CDI Hearings Explore Problems in Calif. Low-Cost Auto

Marking the first anniversary of implementation of California’s low-cost auto insurance program, the state’s Department of Insurance (CDI) held informal hearings on why the results of the program have been less than stellar, to say the least. Data reveals that one year into implementation of the program’s five-year pilot run, only about 850 of the low-income policies have been sold statewide.

For many who participated in the hearings, held in San Francisco and Los Angeles on June 26 and June 28, respectively, two basic points of view emerged. The first—the program is inherently flawed because of the nature of both the product and the population trying to be convinced to buy the product. The second—the program can be modified to make it a success.

According to Edward Fong, deputy insurance commissioner for the CDI, testimony came from the low-income community, insurance companies and brokers, and consumer organizations such as the Consumers Union, the Foundation for Taxpayer & Consumer Rights and the Greenlining Institute.

“We learned that it’s a complex situation,” Fong said. “Just about everybody is disappointed in the results—whether you’re a strong supporter or a critic of the program.”

The two-county, low-cost auto insurance pilot program, launched on July 1, 2000, was established for Los Angeles and San Francisco counties as the result of legislation signed in 1999 by Gov. Gray Davis. The original intent of the legislation—SB 171 (Escutia) and SB 527 (Speier)—was to get more uninsured motorists insured through the provision of a low-cost policy.

The liability-only policies offered under the program are offered at an annual rate of $450 in Los Angeles and $410 in San Francisco, and provide 10/20/3 coverage for an automobile with a maximum value of $12,000 when the policy is purchased. Only agents certified with the California Automobile Assigned Risk Plan (CAARP), the appointed administrator of the program, are eligible to write the business.

One opinion for the program’s lack of success was the observation that there is no market for the low-cost policies—the eligibility cap is too low, and very poor people just don’t have the financial means to buy insurance in addition to the basic necessities of life. Others criticized the type of policy involved—a liability-only policy that provides a relatively low level of protection and no benefits to the purchaser.

Others felt that the product needs to be more aggressively marketed to the target population. But Fong pointed out that the CDI over the past year “has done more than anybody that I know of to promote the program. There was no advertising budget associated with the creation of the program, but, nonetheless, we felt that we had a responsibility to let consumers know about the existence of these policies…We have invested well over half a million dollars in advertising. That does not include staff time. I know several insurance companies have also done some advertising.”

“The industry has done quite a lot,” said Diane Colborn, vice president of legislation and regulatory affairs for the Personal Insurance Federation of California. “State Farm, one of our members, spent over $200,000 on radio ads and electronic billboards in several different languages to educate the public about it.”

Dietmar Grellmann is an attorney for the Sacramento government relations firm Norwood & Pedrotti, which represents the Agents and Brokers Legislative Council (ABL). Two representatives from IBA West, which is an ABL member, testified at the hearings.

“Even the Commissioner said in his opening statement….this product has been rejected in the marketplace and we need to go back to the legislature and make changes to it,” Grellmann said.

Grellmann suggested either coverage limits should be increased or the coverage limits for everyone should be lowered. “We shouldn’t be forced to sell something that’s lower for a certain group of people…Then we need to start eliminating these loopholes and exceptions. The reason those loopholes and exceptions ended up there in the first place is they were trying to drive the cost down. The only way you can drive the cost down of the policy is by eliminating coverage. That’s exactly what they did—they dropped coverage levels and put gaps in coverage. They did nothing to lower expenses.”

Sam Sorich, vice president, western regional manager for the National Association of Independent Insurers, said, “We gave testimony…echoed by representatives of the Greenlining Institute…that the product the program is offering is not appropriate. As long as the program remains a liability coverage, it’s going to be very difficult to convince low-income families to buy the product even though it may be priced at a very reasonable level.

“The second message was questioning the mandatory insurance requirement generally,” Sorich continued. “Until a product is available that people can afford, we question whether it’s really right to criminalize people that are not able to buy insurance.”

While issues and concerns specifically related to agents in the process were identified, Sorich noted that the role of agents was not a central feature of testimony at the hearings. Nor was major blame for the lack of success of the program placed squarely on agents’ shoulders.

According to Sorich, more specific ideas on how to “tinker” with the program to make it more attractive included increasing the policy limits as well as the income threshold so more people would be able to qualify, then to look at the premium being charged and perhaps lower that.

Fong said the next step for the CDI is to review all the information garnered at both the hearings and focus groups to prepare reports.

“The report itself [by the CDI] will actually be on the public hearing,” Fong said. “There will be a separate report that’s done by the marketing research firm that facilitated and put together the focus groups for us.” Fong said the goal is to have the CDI report on the hearings ready by the beginning of August.

In response to the testimony outlining reasons for the disappointing performance of the program thus far, Fong said, “My hunch is it’s a little bit of everything…Our challenge—not only within the [CDI] but within the legislature, other government entities… [and] the insurance industry—is to see what we can do to provide an affordable, relatively low-cost insurance policy that is attractive to the low-income drivers in California.”