Imagine a vast storeroom, filled with boxes stacked 4 or 5 feet high, each containing thousands of pages of abstruse writings, mostly tables with numbers.
Welcome to the California Department of Insurance. The ocean of paper before you was created last June when 460 insurance companies applied for exemptions from the 20% rollback in auto and other casuality rates required by Proposition 103.
This tidal wave was, of course, the result of the state Supreme Court's decision upholding the insurance-reform initiative. To meet the constitutional requirement that insurers be given the opportunity to earn a fair profit, the court modified the rate rollback. An insurer who claimed its rolled-back rates would be unconstitutionally low, the court said, need not reduce those rates until the state insurance commissioner ruled on the claim.
The companies responded with a flood of paper. How can a department that has about one employee per insurance company seriously evaluate this sea of self-serving claims?
The answer would be for the insurance commissioner to identify the fundamental issues common to the applications and to resolve them together in a consolidated hearing--a logical solution to regulatory overload that has long been approved by the courts.
In July I proposed a framework for such hearings, based on the fundamental structure of the insurance business. Insurance rates are supposed to raise money for three basic functions: payouts on insurance claims from accidents, internal expenses such as overhead and profits.
Not surprisingly, few of the applications for exemptions admit to excessive profits. In fact, the companies often claim that they're losing money and have been doing so for years.
To cut through such assertions, one must look at the payouts. Insurers are basing their claims not on the dollars actually paid, but on their "projections" of future payouts. To support higher rates, the company simply projects sharply higher payouts. If the projections never materialize, that's just extra profit for the company.
Insurance Commissioner Roxani Gillespie must therefore develop her own projections, based on actual historical payouts and adjusted for any new factors.
Proposition 103 was intended not only to stamp out excessive profits, but also to trim the waste and inefficiency of a moribund industry sheltered by special-interest laws.
The average auto insurer spends about 35 cents of every premium dollar on internal expenses. But some spend as little as 20 cents or much as 45 cents--with no perceptible difference in service. The U.S. Constitution protects the opportunity of an efficient company to earn a profit; it does not permit a profligate company simply to spend as much as it likes and send the bill to consumers.
I have urged the commissioner to set efficiency standards for internal expenses. Where several insurers have demonstrated that insurance can be provided economically, internal expenses higher than those firms' expense levels should be disallowed in rates.
Profit, the third component of rates, can similarly be dealt with categorically. A company is entitled to an opportunity to earn a fair return on the stockholders' investment that is actually being used to provide insurance. Some companies refuse to write as much insurance as they have the financial capacity to provide. Those companies should not be paid a profit byinsurance consumers for equity they refuse to devote to the insurance business.
The commissioner can establish a formula to determine how much equity each company is using, then deny a profit on any greater amount.
In July I filed with the commissioner a detailed plan for rapidly resolving these fundamental issues--a road map to the rollbacks. Gillespie rejected that proposal, claiming that each of the applications filed by 460 companies must be evaluated separately.
Yet while rejecting hearings to develop general rules, Gillespie announced general criteria of her own--adopted without any public hearings--and proposed to grant the exemptions for all but 47 of the 460 companies on the basis of her unwritten rules.
No announced scrutiny of inflated payout projections. No nod to the need to trim bloated expenses. No visible signs of any regulation. It's as if Proposition 103 had never been passed.
Taking no chances, a number of us whose job it is to represent consumers filed formal demands for hearings on another 237 companies. Forced by the law to grant those hearings, the commissioner consigned the 237--including three of the four largest auto insurers in the state--to a "slow track" and predicted that it would take 10 years to decide those cases. Because we have now blocked the automatic exemptions of those companies from the rollbacks, there is still time to right the regulatory ship.
Only a prompt course correction can save our rollbacks and guarantee a fair adjudication of the insurance company claims.