In a move that could presage lower auto insurance premiums for many of California's 23 million drivers, the state's fourth-largest provider has agreed to base its rates on how safely and how much its customers drive rather than primarily on where they live.
The plan, to be announced today by the Automobile Club of Southern California and California Insurance Commissioner John Garamendi, would slice as much as $133 million from the annual bills of the club's nearly 1 million policyholders. More broadly, it could compel the club's rival insurers to follow suit.
The shift is a victory for consumer advocates, who say that rates based largely on ZIP Codes saddle city dwellers with higher premiums than suburban and rural drivers with similar records. It also is a coup for Garamendi, who has been working to force insurers to comply with requirements approved by voters with the passage of Proposition 103 in 1988.
In revising how it sets rates, the Los Angeles-based Auto Club is breaking ranks with the state's other major insurers. It expects that 88% of the 993,000 drivers it insures will see their bills drop 7% on average, or $134 annually.
Most other Auto Club customers will see their premiums rise less than 5% when the new rate-setting formulas take effect in December, said Thomas V. McKernan, the Auto Club's president and chief executive.
Proposition 103, the landmark auto insurance initiative, required that rates primarily be tied to a person's driving record, number of years licensed and total miles driven each year -- not the ZIP Code where a vehicle is registered.
But changes in industry practice have been held up for the last 17 years. Insurers, which argued that where a driver lives is an essential factor in assessing risks and costs, persuaded former Insurance Commissioner Chuck Quackenbush to allow ZIP Codes to remain a priority in setting rates. Quackenbush's regulations and later court rulings kept the old rules largely in place.
In December, Garamendi announced that he would propose his own regulations aimed at fulfilling the mandate of Proposition 103.
"How safely you drive is more important than where you live," Garamendi said in an interview Friday. He said new regulations expected to be on the books this month would compel insurance companies to overhaul their market practices so they no longer "favor one ZIP Code and trash another ZIP Code," he said. The changes still face expected legal challenges from insurers.
Current rating systems, which rely heavily on geography, allow insurers to discriminate by charging high rates for motorists living in ZIP Codes they might not want to serve, Garamendi said.
A study last year by Consumers Union noted that a woman with 22 years of driving experience and a good record, residing in predominantly white Westchester, would pay $1,443 a year with Farmers Insurance Group. The same driver would pay $2,394 if she lived in the largely African American Baldwin Hills neighborhood, the study found.
Insurers, for their part, criticized the survey, saying their rates were based on the number of claims in an area, not the race or ethnicity of policyholders.
The Auto Club's decision to deemphasize ZIP Codes is historic and sends a message to other insurers that "they can respect the wishes of the voters and make money at the same time," said Harvey Rosenfield of the Foundation for Taxpayer and Consumer Rights. The Santa Monica attorney wrote Proposition 103 and has been working ever since to see it fully enforced.
"This will have tremendous consequences for the marketplace," Rosenfield said.
Garamendi's deal with the Auto Club also would send an important signal to lawmakers and insurance commissioners in other states that California's system could be good for both motorists and insurers, said J. Robert Hunter, director of insurance for the Consumer Federation of America. Hunter, a former Texas insurance commissioner and federal insurance administrator, helped Rosenfield write Proposition 103.
"The rest of the country now should look again at Proposition 103 in its entirety," Hunter said.
By voluntarily accepting Garamendi's rules even before they officially take effect, the Auto Club is distancing itself from the combative stance taken by rival insurers.
Garamendi's proposed regulations, which would greatly diminish the importance of ZIP Code rating, are under review at the California Office of Administrative Law. If cleared there, the rules would take effect after July 18.
Insurers would then have two years to comply fully with the new standards; they must show substantial progress during the first year, Garamendi said.
According to the Foundation for Taxpayer and Consumer Rights, both candidates running to succeed Garamendi, Democrat Cruz Bustamante and Republican Steve Poizner, have said they are committed to deemphasizing the use of ZIP Code rating for auto insurance.
