Auto, home and business insurance rates cannot be excessive

Proposition 103 requires insurance companies to submit applications for rate changes to the California Department of Insurance for review before they are approved. Auto, home and business insurance rates cannot be approved or remain in effect if they are excessive, inadequate, unfairly discriminatory or violate any other provision of Proposition 103. Proposition 103 gives the California Insurance Commissioner the unique authority to place limits on an insurance company's profits, expenses and projections of future losses (a critical area of abuse). Specifically, under Prop. 103, regulators:

• Cap the rate of return;
• Establish ceilings for executive salaries and set an overall limit on expenses equal to the industry average, rewarding insurers who operate more efficiently with a higher rate of return. Expenses in excess of the limit cannot be included in the rate base;
• Prohibit insurers from engaging in bookkeeping practices that inflate their claims losses and limits the amount insurers can set aside as surplus and reserves; and
• Forbid insurers from passing through to consumers the costs of the industry's lobbying, political contributions, institutional advertising, the unsuccessful defense of discrimination cases, bad faith damage awards, and fines or penalties.

Regulation forces insurers to fight fraud. The "prior approval" system established by Proposition 103 disengages the insurers' traditional "cost-plus" approach, ending their ability to unilaterally pass through to policyholders all claims costs, accompanied by overhead and profits. It substitutes a rate structure that encourages both insurers and consumers to engage in loss prevention. Insurers are rewarded for research and innovative programs that lead to reduced losses and claims. One of the greatest achievements of Proposition 103 is its documented success in forcing California insurance companies to prosecute claims fraud for the first time. Consumers, in turn, are rewarded with lower premiums for their individual loss prevention efforts, such as installation of anti-theft or anti-fraud devices and maintenance of a safe driving record.

Text of Proposition 103 as enacted by the voters:

Approval of Insurance Rates 1861.05. (a) No rate shall be approved or remain in effect which is excessive, inadequate, unfairly discriminatory or otherwise in violation of this chapter. In considering whether a rate is excessive, inadequate or unfairly discriminatory, no consideration shall be given to the degree of competition and the commissioner shall consider whether the rate mathematically reflects the insurance company's investment income.

(b) Every insurer which desires to change any rate shall file a complete rate application with the commissioner. A complete rate application shall include all data referred to in Sections 1857.7, 1857.9, 1857.15, and 1864 and such other information as the commissioner may require. The applicant shall have the burden of proving that the requested rate change is justified and meets the requirements of this article.

(c) The commissioner shall notify the public of any application by an insurer for a rate change. The application shall be deemed approved sixty days after public notice unless (1) a consumer or his or her representative requests a hearing within forty-five days of public notice and the commissioner grants the hearing, or determines not to grant the hearing and issues written findings in support of that decision, or (2) the commissioner on his or her own motion determines to hold a hearing, or (3) the proposed rate adjustment exceeds 7% of the then applicable rate for personal lines or 15% for commercial lines, in which case the commissioner must hold a hearing upon a timely request.

1861.06. Public notice required by this article shall be made through distribution to the news media and to any member of the public who requests placement on a mailing list for that purpose.

1861.07. All information provided to the commissioner pursuant to this article shall be available for public inspection, and the provisions of Section 6254(d) of the Government Code and Section 1857.9 of the Insurance Code shall not apply thereto.

1861.08. Hearings shall be conducted pursuant to Sections 11500 through 11528 of the Government Code, except that: (a) hearings shall be conducted by administrative law judges for purposes of Sections 11512 and 11517, chosen under Section 11502 or appointed by the commissioner; (b) hearings are commenced by a filing of a Notice in lieu of Sections 11503 and 11504; (c) the commissioner shall adopt, amend or reject a decision only under Section 11517 (c) and (e) and solely on the basis of the record; (d) Section 11513.5 shall apply to the commissioner; (e) discovery shall be liberally construed and disputes determined by the administrative law judge.

1861.09. Judicial review shall be in accordance with Section 1858.6. For purposes of judicial review, a decision to hold a hearing is not a final order or decision; however, a decision not to hold a hearing is final.

