Friday, January 8, 2010

What can history tell us?

According to The Beatles, "It was twenty years ago today, Sgt. Pepper taught the band to play." So, in 1988, voters in California passed Proposition 103 which, as history tells us, proved to be one of the best Propositions they have voted for. Why? Because it pushed forward reform of the automobile insurance industry. The result? Evidence shows California has the most competitive market in the US with the slowest increase in premium rates. If you ever wondered what consumer protection should look like, California is the model all the other states should follow. Curiously, Illinois is the most unregulated market and the least competitive. Are Californians pleased with the result? Looking at the pattern of increases in the rest of the US, the estimate is that Californian drivers have saved more than $17 billion in premiums. That's almost $2,000 per driver. What's not to like about that? With the last year of recession, the continuing low premiums and strong competition between the insurers guarantees better service standards on claims, just when family budgets benefit from low monthly instalments and fast payments if there is an accident.

But, when the legislature in any other state suggests applying the lessons learned, the insurance industry begins to spend money through the lobbyists and advertisers. Soon, everyone with even half an ear on the issue of insurance knows the Californian approach has broken the insurance industry. Local insurers teeter on the edge of insolvency, barely able to scrape even a few cents of profit from their underwriting. Were it not for the strong profits earned elsewhere, the Californians would be denied insurance altogether. Put the other way round, the rest of the US is subsidising Californian drivers. Except, of course, this is completely untrue. The insurance companies in the Californian market routinely report profits in excess of 10%. This is the lie that proves the automobile insurance industry at large runs on greed. A mere 10% profit margin is chicken feed and close to insolvency.

So what is the Californian approach? It throws out reliance on the zip code and credit scoring. Instead, insurers must focus on the safety record of the individual driver. That ensures the good drivers pay less and the bad drivers pay a bigger percentage of the losses they cause. In most other states, the good drivers subsidise the bad. To complete the package, the auto insurance companies must disclose the basis on which they calculate the premiums. This empowers the Department of Insurance and prevents insurers from trying to cheat on the rate calculations to recover some of their lost profits. If the Commissioner finds evidence of overcharging, he can order the company to cut its premiums and refund the amount overcharged. This is the ultimate sanction and, so far, the Californian courts have consistently refused the appeals of the insurers affected. What better way is there to get full consumer protection? None! That's why the auto insurance industry would prefer you not to know about Proposition 103 and the beneficial effect it has had. History and current events are off the curriculum in other states as politicians take the money from the insurers and look the other way. Only in states where electors get to vote on the issue or can pressure their representatives is there any chance of improvement.


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