SAN FRANCISCO — Declaring that "socially fair prices are antithetical to the American way of life and the free enterprise system," the general attorney for Allstate, a leading auto insurer in California, said Thursday that his company will legally challenge any attempt by state regulators to end pricing of auto insurance on the basis of where a driver lives.
Michael McCabe, Allstate group vice president and general attorney, told a hearing chaired by state Insurance Commissioner Roxani Gillespie that putting an end to the so-called territorial rating system would cause companies to lose money on policies in high-risk urban areas such as Los Angeles.
"If you force me to write business at a guaranteed loss, the incentive that affects my behavior is to treat those customers (who live in high-risk areas) as badly as the law allows," decared McCabe, whose company is the state's third largest seller of auto insurance. "It's an incentive to drive them away."
McCabe's comments came on the third day of hearings on implementation of Proposition 103, which declares that a driver's safety record, the number of miles he or she drives annually and his or her years of driving experience should be given more importance than where the policyholder lives.
The Allstate executive said institution of the Proposition 103 pricing plan would deprive insurance companies of the right to earn a fair return on their business given them by the recent state Supreme Court decision on Proposition 103.
"Regulators may not usurp the economic process" in the interest of "socially based pricing," McCabe said.
Asked whether Allstate would sue to prevent the regulators from doing so, McCabe responded: "We will protect our legal rights to the maximum extent called for. Absolutely."
Gillespie said she was "chagrined" by McCabe's presentation, and in a lengthy exchange finally told him that the views he expressed show why the insurance industry is having problems in California.
"The voters were overwhelmingly negative toward you, and people feel that the insurance industry treats them very badly," said the commissioner, who suggested that the vote for Proposition 103 and against the industry's Proposition 104 last November showed that a majority of Californians want a change in the status quo.
"Whatever went through the voters' mind is irrelevant," responded McCabe, who works out of Allstate headquarters in Northbrook, Ill. He said it must yield to constitutional principles as enunciated by the courts.
However, he said, Allstate is prepared to take into account the safety record and other criteria set in Proposition 103 for establishing prices to the maximum extent they are economically justified, just as long as the company can continue to use territorial rating to a proper extent.
When Gillespie asked how this revised system would alter prices now charged by Allstate, McCabe said it had not been worked out yet and he could not say how long it would take to determine it. The new pricing system is supposed to be in place Nov. 8.
"I am chagrined you haven't taken the time to look at the impact it would have on your own customers," Gillespie said. "It is very important for you not to have customers that vote against you so negatively at election time. . . . I hope you will look at 103 as an opportunity to better please your customers."
McCabe replied: "The industry is down and being kicked around by people who like to kick people who are down."
Other insurance company representatives who were in the room during the McCabe-Gillespie exchange expressed reservations and, in one case, outright disagreement with what the Allstate spokesman had said.
James M. Mattesich, an attorney for State Farm, the largest seller of auto insurance in California, said flatly, "We don't agree with him" in either of McCabe's statements about socially fair prices or bad treatment of unwanted customers.
Richard Wiebe, a spokesman for the Alliance of American Insurers, said he felt McCabe had been "a little bit overly legalistic" and that it might have been more appropriate to point out that what would appear to be socially fair in Eureka, where prices would go up if neighborhood-based rates were abandoned, would differ from what would be viewed as socially fair in South-Central Los Angeles, where prices would go down.
Jim Snyder of the Personal Insurance Federation of California said he felt McCabe had been "deliberately blunt in order not to compromise on clarity of purpose." He said he felt Gillespie would try to strike a balance between social and economic factors in implementing Proposition 103's strictures on pricing factors.
Generally agreeing with the points McCabe had made, however, was George Tye, spokesman for the Assn. of California Insurance Companies, the industry's most important lobbying arm in Sacramento.
"Wherever you have customers that are basically guaranteed losses, you have a built-in disincentive to serve those customers," Tye said. "We can't make social decisions as business enterprises. We can't say we'll have political problems, so we'll subsidize certain customers. If one company did it, they'd lose out in the marketplace; if all decided to do it together, it would be an antitrust violation."
Proposition 103 author Harvey Rosenfield, who was in the hearing room during the exchange, said he felt McCabe "doesn't understand we're in a democracy." He called McCabe's remarks "bankrupt and racist" but he was also critical of Gillespie.
"It is an absolute outrage that Roxani Gillespie is permitting these insurance companies to engage in this ridiculous, convoluted, verbal palaver when in fact the purpose of this proceeding is to require the companies to actuarially justify how they will price policies in the future in accord with Proposition 103," he said.