Amendments (changes from voter approved law in bold):

The insurance industry lobbied the California Legislature for amendments, marked in bold, which placed time limits on the rate review and hearings process:

1861.05. Approval of Insurance Rates

(a) No rate shall be approved or remain in effect which is excessive, inadequate, unfairly discriminatory or otherwise in violation of this chapter. In considering whether a rate is excessive, inadequate or unfairly discriminatory, no consideration shall be given to the degree of competition and the commissioner shall consider whether the rate mathematically reflects the insurance company's investment income.

(b) Every insurer which desires to change any rate shall file a complete rate application with the commissioner. A complete rate application shall include all data referred to in Sections 1857.7, 1857.9, 1857.15, and 1864 and such other information as the commissioner may require. The applicant shall have the burden of proving that the requested rate change is justified and meets the requirements of this article.

(c) The commissioner shall notify the public of any application by an insurer for a rate change. The application shall be deemed approved sixty days after public notice unless (1) a consumer or his or her representative requests a hearing within forty-five days of public notice and the commissioner grants the hearing, or determines not to grant the hearing and issues written findings in support of that decision, or (2) the commissioner on his or her own motion determines to hold a hearing, or (3) the proposed rate adjustment exceeds 7% of the then applicable rate for personal lines or 15% for commercial lines, in which case the commissioner must hold a hearing upon a timely request. In any event, a rate change application shall be deemed approved 180 days after the rate application is received by the commissioner (A) unless that application has been disapproved by a final order of the commissioner subsequent to a hearing, or (B) extraordinary circumstances exist. For purposes of this section, "received" means the date delivered to the department. (d) For purposes of this section, extraordinary circumstances include the following:
(1) Rate change application hearings commenced during the 180-day period provided by subdivision (c). If a hearing is commenced during the 180-day period, the rate change application shall be deemed approved upon expiration of the 180-day period or 60 days after the close of the record of the hearing, whichever is later, unless disapproved prior to that date.
(2) Rate change applications that are not approved or disapproved within the 180-day period provided by subdivision (c) as a result of a judicial proceeding directly involving the application and initiated by the applicant or an intervenor. During the pendency of the judicial proceedings, the 180-day period is tolled, except that in no event shall the commissioner have less than 30 days after conclusion of the judicial proceedings to approve or disapprove the application. Notwithstanding any other provision of law, nothing shall preclude the commissioner from disapproving an application without a hearing if a stay is in effect barring the commissioner from holding a hearing within the 180-day period.
(3) The hearing has been continued pursuant to Section 11524 of the Government Code. The 180-day period provided by subdivision (c) shall be tolled during any period in which a hearing is continued pursuant to Section 11524 of the Government Code. A continuance pursuant to Section 11524 of the Government Code shall be decided on a case by case basis. If the hearing is commenced or continued during the 180-day period, the rate change application shall be deemed approved upon the expiration of the 180-day period or 100 days after the case is submitted, whichever is later, unless disapproved prior to that date.

§ 1861.055. Regulations governing hearings; adoption; rendering of decision

(a) The commissioner shall adopt regulations governing hearings required by subdivision (c) of Section 1861.05 on or before 120 days after the enactment of this section. Those regulations shall, at the minimum, include timelines for scheduling and commencing hearings, and procedures to prevent delays in commencing or continuing hearings without good cause.

(b) The sole remedy for failure by the commissioner to adopt the regulations required by subdivision (a) within the prescribed period or to abide by those regulations once adopted shall be a writ of mandate by any aggrieved party in a court of competent jurisdiction to compel the commissioner to adopt those regulations, or commence or resume hearings.

(c) Nothing in this section shall preclude the commissioner from commencing hearings required by subdivision (c) of Section 1861.05 prior to adopting the regulations required by this section.

(d) The administrative law judge shall render a decision within 30 days of the closing of the record in the proceeding.

1861.06. Public notice

No changes to the original text of this provision have been enacted.

1861.07. Public inspection

No changes to the original text of this provision have been enacted.

1861.08. Hearings; law governing

Hearings shall be conducted pursuant to Chapter 5 (commencing with Section 11500) of Part 1 of Division 3 of Title 2 of the Government Code, except that:

(a) Hearings shall be conducted by administrative law judges for purposes of Sections 11512 and 11517, chosen under Section 11502 or appointed by the commissioner.

(b) Hearings are commenced by a filing of a notice in lieu of Sections 11503 and 11504.

