From Insurance Consumer to Commissioner

While the position of California Insurance Commissioner is elected and there are already rumblings that he’d make a good gubernatorial candidate in 2010, current California Insurance Commissioner Steve Poizner says he’s not a career politician. He spent many years running high-tech companies in Silicon Valley. And as a consumer of insurance and businessman, he began to understand the value of insurance.

Poizner said starting with a pivotal event with the Jaycees, he came to understand how by taking the reins as insurance industry regulator, he could have a measurable impact on the Golden State’s $1.5 trillion economy. That eventually led him to run for one of the state’s highest elected offices, where he says he is constantly striving to provide consumers with insurance options and the information they need to make wise purchasing decisions.

At the recent meeting of the National Association of Insurance Commissioners in Washington, D.C., Poizner sat down with Insurance Journal Editor-in-Chief Andrea Ortega-Wells to discuss his progress regulating a complex industry, his hopes for the California market, and the challenges he faces.

Insurance Journal: You’ve been on the job several months now. Let’s talk about some of the recent events occurring in California. Can you start with your thoughts on what effects recently passed legislation will have on the California Earthquake Authority?
Steve Poizner: The California Earthquake Authority was created just 12 years ago. I am on the Board of the CEA along with the Governor and Treasurer, and most of the state’s earthquake insurance flows through the CEA.

The new legislation that was passed was a positive step in keeping CEA’s claims paying capacity substantial and strong. CEA will maintain it’s “A-” rating thanks to this new legislation, and I am real pleased that it was a step in the right direction to maintain a lot of the financial horsepower.

On the other hand, over the long term, I’m really concerned about the nature of the earthquake insurance markets in California. The take-up rate, the percentage of people who’ve purchased earthquake insurance in California, has dropped from 1-in-3, 10 years ago to 1-in-8 today. Just about 11 percent of all homeowners have earthquake insurance. So, that’s a huge exposure now, because people aren’t buying the product.

The product has a high deductible and it’s considered to be pretty expensive, so I’ve taken some important steps to put together a group of experts in catastrophic insurance issues from around the world. We’re building a set of studies, analyses and recommendations for the CEA and for the Legislature that will allow us to expand the options for earthquake insurance in California in the years to come — (which is) really important for the state of California.

IJ: There’s been talk for many years about a national catastrophe plan. Is this something that would impact the CEA or help consumers to purchase the earthquake coverage they need?
Poizner: I do think that the federal government can play an important role in providing some sort of backstop. Katrina was a huge wakeup call — in California, on the sporadic exposure to earthquakes and to wildfires. On one hand, I think the federal government, if it decided to get involved, can provide some important capacity for paying claims for these terrible catastrophes; like the role that they played for terrorism insurance. On the other hand, I am pretty skeptical that we will see anything done here in Washington, D.C., on that matter any time soon.

California has a $1.5 trillion economy, so we’re quite a substantial economic engine. I’m going to be taking steps in parallel to create new capacity for catastrophic events in California, no matter what happens here in Washington, D.C.

IJ: Another issue that has received a lot of press is California’s Workers’ Compensation System. What do you think about the reforms that have been passed, and is there a need for additional reform?
Poizner: As you know, the workers’ compensation system in California was in a state of crisis just a few years ago. Total workers’ comp premiums at the peak of the crisis in 2003 hit $32 billion a year in total workers’ comp premiums in California. Now, thanks to the reforms that were passed in 2003 and 2004, workers’ comp premiums are about $20 billion a year. So, that’s a $12 billion cash infusion into California’s economy. Reforms are clearly working. Costs are coming down, workers’ comp premiums are coming down, and I fully support those reforms and will fight extremely aggressively to keep those reforms in place.

On the other hand, as Insurance Commissioner, I have responsibility to fine-tune this new system to make sure that injured workers get medical attention as quickly as possible. There are some instances where utilization reviews are being abused and workers are not getting medical attention quickly enough. I want to fix that problem, but the basic reforms are working and need to stay in place.

