on Proposition 103 and its implementation by the California Department of Insurance. The following points were raised:

* By June 3, insurers were to either roll back property and casualty insurance rates to November 8, 1987, levels and reduce them by 20 percent, or file for rate relief, showing that the rollback or reduced rates are confiscatory and do not provide a fair and reasonable rate of return.

* The department will charge an application filing fee of $2,500 per insurer or $5,000 per group-affiliated insurer. In addition, the department will charge an hourly fee to review applications to be credited against the applications.

* By June 16, insurers were to submit affidavits to the department showing compliance by rollback or rate application.

* Forms for rate filings are now available, and all rate applications must be submitted on them. Applications already submitted must be resubmitted on the new forms.

* Proposed rules for public hearings on rate applications prior to November 8 will be discussed during a public hearing in August. The commissioner promised to approve or give notice for public hearing all applications by the end of August 1989. Final administrative determination on all applications will be made by November 8.

* In determining whether a rate is confiscatory, each line will be evaluated separately. In determining profits, losses and investment income, the commissioner will evaluate only the insurer's California operations and will not permit "cross-subsidization" between lines. The commissioner will allocate investment income based upon the amount of business an insurer transacts in California. Additionally, the Supreme Court decision prevents the department from looking to past surplus to determine present rates.

* There will be no specification of a fair and reasonable rate of return on an industry-wide or line basis. Instead, the determination of what constitutes a fair and reasonable return will be made on a per company/per application basis, giving some unspecified allowance for the efficiency of an insurer and the degree of risk presented by its business. Accordingly, some companies will be allowed a higher rate of return. (The commissioner indicated that she feared the universal rate of return for all insurers might be vulnerable to an attack as arbitrary).

* The good driver discount will not result in an automatic 20 percent rate cut for qualifying drivers, because insurers already incorporate a similar based differential for good drivers.

* Urban drivers need lower rates, a goal the commissioner promised to pursue. The issue of territorial rating is still under review, and even if allowed, it will be only a minor factor in rates behind driving record, miles driven and years of driving experience.

* Automobile insurers must continue to renew existing policies, except in cases of nonpayment of premium, fraud or material misrepresentation or substantial increase in the hazard insured against. However, insurers are not required to issue new policies.

P. Bruce Wright is a member of the New York Bar. Mr. Wright is also a member of the law firm LeBoeuf, Lamb, Leiby and MacRae.
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Title Annotation:California State Insurance Commissioner, Roxanni Gillespie, on Proposition 103
Author:Wright, P. Bruce
Publication:Risk Management
Article Type:column
Date:Jul 1, 1989
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