Auto insurers across the state are making a beeline for Sacramento with their Christmas wish list for rate hikes following several years of rate cuts for California motorists.
Those insurers who were chopping rates two or three years ago are presently filing rate hike requests, about 8 percent statewide. Insurers note that high-risk drivers will likely witness double-digit premium increases to their premiums, with low-risk drivers seeing less drastic increases.
Going back to Sept. 30, according to California Department of Insurance information, 167 companies received CDI approval to raise rates while only 11 companies cut rates, with more requests currently being reviewed.
State Farm Insurance remains California’s largest auto insurer, with 2.9 million auto policies enforced statewide. Tri Tran, State Farm public affairs specialist in San Diego, noted that many companies have requested rate hikes in recent weeks.
“We have filed for a rate increase of 6.9 percent,” Tran said. “I think we’re part of the whole process of everyone looking at their operation and making sure we maintain our fiscal liability to honor our policyholders’ claims. For the past five years, State Farm has cumulatively reduced about 25 percent in the premium rate. Over that same five years, we’ve returned about $450 million back to our policyholders in dividends. It has been a good run.”
According to Tran, a number of factors have impacted the decision by companies to raise rates, but the main three include an increase in accidents, a high cost to maintain the policies, and an investment environment that has not provided the returns companies have witnessed in the past.
“At this point, we’re waiting to see what the Department of Insurance does with these rate requests,” Tran noted. “I think the policyholders will understand that we want to continue to be able to honor their policies. Part of that is ensuring we have fiscal strength and that we’ll be around—we want to maintain our leadership in the state.”
Tran said if State Farm’s rate increase request is approved, it would likely take effect in March 2002.
Brian Sullivan, editor of the Auto Insurance Report, notes that with a number of companies filing for rate hikes, policyholders will likely be more understanding.
“For years, California was one of the most profitable markets in our nation for auto insurers,” Sullivan said. “They couldn’t believe the low claims costs would continue. They held on to their rates and didn’t cut them. The second they cut their prices, claims started to climb. The good news is this is not a structural problem with the marketplace. It’s not that there’s something specifically wrong in California, it’s simply a cyclical change.”
Sullivan said the nonstandard risks are most likely to see the greatest rate hikes.
“Those drivers with multiple points on their licenses, those who drive high-risk vehicles or live in high-risk areas, will see it the most,” Sullivan said. “Those were areas where the rate cuts were the strongest. I think just about everybody will feel [the rate hikes], just as about everybody benefited from the rate cuts of two years ago.”
Companies rely on three prime factors when determining rates—driving record, amount of driving experience and the amount of miles driven annually. Companies, however, can use up to an additional 16 factors to decide rates.
As for future rate hikes, Sullivan said it will depend on claims cost trends.
“There are several things driving up claims costs. One is healthcare costs have been going up overall—it has a big impact on auto insurance costs. If they keep rising, auto insurance costs will continue to rise. A secondary factor is that cars are becoming increasingly more expensive to repair.”
Rick Holbrook, CDI bureau chief for rate filing in the San Francisco office, said having looked at a lot of the filings already through this year, it is very evident that the statistical support is there for the rate increases.
“There is nothing in the regulation that prohibits a company from filing as many times as they want to,” Holbrook said. “They would need to have enough new statistical data to support whatever it is that they’re proposing in their rate filing. Realistically speaking, a company would not usually have enough accumulated new data to support more than one or two rate filings in a given year.”
Holbrook described the basic procedure once a company files a rate request.
“When a company initially makes a filing, it comes into the department to an intake area which has 14 days to review it for basic compliance,” Holbrook said.
“Once the intake unit determines the filing can be accepted, we’re required by code to notice it to the public. We receive three copies of the filing—one goes to the analysts, the other two go to the San Francisco and Los Angeles public viewing room. The department then has 60 days to review that file…From the public notice day, there is a 45-day provision by code that allows intervention by the public. In private passenger auto, if the proposed rate increased is higher than 7 percent, the commissioner has to grant a hearing. The commissioner can, however, request a hearing at any level.”
While some California policyholders may feel like the Golden State is very costly to drive in, California is not alone in rising premiums for drivers.
“Auto rates are rising everywhere,” Sullivan pointed out. “One of the things peculiar about California is that you just had rate cuts, so we’re in a bit of a yo-yo situation. It’s just that the rate cuts in California were almost immediately followed by rising claims costs. That’s just kind of aggravating.
“I think all companies lose customers when they raise rates,” Sullivan noted. “But when everyone else is raising rates, it doesn’t seem to hurt as much. I would say in general, no one company is really out there doing it. I think the independent agent will be able to say to a customer that they shopped them around to four different carriers and they’re all doing the same.
“I don’t think this will make auto insurance become a public policy issue. I don’t think auto insurance rates will be part of the insurance commissioner’s race next year. Profits are shrinking so it’s hard to complain about rising rates and that insurers are gouging the public. Frankly, their profits are disappearing.”
As for the future, Holbrook said that each request will get a fair review. “There will probably be ones that will be approvable and others where we’ll go back and tell the company what they want is not justified.”