High Risk Means Lower Rates for Some Drivers

It used to be that virtually all those insured under the California Automobile Assigned Risk Plan were drivers with bad records, who paid extremely high rates so that they could comply with the state’s minimum liability coverage requirement.

Such drivers were assigned to insurance companies in proportion to each firm’s share of the state’s auto insurance market. The premiums were high enough that the companies did not lose money on their assigned-risk customers.

Not so anymore. In some parts of Los Angeles, assigned-risk rates, which are regulated by the state insurance commissioner, are lower than the rates charged for regular coverage. The insurance companies say they are losing money on the state’s 780,000 assigned-risk policyholders, especially in urban areas.

Assigned risk has become such a good deal for urban drivers that many with good records now choose to participate in the Assigned Risk Plan, which was specifically devised to serve the problem driver.

According to the insurance executives who hold a majority of seats on the Assigned Risk Plan board, the companies in 1987, the latest year for which statistics are available, incurred $1.94 in claims and expenses for every dollar they collected from their assigned-risk drivers, resulting in a $262-million deficit.

The insurers reported that, on the average, it was costing the 13 million regularly insured California drivers about $20 a year each to subsidize the assigned-risk drivers.

Founded in 1947, California’s assigned-risk system has undergone a series of dramatic changes during the Administraton of Republican Gov. George Deukmejian:

- Two consecutive Deukmejian-appointed insurance commissioners, Bruce Bunner and Roxani Gillespie, have held down assigned-risk rates in urban areas, particularly Los Angeles, repeatedly refusing to approve rate increases that the Assigned Risk Plan board says are needed to put the system on a pay-as-you-go basis.

Gillespie has said that because such rate increases would make insurance unaffordable for high-risk drivers, many such drivers would go without insurance, despite the state’s mandatory insurance law. That, in turn, would send premiums for the uninsured motorist coverage carried by most people soaring.

- Citing the actions by Bunner and Gillespie to keep a lid on assigned-risk rates, insurance companies say they now are losing $1 million each working day providing such coverage. When State Farm announced a statewide average rate increase of 9.6% on Jan. 30, the company said that in the 12 months ending Nov. 30, it had lost more than $100 million on its assigned-risk customers.

- The companies note with alarm that in an ever-spreading area of Central, East and South Los Angeles, assigned-risk policies providing the required minimum liability coverage are cheaper than regular policies for the same coverage. Allstate Insurance executives say the same policy they sell in Central Los Angeles for $1,314 can be obtained through the Assigned Risk Plan for $850. But in most of the state, where regular rates are far lower than in Central Los Angeles, assigned risk still costs more than regular policies.

- The public has been slow to catch on to the good deal being offered under assigned risk, and many drivers with good records are still leery of the assigned-risk plan because of its past reputation for insuring only the poor drivers.

Nonetheless, the number of assigned-risk policyholders has more than doubled in the last three years. They account for 6% of all California policyholders. In some parts of Los Angeles, more than 25% of all insured drivers are assigned-risk policyholders.

Contending that the situation is fast reaching crisis proportions, the insurance industry has gone on the offensive.

On Feb. 7, the Assigned Risk Plan governors announced they will seek a 112.3% average statewide increase in assigned-risk auto rates and a 137% increase in Los Angeles. If the increase are approved, the average statewide rate would rise from about $700 to nearly $1,500 and would exceed $2,000 in Los Angeles.

The governors emphasized that “the requested rates will provide no profit to participating insurers nor will the rates recoup past deficits.”

Regular Coverage

However, the increase, if approved, would make it impossible for drivers to get assigned-risk policies cheaper than regular ones, presumably restoring the incentive for cost-conscious good drivers to buy regular coverage.

“The large deficits incurred by the plan’s participating insurers cause drivers in the voluntary market to subsidize drivers in the assigned-risk market,” the Assigned Risk board said in a statement asking for the rate increase. “The plan’s governing committee believes that voluntary market drivers should not bear the cost for assigned-risk drivers.”

Gillespie reacted cooly to the group’s request.

Nearly a month has gone by, and Gillespie has yet to call the required public hearing that would legally have to precede any increase authorized by her. A spokeswoman said last week that the Insurance Department staff is continuing a review of the matter and would not say when a hearing will be called.

The last time the Assigned Risk Plan governors called for a rate increase, asking for 50% in two stages in December, 1987, Gillespie took a year to rule, and she then gave them only an 18.5% increase in one stage.