(c) The commissioner shall adopt, amend, or reject a decision only under Section 11518.5 and subdivisions (b), (c), and (e) of Section 11517 and solely on the basis of the record as provided in Section 11425.50 of the Government Code.

(d) Notwithstanding Section 11501, Section 11430.30 and subdivision (b) of Section 11430.70 shall not apply in these hearings.

(e) Discovery shall be liberally construed and disputes determined by the administrative law judge as provided in Section 11507.7 of the Government Code.

1861.09. Judicial review

No changes to the original text of this provision have been enacted.

Status of Provision:

In 1991, Insurance Commissioner John Garamendi — the first commissioner to be elected by the voters, as specified by Proposition103 — used the authority of this provision of 103 to order a rate freeze, blocking any rate increases until insurers paid the mandatory premium refunds (see "Refunds" section) required by the initiative.

This rate freeze was in effect through 1995, when Insurance Commissioner Chuck Quackenbush (click here for more info on the Quackenbush Scandal), supported by the insurance industry, took office and allowed insurers to begin rate increases. Quackenbush often approved rates that were too high — a result of the agency's failure to finalize permanent, uniform rules to apply to all insurance companies and prevent excessive rates across the board.

In 1996, consumer groups first petitioned the CDI to complete the regulations necessary to ensure that rates were not "excessive" within the meaning of Proposition 103. Unfortunately, the CDI stalled for years while consumers overpaid — during the first three years of former Commissioner Quackenbush's term in office alone, consumers paid over $5 billion in excessive premiums. Commissioner Harry Low, who was appointed to office to fill out the remainder of the term Quackenbush forfeited by resigning in the face of impeachment, issued draft regulations. They have not yet been finalized.

As of January, 2003, the California Department of Insurance still had not promulgated all regulations needed to implement this section of 103. Thus, requests for rate changes submitted by insurers are reviewed under informal guidelines based on the regulations promulgated by Insurance Commissioner Garamendi in 1991 to govern the rate rollbacks and refunds required by 103. (Go to section on "Refunds" for more info.) And the task of monitoring and challenging rate increase requests has fallen to citizen groups like FTCR, with highly limited resources.

Even though it has sometimes been only weakly enforced by the CDI, the rollback and rate freeze imposed in 1990 dramatically lowered premiums, and regulatory constraints imposed by 103 have deterred increases. California was the only state in the nation in which auto insurance premiums actually dropped between 1989 and 1998, thanks to this tough regulation, while rising 25% on average throughout the rest of the nation, according to a 2001 study by the Consumer Federation of America (see below). The report concluded that this provision of Proposition 103 blocked over $23 billion in rate increases for auto insurance alone through 2000.

Source Documents:

Read the study of Proposition 103's impact in California, and a model for the nation: "Why Not the Best?" by Dr. Robert Hunter, Consumer Federation of America (6/6/01).

Read Dr. Hunter's reply to the Insurance Industry's critique of "Why Not The Best" (8/10/01)

Read 1998 study by FTCR of Proposition 103's impact on auto insurance premiums in California.

The insurance industry, determined to avoid similar regulation in other states, has paid for numerous academic studies arguing that contrary to California's experience under 103, regulating insurance rates raises premiums. However, a contrary view was taken by Russell and Jaffee, concluding that Proposition 103 benefited consumers by lowering rates and in other ways. Read their analysis (April 1, 2001).

Read a brief fact sheet on Prop. 103's "prior approval" process.

View a Los Angeles Times article (10/18/90) quoting the Los Angeles District Attorney on how Proposition 103 has forced insurance companies to fight fraud for the first time.

Read Announcement by Insurance Commissioner John Garamendi (1/1/91), imposing a rate freeze on insurance companies.

Relevant Legal Materials:

See the "Refunds" section for court decisions upholding right to limit insurers' expenses, profits, reserves, surplus and other financial accounting methods as part of regulation of rates required by Proposition 103.

Read a sample petition by FTCR challenging a rate increase request submitted by a medical malpractice insurance company.

Other:

For a narrative description of how Proposition 103 works, review An Analysis of California Proposition 103.

To learn more about the right of consumers to challenge rate increases, and the process to do so, click on the "Public Participation" section.
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Updated: January 28, 2003