IJ: The State Compensation Insurance Fund has received a lot of scrutiny in the past year, and your staff is auditing the organization. Can you tell us about any preliminary results on that and what you think should happen within SCIF?
Poizner: The State Fund in California is the largest workers’ compensation insurance company in the country. It’s a multi-billion dollar company, a very large organization. When I took over as Insurance Commissioner nine months ago in California, I was really quite stunned to find out that this large, quasi-public sector/private sector organization was significantly mismanaged and not organized in a way that would lead to excellence.

For example, there was no audit committee. The board of directors really didn’t have any controls in place to audit and understand the financial implications of what was happening in the organization. SCIF has a $20 billion investment fund, but they don’t even have a chief investment officer or a chief financial officer.

So when two board members resigned for conflicts of interest a few months ago for mismanagement, none of this was really a big surprise because the organizational structure was not in place. They didn’t even have the right executive team with a CFO in place.

I’m taking steps with the Governor and the Legislature to modify the structure of the board of directors to create a professional board that can provide the kind of oversight that’s needed. Separately, as you have referred to, I have sent in my team of fraud investigators and financial auditors to audit the State Fund from top to bottom. We’re going to come up with a report shortly that will outline in great detail specific steps that the State Fund needs to take so that we can restore some integrity and confidence in that very important organization.

As the market leader, SCIF sets the pace for pricing and market conduct in the workers’ compensation system. SCIF needs to be a well-running organization, and we’ll make that happen.

IJ: What are your thoughts on SCIF still being the largest workers’ compensation insurer in the state, but it is theoretically the market of last resort for workers’ compensation. Do you think that in today’s competitive market with reforms that it should continue to be the largest market for workers’ comp?
Poizner: Not necessarily. I think at the peak of the crisis State Fund’s market share hit 60 percent. It’s supposed to be the workers’ comp insurance company of last resort, so that was totally out of whack. Now its market share has come way down. I am pleased to report a large number of workers’ comp companies have re-entered the California market, thanks to these reforms. So the market is much healthier now. I think State Fund’s market share should be around 20 percent and that would be, an appropriate role for the workers’ comp insurer of last resort.

IJ: With new auto rating factors that were recently implemented, insurers are saying that the rural market will likely see rate increases. How do you feel about the new rating factors. Are they sufficient?
Poizner: The law in California is crystal clear, and people want auto insurance rates based on some fairness. The fact is, and I fully support this, auto insurance premiums should be based on how you, the driver, drive and not how your neighbors drive. It’s just not right or fair to penalize you just because you live in a neighborhood that might have some bad drivers. The new auto rating factors require auto insurance companies to follow the law that’s already on the books. That requires them to give much higher weighting to an individual’s driving record and less weighting to where the driver lives.

Where the driver lives is still a factor because that’s important if you do live in an area where there are a lot of accidents, a lot of vandalism — that will be factored into the model. But the most important factor should be your driving record, and I support that.

IJ: Do you feel the issue of agent/broker fees has been settled in California, or is it an ongoing issue?
Poizner: It’s an ongoing issue, but I think things have settled down quite a bit. Some agent/broker organizations have voluntarily put together some policies and procedures about disclosure. I think that voluntary disclosure is working pretty well in California.

I am a big fan of disclosure. I do think that consumers of insurance should have all the information they need to make a wise decision. Most importantly, consumers — both businesses and families — need to shop around. That is the best thing they can do, no matter what. But disclosure is an important element, especially for commercial customers.

I have an advisory committee of agents and brokers who have given me a substantial amount of input and advice on how to, once and for all, finish the work here on how to make sure that customers in California get all the information they need to make wise decisions. We’re making good progress there.

There’s a working group of these agents and brokers who are still working on definitions on what’s an agent versus what’s a broker — that’s still unclear in California based on the law. This working group consists of people from the Department of Insurance working closely with agents and brokers. Together, I am confident that we can finish the work here and resolve the ambiguity that still exists.

IJ: Does that advisory committee of brokers and agents enable you to hear other issues agents and brokers may have in your state?
Poizner: Yes, let me be clear about how I feel about agents and brokers. The agents and brokers are in the trenches every day, fighting for consumers. They’re the ones that have to deal with the insurance company as well as the consumer, and I really value that role. I get a substantial amount of fantastic advice from agents and brokers. Insurance companies are one thing … they have a particular agenda of their own to maximize their business and so forth. Agents and brokers have to, of course, make sure that there are healthy insurance markets for us. There are lots of products to offer, but at the end of the day, the consumer is what the agent/broker really cares about because they are dealing with the consumer.

