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Auto Insurance Reforms Set to Equalize Rates Face a Deadline

Oct 20, 2007

By Evangeline Mitchell

STARTING IN JULY, whether your car is parked in a high-crime neighborhood of East Oakland, a tony enclave of Walnut Creek or a rural Central Valley town isn't going to matter when it comes to how much you pay for automobile insurance.

You may have already been impacted by the changes under the long- delayed rollout of Proposition 103, which requires insurers to give more weight to your driving record than your ZIP code.

But then again there's a very good chance you haven't. That's because most of the state's auto insurers are taking the long and scenic route instead of the expressway when it comes to being in full compliance with Prop. 103 regulations.

To date, only 22 of the state's 210 auto insurance companies have met a July 14, 2008, deadline to comply with the regulations, according to the state Department of Insurance.

Under Prop. 103, which was passed by voters in 1988, insurers are required to give more weight to a motorist's driving record, annual number of miles driven and years of driving experience than other factors such as ZIP code, gender and marital status.

Supporters and opponents alike agree Prop. 103 regulations will create big changes in how auto insurance is written in California. Some drivers in urban areas could see premiums decline while some motorists in suburban and rural areas could see higher premiums.

Prop. 103 is "all about giving drivers a fair shake," said Doug Heller, executive director of the Foundation for Taxpayers and Consumer Rights. Under the old system, urban drivers can end up paying for insurance that is hundreds of dollar higher than drivers in other areas.

But the new rules are a matter of concern for some drivers, especially those who live in rural areas.

Drivers in rural areas tend to live in neighborhoods where there are less instances of accidents, crime and vandalism, said Dave

Kranz, spokesman for the California Farm Bureau Federation.

Another concern is that the regulations give more weight to the number of miles driven than where those miles are driven, he said.

That's because rural people are generally going to have to drive longer distances to get to the grocery store and take the kids to school, Kranz said.

"Our concern is that the new rules, when put into effect, would create some inequities in the rural area by giving more emphasis to number of miles driven and reduce the weight given to ZIP code and residence," he said.

In August 2007, several consumer groups and the Department of Insurance were finally able to fully roll out Prop. 103 regulations, which the insurance industry has fought for nearly two decades. Right after the state prevailed, insurers were required to partially comply with the regulations, with 100 percent compliance required by the July 2008 deadline.

"Insurance companies are very

INSUREIBusiness 2much in some ways like the government. They are big and they are slow and there is lots of bureaucracy," said Amy Bach, executive director of San Francisco-based United Policyholders, a consumer advocacy group that is active in insurance issues.

"In regards to most regulations, you will find historically that (compliance) will come a lot closer to the time when the regulations come to fruition," said Dan Edwards, spokesman for the Personal Insurance Federation of California, whose membership includes some of the state's largest insurance carriers: Farmers, State Farm, 21st Century, Progressive and Safeco.

None of them have yet fully complied with the Prop. 103 requirements.

"All of our companies are in the process of reviewing the requirements of the regulations and how they will get there," he said.

Filing new rate plans

In addition to filing the changes needed to carry out the Prop. 103 regulations by next July, insurers also have to file new rate plans -- which are used to provide financial justification for lowering or raising rates.

GEICO Insurance, AAA of Northern California and 20 other insurers have submitted Prop. 103 compliance plans that have been approved by the Department of Insurance. (See list.)

But not all of the companies that in compliance are yet writing policies under the new regulations. For example, GEICO started writing policies under the new regulations a few weeks ago, while AAA expects to start writing policies under the new regulations by the end of the year.

"The early compliance allowed GEICO to deliver all of the potential savings up front and at once," Greg Kalinsky, regional vice president, said in an e-mail. He declined to be interviewed about how the new regulations are impacting drivers in different cities, suburbs and rural areas.

Even though most insurers are not racing to meet next year's deadline, rates have been falling for reasons that have nothing to do with Prop. 103.

From mid-2006 to mid-2007, the Department of Insurance approved approximately $789 million in auto insurance rate reductions. Lower than expected claim costs, along with competition in the industry, are behind the falling rates, observers point out.

In March, State Farm Insurance rolled out a 10.1 percent average rate reduction, or $86 per policy, for its 3 million policyholders.

In August, GEICO Insurance announced a 10.8 average rate reduction, or $150 per policy, for its 436,000 policyholders.

By the end of the year, AAA plans to reduce rates an average of 6.5 percent, or $100 per policy, for its nearly 1 million policyholders, said company spokeswoman Jenny Mack. The rate reductions will roll out at the same time AAA starts writing policies under the new Prop. 103 regulations, she said.

"Under the new regulations, rates for some drivers in urban areas will decrease while rates for drivers in urban and rural areas may increase," said Mack.

Drivers affected differently

Still, because there are so many factors that go into setting insurance rates, not all urban drivers will see a decrease and not all suburban and rural drivers will see an increase, Mack added.

The 6.5 percent rate reduction results from a previous decline in the number of claims filed along with increased competition in California's auto insurance marketplace.

"When you are talking about insurance rates, it's not what we've seen in the past, it's what we anticipate in the future. We used the trends we've seen in our (claims history) to help set our rates (through) the trends that are identified over time," Mack said. "Our analysis indicated the number of claims has been decreasing. That trend, along with the current trend of the competitive environment for California (auto) insurance, has led us to drop our rates."

A hearing for Allstate's compliance application and rate plan is set for early November, said Allstate spokesman Peter DeMarco. At the hearing, Allstate's request to keep rates as they are will also be considered.

"We have filed for rate neutrality. We have not filed for a rate increase for auto insurance," he said.

The rate neutrality request is based on Allstate wanting to introduce a new auto insurance product in California that will allow consumers to have more choices and options in the way they buy insurance, he said.

Rate reductions from lower claims costs and competition are one thing. Full compliance with the new regulations to tag premiums primarily to your driving record and not where you live is another.

The Prop. 103 regulations won't change the overall cost that Californians will pay for insurance, said Bill Sirola, spokesman for State Farm, which is the largest provider of auto instance in California.

"All it does is shift who pays how much," he said.

Consumer advocates have a different outlook.

"At the end of the day, companies that price policies more on ZIP codes are going to be more competitive," said Heller, of the Foundation for Taxpayer and Consumer Rights.

State Farm plans to submit its full compliance filing before the July 2008 deadline, Sirola said.

"We think we will meet the criteria and yet reflect our actual costs," he said.

Meeting the challenge

Setting rates based on the Prop. 103 regulations for products such as comprehensive auto coverage, which covers theft of a motorist's vehicle and other damage not related to collision, and uninsured motorist coverage is a challenge, Sirola said.

"Prop. 103 did not differentiate between the different types of automobile insurance coverage," he said. The requirement to focus on a person's driving record has "nothing to do with the auto theft (rates in their neighborhood.) They have no impact on the actual base to price the comprehensive coverage," said Sirola. "Those are the kind of issues we are struggling with."

Evangeline Mitchell covers personal finance. Reach her at 925- 952-2690 or [email protected]

Originally published by Evangeline Mitchell, Business Writer.

(c) 2007 Oakland Tribune. Provided by ProQuest Information and Learning. All rights Reserved.

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