State Insurance Commissioner John Garamendi said Thursday that he would propose rules forcing auto insurers to set rates based on the driving records and miles driven by motorists, and to give less weight to where drivers live—a change that could affect the pocketbooks of 23 million California drivers.
The proposal was embraced by consumer and civil rights advocates who have long complained that city dwellers—especially in minority neighborhoods—pay higher rates than drivers with similar records who live in rural towns and suburbs.
But insurance industry representatives said the proposal could lead to rate hikes for more than 60% of California drivers, and they said the formula would deny insurers the ability to set rates based on a proven risk factor.
“We are hoping to go through the regulatory process and come out, at the end of the day, with a change that will balance the competing interests of different drivers,” said Sam Sorich, president of the Assn. of California Insurance Cos. “Fairness requires that rates reflect the risk of loss. The question is whether these regulators will move too far away from that principle.”
As insurance commissioner, Garamendi has the authority to implement new rate formulas after public hearings and legal review. He plans to release details of his proposal next week, with the first hearing set for Feb. 24.
Garamendi said his proposal was intended to implement provisions of Proposition 103, the 1988 voter initiative that said auto insurance rates should be based primarily on three factors—driving record, miles driven and driving experience.
School records, marital status and ZIP Codes, among other things, could be secondary factors.
“What’s going to change is who pays more and less,” said Rex Frazier, vice president and general counsel of the Personal Insurance Federation, a trade group. “Imagine you have a balloon and you squeeze on one side. It pops up on the other. In this case, rural drivers are going to subsidize both good and bad urban drivers.”
Consumer advocates, however, said the current system was unfair, because it raised rates for minority group members and others who could least afford the payments.
A female motorist with 22 years of driving experience and a good record who lives in predominantly white Westchester would pay $1,443 a year with Farmers Insurance Group, advocacy group Consumers Union said in a study released this week.
That same driver would pay $2,394 a year if she lived in the African American neighborhood of Baldwin Hills, the group said. Similar disparities occur for customers of other major insurance companies, Consumers Union said.
Insurance executives criticized the study, saying that rates are higher in certain neighborhoods because accident rates are higher, and that neither race nor ethnicity is a factor.
Though they expressed reservations, insurance trade groups said they would withhold formal comment until they had a chance to review Garamendi’s proposal.
Still, insurers said they had statistical data showing that driving records, miles driven and years of driving experience were less important in predicting accident rates than people might think.
In particular, the number of miles driven is a poor risk indicator, said Frazier of the Personal Insurance Federation. That’s because the risk of a fender bender is far greater on a five-mile ride through the city than it is during a five-mile jaunt through the country.
“Five miles driven in Tulare is not the same as five miles driven in Los Angeles,” he said.