California Aims to Improve Insurance Rate Approval Process

California Insurance Commissioner Steve Poizner has issued emergency regulations that he believes will clarify and streamline the prior approval rate system for insurance. However, a consumer advocacy group said the regulations will likely lead to discrimination in the state’s underserved communities.

Poizner proposed the regulations to make the insurance rate filing process more efficient, accurate and transparent, he said, speeding “lower insurance rates to consumers.”

“The new rules also increase transparency in the rate-setting process by requiring insurance companies to provide more information to the public,” he added.

Voter-approved Proposition 103 established in 1988 a system of prior approval rate regulation. In 1991, the Department of Insurance (CDI) adopted regulations that provided a formula to determine whether a proposed rate is excessive or inadequate. In 2007, the department issued additional regulations that allows insurers to request a deviation from portions of the rate formulas. Such “variances,” can be granted to insurance companies by CDI on a case-by-case basis.

The commissioner’s emergency regulations make changes to the regulations that took effect in 2007. Increased efficiency in the rate approval process is critical, Poizner said, because of an anticipated spate of prior approval filings as insurers seek to comply with recently enacted Auto Rating Factor (ARF) regulations that identify the factors an insurance company may use to rate automobile insurance risk and specify the order and weights of those factors.

While 46 carriers have complied with the ARF rules, CDI expects about 200 more filings by the July 14, 2008, deadline.

The sooner the rate filings are processed and the ARFs are implemented, the sooner consumers can reap the benefits of fairer and potentially lower auto insurance rates, Poizner indicated.

In the proposed regulations, Poizner eliminated two variances, thereby reducing the possibility of certain rate increases. He also modified a component of the formula to afford the commissioner increased options to use data that could result in lower rates. In addition to streamlining of the current prior approval system, the regulations modify a component of the formula that will provide more accurate data and will allow the commissioner the ability to impact rates to the benefit of consumers, CDI said. The regulations also will assist in fighting insurance fraud, prevent future losses and encourage insurers to provide superior service to policyholders.

The Greenlining Institute, however, said the regulations would harm underserved communities. The group said under the current rules, “financial investment in underserved communities” is a factor for rate setting. The proposed rules eliminate that factor, said Samuel Kang, the group’s legal counsel. He said that would give the industry permission to redline underserved communities.

“This would have a devastating impact on California’s most vulnerable residents,” he said. “The record budget shortfall is already forcing underserved communities to slash basic vital services. Choking off investment when it is most needed would be a nightmare.”

Greenlining was also critical of how the new regulations would measure the level of service of insurers. The group contends that under the proposed rules, an insurance company that is in the top 25 percent of service to underserved communities would receive favorable treatment in rate setting.

The group believes the regulations would make it easier for insurers to raise their rates. Thus, it is asking the commissioner to withdraw the regulations until their impact can be examined through a public hearing.

The regulations are being reviewed for approval by the Office of Administrative Law.

For more information, visit http://www20.insurance.ca.gov/epubacc/REG/110669.htm and http://www20.insurance.ca.gov/epubacc/REG/110671.htm.