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Get Set for Insurance Rates to Inflate

After several years of falling premiums, insurers appear eager to halt price wars and boost profits.


Drivers, tighten your seat belts. Auto insurance premiums may be on the rise.

Insurance companies say higher medical costs and recent court cases may soon force them to increase rates that had been on a steady decline in California through the late 1990s.

What's really going on, however, is a much more interesting story of politics converging with economics to halt an industry price war and lay the groundwork for future rate increases.

Until last year, California drivers had been enjoying the fallout from one of the nation's fiercest battles over insurance market share.

Out-of-state insurers, including Progressive, invaded with lower-cost policies; aggressive companies such as Mercury and 20th Century (now 21st Century) fought back with their own price cuts in an escalating skirmish that finally forced market leaders State Farm, Farmers and Allstate to trim their premiums.

Even once-sleepy insurers like the Automobile Club of Southern California were pulled into the fray; the Auto Club went from having some of the highest premiums to having some of the lowest in many parts of Southern California.

The state Department of Insurance boasted that rates overall dropped by more than 11.3% from 1995 to 1998 in the hyper-competitive environment, even as inflation ran about 2% to 3% a year. Figures collected by the National Assn. of Insurance Commissioners, a regulators' group, showed the rate paid by the average California driver dropped from $803 to $718 in those four years. (The NAIC says 1999 figures for California aren't yet available.)

But the rate cutting largely ground to a halt last year over the issue of third-party "bad faith" lawsuits.

The Legislature passed a law that made it easier for accident victims to sue other people's insurance companies if the victims didn't think their claims had been handled fairly.

The insurance industry responded by putting Propositions 30 and 31 on the March ballot, measures designed to defeat the new law. You may remember the insurers' advertising campaign for the propositions, warning that premiums would skyrocket if the legislation were allowed to go into effect.

In fact, insurers were so fearful of higher costs from such lawsuits that they abandoned their premium-cutting binge almost as soon as the words "third-party bad faith" were uttered in the Legislature, said Brian Sullivan, an independent insurance industry analyst based in Laguna Niguel and the editor of Auto Insurance Report.

The timeout gave insurers a chance to notice that all the price cutting had hurt their profits.

After they won on Propositions 30 and 31, insurers--instead of resuming auto rate cuts--started rumbling about higher claims costs and adverse court decisions, such as the Illinois case that prevents insurers from using generic auto parts in repairs.

The rumbling has continued: The Insurance Information Institute, a national trade group, issued a new release last week warning that rates may rise because of pressure from higher costs. The institute's chief economist, Robert Hartwig, said medical costs are up 50% since 1997 and the median jury verdict in auto accident cases is up 23%.

The overall feeling in the industry is that insurance companies may have gone too far in the 1990s in cutting rates, and that higher rates may be needed to keep insurers profitable, said Candysse Miller, spokeswoman for the Insurance Information Network of California, an insurance trade group. Insurers also worry that the third-party bad faith issue could surface again in the Legislature, she said.

Sullivan, however, dismisses the idea that the environment for insurance costs is all that different from a few years ago. The reasons that insurers gave for lower auto rates--fewer drunk drivers, safer cars, aging boomers driving more safely--are still in place. Sullivan doesn't believe higher medical costs or the replacement-parts issue will affect premiums by more than 1% to 2%.

What's really different, he says, is the cooling of insurers' fever to grab market share by whacking premiums.

One ray of hope shines for California consumers, and it emanates from State Farm, of all places. The insurer recently asked the state for permission to drop rates about 5%.

Since State Farm is still one of the more expensive insurers, the rate drop isn't likely to force other insurers to follow suit. But it might prevent the competition from raising rates as aggressively as they might like, Sullivan says.

"When everybody else wants to raise rates and the market leader says, 'I'm going the other way,' that's going to dampen the trend," Sullivan said. "But the trend is still going to be upward."

For consumers, that will make rate-shopping more imperative than ever. See the accompanying Financial Planner column for some tips.


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