Calif. Senate Approves Bill Requiring Cross-Subsidy for Inner-City Auto Drivers
The California Senate approved a bill that would expand eligibility for the current low-cost automobile insurance program to middle-income drivers, a measure that will force insurers to increase premiums for non-urban drivers to subsidize potential losses, according to the Alliance of American Insurers.
Two years ago, the state Legislature approved a low-cost automobile pilot program for low-income drivers in the counties of Los Angeles and San Francisco that offered policy limits of 10/20/3 ($10,000 bodily injury liability injury coverage per person/$20,000 bodily injury liability per occurrence/$3,000 property damage liability coverage). The law required initial rates to be set at $460 in Los Angeles and $410 in San Francisco, with annual adjustments made by the insurance commissioner based on actuarially sound experience information.
With the passage of SB 1427, Senators Martha Escutia (D-Montebello) and Jackie Speier (D-Hillsborough), who represent constituencies in Los Angeles and the San Francisco Bay Area, respectively, have successfully pushed through legislation that would remove the 2004 sunset date for the pilot program, lower premiums to $319 for both counties and add $1,000 in medical coverage.
“By raising the ceiling for eligibility from its current 150 percent of the federal poverty threshold for a family of four to 250 percent of the poverty threshold, the bill would allow a family in San Francisco or Los Angeles earning $45,250 annually to qualify for the low-cost program,” Peter Gorman, vice president of the Alliance’s Western Region, commented. “The $319 premium for this offering is below loss costs and will result in a cross-subsidization by suburban and rural drivers in Los Angeles and San Francisco counties. If this bill is signed into law, carriers will be forced to increase rates in suburban and urban areas to offset losses incurred under the low-cost automobile program in these counties.
“The current low-cost automobile policy plan has been a failure to date because alternative, better coverages with higher minimum thresholds of 15/30/5 are available from the private voluntary market.” Citing statistics from the California Automobile Assigned Risk Plan, which administers the plan, he noted that, for the first nine months of 2001, only 514 of the low-cost policies were sold in Los Angeles and only 17 were sold in San Francisco.”
According to Gorman, agents, concerned by the errors and omissions exposure inherent in the low-cost policy, have been quoting coverage in the private voluntary market and applicants have been choosing them as better alternatives.
Gorman said another problem with SB 1427 is its turning over of the rate-setting function entirely to the insurance commissioner.
“Whereas current statute allows for a 25-percent surcharge on high-risk drivers, SB 1427 makes any surcharge the discretion of the insurance commissioner. That change assures that any needed surcharge will not be allowed because the majority of voters who elect the commissioner is located in these two metropolitan areas,” Gorman added.