California voters approved Proposition 103 in 1988. It was about "prior permission" of policyholders from California's Department of Insurance before any insurance company could implement property, car, casualty, and business insurance rates. Most consumers were concerned about the huge increase in vehicle insurance throughout the 1980s, and campaigners argued that the insurers' greed was the fundamental culprit. The proposition then tried to address the insurance industry's high costs, and this article lists the primary adjustments made as well as describes the political atmosphere that contributed to Prop 103's approval. The first change was the premium rollback where each insurance company was required to rollback its premiums to August 8th, 1987 rates and then reduce them by 20% subject to their right of earning a “fair and reasonable return.” An insurer was only exempt if he could prove that the move would prevent them from making a “fair return, ” but if unable to do so, they would refund all the excess premiums plus interest collected between August 8th, 1988 and August 8th, 1989.
The second change was the requirement that all rate changes would have to be approved by the insurance commissioner. Before the passage of Proposition 103, insurance companies could have the freedom to change the rates whenever they wanted. However, the commissioner was required to justify any rate increase or increases, and under some conditions, public hearings were necessary. A public hearing was required when personal, and auto rates were to be increased by 7% and 15% respectively with the insurer catering for all the costs and expenses of “interveners” advocating for the rights of the consumers.
The third change was in the establishment of auto insurance rates. Initially, they were determined using the Zip-Code system, but Prop 103 required the consideration of three key factors: the safety record of the driver, years of experience, and the annual miles covered. The good drivers would receive a discount of 20% on the average coverage charges. Such a driver was one who had at least three years’ experience and at most one violation in the last three years.
The political climate from which proposition 103 emerged
The “tort law crisis” dominated the American headlines throughout the 1980’s. Individuals held the opinion that the “personal injury law and liability insurance” system was out of control resulting in significant increases in insurance premiums to the extent others could not provide to buy liability insurance. As a result, consumers and businesses created a coalition lobbying for a change in the tort law with the hope that prices would stabilize and liability insurance would become available to all.
The move elicited political debates in most states throughout the U.S resulting in some jurisdictions undergoing some changes. However, California passed the Proposition 51, a modest initiative which limited the liability award for pain and suffering cases. The passage of that reform frustrated lawyers on the plaintiff’s side, and they threatened to initiate insurance reforms on their own. According to Roth (1992), two problematic issues were at the core: defining a “fair and reasonable” rate of return and how to develop suitable criteria for the prior approval of rates.
The result was the forging of a compromise in September 1987 where the Insurance Coalition and the California Trial Lawyers Association made a truce whereby all the parties agreed for five years to cede pressing for further legal change, either in the legislature or through the initiative process (Klein, 2013). However, the truce was short-lived because several interest groups were circulating initiative petitions dealing with tort law, insurance law or both. These hearings failed because the lawyers lacked knowledge on insurance yet they drafted the regulation and the experts involved did not properly work out the insurance industry’s rate of return (Klein, 2013).
People are divided on whether Proposition 103 has reaped any benefits to the consumers. The Consumer Watchdog reports that Californian Motorists have saved $102 billion worth of premiums and it is estimations show that that savings of over $350 billion will accrue over the next ten years.. However, Adams (2015) points out that Prop 103 has resulted in California having a lower number of rate filings and approval process compared to other states. The insurance system has become increasingly inefficient because of the few number of insurance groups, the Californian insurance rates are among the highest in the U.S, and the administration has become too expensive. Adam (2015) argues that it has not adequately protected the consumers from higher insurance rates which would otherwise be lower if the regulatory system was dynamic and flexible. Also, Prop 103 was passed under the assumption that the insurance rates would continue to increase, but instead, costs have declined, and newer technology has improved driver behavior and reduced accidents.
I agree with the changes made to rate regulation after the passage of Prop 103. The 20% cut in the insurance rates and restriction of the setting of auto rates have translated into huge savings for the consumers. As indicated above, consumers have made savings of over $100 billion in premiums since it was passed and policy holders have had their premiums refunded. I recognize that it has some limitations such as a lower rate of filling rates, but most consumers report that they are saving on their premiums.
In conclusion, Proposition 103 seeks to reduce automobile, business, and insurance premiums and offers a cut of 20%. It also ensures that the rights and interests of insurance consumers are protected and championed through the consumer watchdog system. Individuals are still divided on its success but it has played a huge role in savings insurance consumer’s massive amounts of premium payments. Going forward, it is essential to involve all the major stakeholders to make the Prop 103 fair and favorable to all.
References
Adams, I. (2015). THE TROUBLESOME LEGACY OF PROP 103 (pp. 1-18). R Street. Retrieved from https://www.rstreet.org/wp-content/uploads/2015/10/RSTREET43.pdf
Klein, R. W. (2013). Insurance market regulation: Catastrophe risk, competition, and systemic risk. In Handbook of Insurance (pp. 909-939). Springer New York
Roth Jr, R. J. (1992). Observations on the California Proposition 103 Debate Over Profitability and Surplus. In Casualty Actuarial Society Forum, Spring