This advisory group of agents and brokers is a permanent committee. I meet with them once a quarter for many hours to go over all the key issues. There are special task forces that this advisory committee also has created. And I have a tight working relationship with agents and brokers, and I would like to expand that. If there are other agents and brokers out there that want to join one of these task forces or advisory committees, I suggest they go to my Web site www.insurance.ca.gov, and there is a lot of information there, and ways to apply for one of these advisory posts.

IJ: Can you tell us about your first experience with insurance and how that involved meeting your wife?
Poizner: Most of my career is not in politics. I started and ran high tech companies in Silicon Valley for many years. So I have been a consumer of insurance for a long time, and my insurance broker was a key part of my team. My insurance broker provided me the expertise I needed to make wise decisions for my businesses and for my family for that matter. (Brokers) have always been a very important part of all of the work that I have done in the private sector in starting growing companies.

But my very first experience with insurance dates back about 25 years ago. Insurance is a special product — it’s not like toasters and TV sets. Insurance was developed thousands of years ago by the Babylonians I think, and it evolved over the centuries because when people are in a crisis situation, they really depend on their insurance. They can be in a life and death situation, and if they have the right insurance in place, it can be a lifesaver.

For me, I had a crisis one time in my life where I needed my insurance company and it really made a lasting impression on me about the importance of insurance. It was when I joined a community service organization in Palo Alto, Calif. I had just graduated from Stanford Business School and I joined a community service group called the Palo Alto Jaycees — the Junior Chamber of Commerce — I’m sure a lot of your readers have heard of them. There are thousands of chapters all over the country.

I joined this group in 1981 and became president of the local Palo Alto chapter in 1982. Anyone could join if you were between the ages of 18 and 40, and if you were male. It was a male-only group, just like all those other service clubs — the Rotary Club, the Kiwanis Club — all men only.

In Palo Alto, we said nonsense to that and admitted women anyway and became one of the largest Jaycee chapters in the country. We had hundreds of members, half men, half women doing great community service work.

The U.S. Jaycees, the parent organization, follows what goes on in each of the local groups. They sued us in federal court and in state court for violating the men’s-only rule. They tried to throw us out of the organization. We were in a crisis where we were in this huge legal battle and we were being out-resourced by this large national group.

I called an emergency board meeting to ask, “What do we do?” The treasurer of my group raised his hand — he was an insurance broker — and he said, “You know, I have been reading our insurance policy that we bought for our local chapter and in there there’s clause that says that our insurance company will pay for legal defense under certain circumstances.”

Believe it or not, the insurance company decided to back us and said, “Yes, you are covered by this,” and they gave us a legal defense fund.

We took the case all the way up to the U.S. Supreme Court and in 1984, the U.S. Supreme Court ruled 7-to-0 that the U.S. Jaycees had no business discriminating against women. The vote would have been 9-to-0, but two Supreme Court Justices were former Jaycees and had to excuse themselves. That decision became the precedent-setting case for the Kiwanis Club, the Rotary Club. All those clubs had to change their membership policies thanks to this decision. And the moral of this story — it wouldn’t have happened without insurance.

If it wasn’t for our insurance policy, we wouldn’t have had legal defense monies to fight this battle. That left a lasting impression on me … the importance of insurance, the importance of having lots of options.

As Insurance Commissioner, that’s what I’m trying to do. I want to make sure that consumers of insurance have lots of options, that they have all the information they need to make wise decisions.

Then, if there are people who aren’t following the rules, as Insurance Commissioner, I’ll come down on them like a ton of bricks. I’m a real strict enforcer of the rules.

With regard to my wife, I didn’t know her in 1981. She lived in San Jose, Calif., and wanted to join the Jaycees. The Palo Alto chapter is about 30 miles from San Jose, but was the only chapter that admitted women at the time. So she had to drive from San Jose to Palo Alto to join. If it wasn’t for this discrimination lawsuit, I would never have met my wife.

But, in any case, I am now a passionate believer in the value of insurance and the value of having a healthy insurance market. That was one of the reasons that I ran for Insurance Commissioner in California.