Car Insurers Hold Price Hikes Down

California's Proposition 103 shocked industry with mandated premium reductions

Many people may not have noticed, but the cost of insuring cars has been staying under the national inflation rate since 1990. In the last five years of the 1980s, auto insurance rates were zooming up at 10 percent a year, well above the national inflation rate.

"We have seen a sea change in the cost of auto policies," says Robert Hunter, head of the insurance division of the Consumer Federation of America (CFA) in Washington, D.C.

There are several technical reasons for the change, Mr. Hunter says, and one major political one.

The technical reasons are these, he says: Insurance companies are fighting fraud more vigorously and cutting agents' commissions, some states are allowing rate discounts to groups like teachers' unions and automobile clubs, and the insurance companies are making cost-cutting moves internally, such as thinning middle management.

The political reason is passage of Proposition 103 in California in 1989, Hunter says. Outraged by ever-higher insurance costs, voters supported forcing a 20 percent cut in rates unless an insurance company could prove that such cuts would harm the company.

Hunter, former insurance commissioner for Texas, was head of the National Association of Insurance Commissioners (NAIC) in Washington when the proposition passed.

"It really scared all the companies, across the country," Hunter says, and they began to institute reforms. "For one thing," he says, "they reached out to consumer groups like ours [CFA]. We now have coalitions with companies in which we jointly fight for auto safety and for less fraud."

Studies by the CFA and NAIC show that rate increases have been kept within the bounds of inflation of late.

In Massachusetts, the American Automobile Association has caused a stir by offering its members a 10 percent discount on auto policy rates through the Commerce Insurance Company of Worcester, Mass., and an additional 10 percent cut for drivers with excellent safety records. Massachusetts was the first state to offer group discounts, starting in 1979. A number of other states now offer them.

Until last September, when AAA announced its program, only 103 other groups participated, according to AAA spokesman John McMann. Now, he says, 1,100 Massachusetts groups participate. Publicity has its impact.

Rates are set by the state in Massachusetts, so opportunities for price competition are limited to the group-rate program and to safe-driver programs the companies have. Also, 35 percent of the members of any group must participate or the discount is not given. Insurance companies and brokers are waiting to see if AAA gets 35 percent of its members to participate this calendar year.

Price competition is hotter when states do not set the rates. The Consumers Union in Yonkers, N.Y., which publishes Consumer Reports, offers comparative price information on auto insurance to consumers in California, Florida, New Jersey, New York, Pennsylvania, and Washington State.

By November, they hope to expand the year-old service to include Illinois, says Thomas Blum, manager of the price service.

"Shopping around for better auto-insurance prices is no fun," Mr. Blum says. His service offers consumers a five-page report, for a fee, that lists companies selling in the consumers' states and their prices. He says other ways to get price information is through the individual companies, through rating manuals, often available in libraries, and from state departments of insurance.

Increasingly, he says, "aggressive companies are marketing on the basis of price."

State Farm Insurance Company of Bloomington, Ill., for example, announced Aug. 16 that it is asking the California State Department of Insurance to approve a 5.4 percent reduction in its auto rates. The firm reduced rates last September by 1.7 percent. State Farm, the largest auto insurer in the US, sells $22 billion worth of policies per year, out of a total US figure of $97 billion, Hunter says.

Progressive Insurance Company provides comparative pricing information, Hunter says, because its share of the market is small and it believes its prices are very competitive.

"Most insurance commissioners have not decided if they want regulation or price competition," he claims. "They have not thought it through, so they end up having a little of each."

Hunter says ensuring price competition depends on several steps: (1) enforcing antitrust laws so there is no price-setting collusion by companies; (2) providing price information; (3) balancing supply and demand by using good no-fault laws that supply necessary funds for serious injury awards and discourage unfounded and small claims. Fraudulent claims are a major problem in the industry.

On the latter point, for example, he says that Michigan is the only state with a truly workable no-fault law. There, the right to sue is sharply restricted unless there is serious injury. In other states with no-fault, there are many lawsuits involving lesser injuries, making it hard to pool enough funds to deal with truly serious cases.

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