Industry Report Condemns Regulated Car Insurance

A report commissioned by the chief lobbying group for many of California’s auto insurance companies said Monday that giving the state Insurance Department control over rates, as proposed by a coalition of consumer groups, would be bad for consumers.

The $160,000 study for the Assn. of California Insurance Companies contended that the state’s competitive rating system, under which insurers set their own rates, has resulted in auto insurance coverage being sold at a smaller average profit than in most states with regulated rates.

But Robert Litzenberger, professor of investment banking at the University of Pennsylvania’s Wharton School of Business, and Blaine Nye, president of Stanford Consulting Group Inc. of Menlo Park, were questioned sharply at a Los Angeles news conference when they refused to provide rate comparisons of California with the other states.

They said such comparisons would be invalid because claims costs, accident rates, litigation and other factors are not consistent from state to state. “The rates themselves are irrelevant,” Litzenberger said at one point.

His remark drew a sharp rejoinder later from Steven Miller, head of the Los Angeles-based Insurance Consumer Action Network and a leading initiator of the proposal for rate regulation--at least for any sizable increases--authored by Assemblyman Lloyd G. Connelly (D-Sacramento).

“Rates may be irrelevant to the insurers, but they are critical to the consumers,” Miller said, citing a study by the federal General Accounting Office that found that states with insurance rate review regulations have, on the average, 13% lower rates than those that do not.

Litzenberger and Nye said, however, that “regulation cannot duplicate the efficiency of competitive forces in the market,” and they extolled California’s system as having the advantage of letting the private companies respond on their own to changing consumer and market demands.

A rate-making government authority, they suggested, might well allow the companies to earn a higher rate of return than they are earning now, and prices would go up.