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Rollbacks and reductions in limbo on Proposition 103.

Rollbacks and Reductions in Limbo on Proposition 103

On election day, California voters enacted Proposition 103, requiring insurers to roll back charges for automobile and certain property/casualty insurance coverages to the levels prevailing on November 7, 1987, to reduce such premiums an additional 20 percent and to freeze them until November 8, 1989. A month later, the California Supreme Court extended a stay preventing the implementation of the rate rollback and reduction provisions of the proposition until it rules on insurer challenges to their constitutionality. The briefing schedule established by the court suggests that a decision on their constitutionality will not be rendered until this or next month at the earliest. If the rate rollback and reduction provisions are implemented, they will apply to a wide range of personal and commercial property/casualty coverages.

In its ruling, however, the court lifted the stay on several other provisions of Proposition 103. The provisions that are now in effect, some of which also apply to accident and health insurers, include:

* Prior approval of rates will be required commencing November 8, 1989. The commissioner will consider whether rates "mathematically reflect the insurance company's investment income."

* Insureds will be required to notify the public of applications to change rates. Public hearings, with full adjudicatory rights, can be held regarding rate applications if the commissioner desires, or in the case of rate adjustments exceeding 15 percent, if a consumer or his representative requests. Insurers can be ordered to pay "reasonable advocacy and witness fees and expenses" of consumer advocates who are involved in rate application proceedings.

* California's Civil Rights Act, antitrust and unfair business practices laws now apply to the "business of insurance."

* Group insurance plans may be underwritten "without restriction as to the purpose of the group, occupation or type of group."

* Beginning in 1990, the state's insurance commissioner will be elected.

* California's anti-rebating laws have been repealed.

* Certain banks and bank holding companies can now apply for licenses as insurers and insurance brokers.

There are other provisions that are now effective but impact only private passenger automobile insurance. For example, auto insurers are prohibited from basing rates primarily on geographic factors. Insurers may cancel and refuse to renew coverages only in limited circumstances, and they must offer a good driver discount of 20 percent beginning in 1989.

If the California Supreme Court permits the rate rollback and reduction provisions to go into effect, there will be many questions concerning how they be applied to commercial lines coverages. How the provisions will be applied to risks whose per unit exposures have changed between November 8, 1987, and November 8, 1989, is one such question. Equally uncertain is how they will apply to charges on November 8, 1987, that were higher than those prevailing on November 8, 1988. There also will be questions concerning premiums for retrospectively-rated risks.

On the Docket

Participants at a recent Federal Bar Association seminar addressed several important insurance tax issues.

Because of a recent reorganization, according to an Internal Revenue Service official, the agency now will be able to pay more attention to the insurance industry. This portends greater audit analysis.

Second, the official indicated that the IRS is focusing on retroactive insurance arrangements, in which both the loss event and the amount expected to be paid are known before the transaction is concluded. The arrangements are not viewed as risk transfers--a key to any true insurance transaction. Portfolio cessions that fall into this category also are being carefully reviewed to determine if they lack the requisite elements of risk transfer.

P. Bruce Wright is a member of the New York Bar. Mr. Wright is also a member of the law firm of LeBoeuf, Lamb, Leiby and MacRae.
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Author:Wright, P. Bruce
Publication:Risk Management
Article Type:column
Date:Feb 1, 1989
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