Testimony of Douglas Heller, Consumer Advocate

Foundation for Taxpayer and Consumer Rights

Presented to the California Department of Insurance

Thursday, November 9, 2000

The Foundation for Taxpayer and Consumer Rights (FTCR) has worked to protect California consumers for 15 years. FTCR’s staff has led the efforts to defend and implement insurance reform Proposition 103 since its enactment by California voters in 1988. Proposition 103 established a strict regulatory system to ensure fair insurance rates and has resulted in over $1 billion in rate rollbacks returned to consumers and more than $16 billion dollars in consumer savings on insurance premiums.

The National Association of Insurance Commissioners (NAIC) “uniformity” proposals represent, in FTCR’s view, a wholesale attempt by the insurance industry to decimate California’s insurance rate system and consumer protections enacted under Proposition 103 and other legislative reforms.

Race to the Bottom

That the insurance industry wishes to escape effective regulation is nothing new. What has changed is that the industry is now calling for what it once considered anathema — a national “regulation” scheme — because it would be, in practice, the same as deregulation. In deference to the industry, the NAIC has concocted a plan that would effectively deregulate the industry at the state level through a toothless, national system of insurance company self-regulation. This system would use a “lowest common denominator” approach in which the state with the weakest regulatory system and fewest consumer protections would become the standard model for insurance regulation nationwide. What is euphemistically called “speed to market” by the insurance industry and the NAIC, would be better described as a “race to the bottom.”

The Coordinated Advertising Rating and Form Review Authority (CARFRA) system, proposed by the NAIC “Speed to Market” working group, would undo strong consumer protections in place under California law. The examples of how California consumers would lose under the NAIC’s proposal are numerous:

• California requires that all insurance rates receive the approval of the Insurance Commissioner prior to implementation, and rate changes may be subject to public hearings. This protection against price gouging (as well as underpricing to gain market share) is threatened by the approach put forward by the NAIC;
  

• the CARFRA proposal does not provide for the kind of consumer participation in rate-setting that California currently allows. California law, that is, includes an intervenor process that provides resources for individuals and groups to challenge inappropriate rate changes;
  

• standards for licensing agents and brokers would be compromised by the plan; and
  

• the market conduct examination process for investigating the behavior of companies would be undone by the NAIC proposals.

California Insurance rates will increase under CARFRA and create instability in the market

The Speed to Market program is clearly a power grab by insurers from the largest states with the most effective regulatory regimes. The NAIC recommendations would place far too much emphasis on the regulatory work of states with small Insurance Departments (such as Alabama with a staff of 66 employees ), thus undermining the role and authority of states more well-equipped to analyze rate increases. Under the CARFRA plan, if a company is domiciled in Alabama, that state’s staff of rate analysts and actuaries (two and zero, respectively) could have more power to assess and accept insurance rate changes for California consumers than California itself (with its 70 rate analysts and ten actuaries).

By relinquishing California’s regulatory oversight, insurance rates will increase with no curbs on excessive rates. Moreover, without regulation, insurance premiums will swing dramatically as companies try to increase market share with inadequate rates and then increase profits by charging excessive rates. For insurers, speed to market means that they will have fewer roadblocks to excessive profits and be less accountable to the state’s interest in reasonably priced insurance products.

NAIC plan illegal under Proposition 103

Proposition 103 does not allow the State Legislature to make many of the statutory changes that the NAIC plan would require. Proposition 103 can only be amended in the Legislature (by a 2/3 vote) in a manner that would further the purposes of the law. A decrease in the regulatory authority of the state does not further the purposes of proposition 103 and would be turned down by the Courts.

One of the key regulatory duties under Proposition 103 is the approval of rate changes prior to implementation. The voters of California selected the prior approval system in direct response to the failures of the file-and-use system that led to the dramatic rate swings of the 1980s. State law, as enacted by the voters does not allow the insurance industry, the NAIC or even the Legislature to return California to unregulated insurance premiums.

Deregulation of the insurance industry is bad public policy

In addition to the fact that there is no legal authority to undo the state’s prior approval system, there is no public policy reason to relinquish regulatory oversight. The dysfunction of the deregulated workers compensation market is a testament to the importance of a well-regulated insurance market. The NAIC would have the state of California do to its private and commercial property and casualty markets what was done to our workers compensation market. Furthermore, we must take some cues from the state’s electricity deregulation fiasco. The energy rate crisis of this summer provides parallel evidence that the state ought to retain its role in insurance rate setting.

Insurers may threaten to pull out of state market

If the Speed to Market plan moves forward, insurers will issue threats similar to those of the mid-1990s, when companies said that they would refuse to sell homeowners policies in California unless the state removed the requirement that the companies sell earthquake insurance. If the NAIC plan is adopted, insurers may threaten to pull out of states such as California unless the state eliminates its strong consumer protections and adopts the less rigorous, “uniform standards” of the NAIC.

The California Department of Insurance must demonstrate to the NAIC and insurance industry that the state will stand firmly by its consumer protection standards.

Dep’t of Insurance should launch a counter-proposal to strengthen consumer protections

While the insurance industry and NAIC seek anti-consumer concessions from California, the California Department of Insurance should be countering these proposals with aggressive consumer protection measures based on our own state laws. Rather than the devolution of regulatory protections, there should be an effort to improve and strengthen protections in other states with such policies as:

• a prior approval system for setting insurance rates to ensure that rates are neither excessive, inadequate or unfairly discriminatory;
  

• a ban on ZIP Code-based insurance rates
  

• a low-cost auto insurance program for low-income drivers; and
  

• automatic publication of market conduct examinations or settlements of exams to inform the public about insurance company behavior.

The NAIC plan to abandon virtually all regulatory power over insurance companies should alarm advocates and politicians throughout the country who have worked for years to develop meaningful and effective consumer protection standards. Under the guise of standardizing insurance regulation, the NAIC offers consumers the antithesis of regulation: a race to the bottom in which the most industry-friendly system wins and the public loses. In an era in which S&Ls will be underwriting auto policies and stock brokers will be paying disaster claims, the Department should encourage the NAIC to pursue more, not less, government oversight of the affairs of insurers.