‘Voluntary Market’

In their statement this year, the governors remarked: “The (Assigned Risk) plan was intended to be self-sufficient; the statute and regulations do not call for (it) to be subsidized by the voluntary market.”

But Gillespie said last week that she does not think the law requires her to make assigned-risk customers pay their own way.

“The law is silent on this point,” she said. “The silence is total and complete.”

Although Gillespie declines to say what she will do with the rate increase request, her comments indicate that she does not intend to give the Assigned Risk Plan governors everything they want. The last time the board made such a request, Gillespie promptly declared she would not give anywhere near the 50% increase they had requested.

Already, the insurers, ever more concerned that they are being saddled with an increasing number of assigned-risk customers, are expressing nervousness.

Stanley Zax, chief executive of Zenith Insurance Co. and the immediate past president of the Assn. of California Insurance Companies, the industry’s most important Sacramento lobbying agent, recently said he feared that Gillespie was using the assigned-risk system to undercut the so-called territorial rating approach, under which insurers charge the highest rates for regular policies sold to drivers living in congested urban areas.

He noted that the assigned-risk rates have been held down most in the four urban rating zones, while in six suburban and rural rating zones, they have not been held down very much.

‘Rating Issue’

“To me, it’s the territorial rating issue revisited in a different fashion,” Zax declared. “It’s talking about redistributing the wealth.”

A similar point was made by Rex Davis, a group president for Allstate, who said the disparity between assigned-risk and regular policy rates is so large in Los Angeles “that we fear a disruption of the voluntary (insurance) market.”

The insurers say that by keeping the assigned-risk rates so low, the insurance commissioner is in effect providing a subsidy to drivers in high-risk areas, one that can only be supported by charging other drivers more for their coverage.

Davis said that if Gillespie feels a need to provide “a subsidy of a large magnitude, then government has to get involved in that subsidy, perhaps by providing insurance stamps” for those unable to afford insurance.

“It is government which is designed to redistribute the wealth, not private corporations” the insurance executive said. “But I recognize there is a danger this could lead to state insurance.”

Budget Problems

So far, neither Gillespie nor any legislator has proposed an official state subsidy such as insurance stamps. Such a proposal would likely run into opposition at a time when the state is facing severe budget problems.

Daniel Foley of the Alliance of American Insurers, who is chairman of the Assigned Risk Plan governing board, turned down a request for an interview on whether a subsidy for assigned-risk customers is warranted. A spokesman, attorney James R. Woods, said Foley and other members of the governing board believe that their function is to recommend what they considered adequate rates to Gillespie.

The subsidy matter “is not an issue that we’re prepared to deal with,” Woods said.

Woods warned that even the 112.3% increase in rates the governors are requesting would not actually be sufficient to erase the deficit incurred by the companies in providing assigned-risk coverage now.

“Remember, we were citing only 1987 figures,” he said. “When the 1988 figures come in, the deficit will be even higher.”

Gearing Up for a Fight

But consumer groups are already gearing up to oppose the proposed increase when Gillespie holds a public hearing on the issue. Harry Snyder, West Coast director of the Consumers Union, publisher of Consumer Reports magazine, said he was not worried that the commissioner would give the insurers everything they want in terms of an increase.

“This has become a PUC (Public Utilities Commission) kind of game,” he remarked. “They (the insurers) always ask for more than they expect to get.

“But the question here is, if Gillespie gives them anything, will assigned-risk coverage become unaffordable and will it drive people to become uninsured. If anything, we should increase the subsidy.”

In the meantime, a legal dispute rages among the insurance companies about what is termed the lack of equity in the way assigned-risk customers are apportioned to the various companies.

Acting on the complaints of several companies, the Assigned Risk Plan governors in late 1987 passed a motion requiring the California State Auto Assn., the Northern California counterpart of the Automobile Club of Southern California, to start offering coverage to assigned-risk customers in the Los Angeles area, even though it normally does no business south of the Tehachapi Mountains.

Lower Price

The governors decided this gave the Northern California association an unfair competitive advantage, because it did not have to incur the very heavy assigned-risk deficits involved in doing business in the Los Angeles area, while the other companies, competing with the auto association in Northern California, did. This, presumably, would allow the auto association to offer insurance at a lower price in its area of operations.

The association, however, sued to prevent implementation of the rule ordering it into the Los Angeles assigned-risk market and obtained a stay that is still in effect.