Initiative to Expand California Prop 103 Ignites Insurance Battle

A ballot initiative to expand the scope of California’s Proposition 103 to include health insurance could also impact the auto insurance industry by challenging a long-sought-after initiative on auto insurance discounts for persistency, industry watchers say.

Santa Monica, Calif.-based advocacy group Consumer Watchdog, which filed the Insurance Rate Public Justification and Accountability Act on Wednesday, must get 500,000 signatures to qualify it for the Nov. 6, 2012 ballot. If the group gets the signatures, the health insurance rate initiative could be placed on the same ballot as the 2012 Auto Insurance Discount Act, which is near to qualifying for that ballot.

Either initiative would expand Prop 103. Prior to the passage of Prop 103 in 1988, insurance companies were not required to file rates for approval except for health and life, and the state was considered an “open competition” state in which competition regulated the marketplace.

A major provision of Prop 103 dealt with personal automobile insurance, requiring personal automobile insurance rates to be determined using the following factors in decreasing order of importance: insured’s driving safety record, number of miles driven annually by the insured, and number of years of driving experience the insured has had.

The proposition also prevented rates from being determined based on a person’s history of insurance.

The stated purpose of the Consumer Watchdog health insurance initiative is to “ensure fair and transparent rates for health, home and auto insurance.”

“Getting control of health insurance premium increases in California is like trying to slow down a run-away train,” Consumer Watchdog says on its Web site about its initiative. “Health insurance companies can raise their rates at will, and they don’t even have to open their books and get permission from our insurance commissioner first. Right now, there are five health insurance corporations that control 80 percent of the market in the state of California. These health insurers are accountable to no one.”

However, it’s not just about health insurance. Among the proposed act’s 900 words is language that prohibits “unfair pricing” not only for health, but for auto and home insurance based on prior coverage and credit history.

The initiative proposes to accomplish these ends by: “(1) requiring health insurance companies to publicly disclose and justify their rates, under penalty of perjury, before the rates can take effect; (2) prohibiting unfair pricing for health, auto and home insurance based on prior coverage and credit history; and (3) requiring health insurance companies to pay a fee to cover the costs of administering these new laws so that this initiative will cost taxpayers nothing.”

“Basically it goes to the heart of the persistency initiative that’s being circulated,” said John Norwood, the managing partner of Norwood & Associates who serves as a legislative advocate for Insurance Brokers & Agents of the West.

The 2012 Auto Insurance Discount Act is being sponsored by the American Agents Alliance, which says the initiative’s new law “will allow consumers to receive a discount for their years of continuous automobile coverage regardless of the company where they seek insurance.”

The persistency initiative is similar to Proposition 17, which was on the California ballot in 2010. The Proposition 17 campaign was sponsored largely by Mercury General Corp. It was opposed by most newspaper editorials and by Consumer Watchdog. The insurance industry outspent the proposition opponents and the initiative was narrowly defeated, 52 percent to 48 percent.

The latest persistency initiative is being supported personally by Mercury’s chairman, George Joseph, but not by the insurer Mercury this time, according to Joseph, who called the initiative he’s backing “pro consumer” because it would allow portable persistency as opposed to the singular choice of loyalty programs that lock consumers into one carrier.

“Anybody can see if you’re truly a consumer advocate this is a competitive arrangement,” Joseph said. “With loyalty, you get a discount but you are locked in. There’s a penalty today, not only if you’re not insured and applying for the first time, but if you decide to move.”

For insurance companies like Mercury, the initiative better positions them to lure new customers from other companies, creating a more competitive environment, which is the spirit behind Prop 103, he said.

“All it does is make the business more competitive,” Joseph said. “It doesn’t penalize anybody. And it makes a level playing field. When Mercury was able to do this, the agents were doing much better.”

But Consumer Watchdog does not like the idea of basing auto insurance rates on whether a person previously had insurance, or charging more to those without insurance history. The group, which is often at odds with Joseph, has criticized him for spending $10 million on his efforts to pass a persistency initiative.

But Joseph, who said the money amounts to “20 years’ take-home pay,” believes it is the right thing to do, and he added, “It takes a lot of money to run an initiative.”

In introducing its health insurance proposal, the Insurance Rate Public Justification and Accountability Act, Consumer Watchdog is taking advantage of anticipated support as sort of a preemptive strike against the persistency initiative, Norwood believes.

“They’re going to take advantage of that support by stuffing this into this initiative,” Norwood said, adding that having two initiatives addressing the same issue on a California ballot effectively kills the weaker of the two. “If both initiatives show up on ballots, the ones with the most votes win.”

Jamie Court, president of Consumer Watchdog, acknowledged that part of the plan is to continue to prevent insurance companies from basing rates on prior insurance history.

However, Court said, if supporters of the persistency initiative can reward customers by offering discounts “without charging people more because they didn’t have insurance before, then we don’t have a problem between our initiatives.”

At the heart of argument that is once again taking shape is whether offering discounts to drivers based on their past with another company amounts to penalizing those drivers who do not get better rates.

“Historically one person’s surcharge constitutes a discount for other people,” Court said, then added, referring directly to Joseph, “What we prohibit him from doing is using prior insurance history as a rating factor. He says he wants to give discounts, fine. Just don’t use prior insurance as a rating factor. It’s a zero sum game. If you lower rates for one person, you are raising them for another person.”

As for the health care portion of the initiative, Court sees the proposed language as adding another element to Prop 103 that is much needed, particularly as new federal laws on health care come into play over the next few years.

“What we’re talking about is connecting health insurance with the other prior approval language that already exists,” he said. “This is clearly trying to make sure that when Federal reform kicks in in 2014 that it works well. We’re going to need to have reasonable premiums if everyone’s going to be required to have health insurance.”