CALIFORNIA PROPOSITION 103 OF 1988

The primary target of the California Proposition of 1988 was the vehicle insurance sector in the state of California (Sugarman). Nonetheless, the measure moved on to cover additional insurance components for California State, such as property-casualty insurance and general insurance regulations. Auto insurance, the elected insurance commissioner, and property-casualty insurance regulations such as homeowners insurance and commercial liability insurance are among the primary topics covered (Sugarman).

The increase in auto insurance rates a year before to the approval of Proposition 103 was one of the causes that prompted the creation of Proposition 103 in California (Sugarman). The rates had increased exorbitantly in that one year. This proposition which was written by the consumers (Shultz) sought to roll back the insurance rates to the November 1987 rates (Dwight M. Jaffee, Thomas Russell). The rates were frozen to a rate of 80% of 1987 rates.

The proposition addressed the future behavior of setting auto insurance rates. Initially, the insurance rate setting in California State was regulated by forces of demand and supply, i.e. competition (Sugarman). The proposition introduced elected insurance commissioner who could help regulate the rates to be neither excessive nor inadequate. The proposition also called for approval of any proposed rate increase and public hearing for any substantial hikes (Sugarman). This move was aimed at protecting the policyholders from unscrupulous insurers exempted from the reach of antitrust federal laws.

On pricing criteria, proposition 103 quashed the initial criteria used to set premium prices as advanced by the actuaries (Sugarman). The proposition outlined three major factors to be considered when setting auto insurance prices. These include; the safety record of the insured, total annual miles driven in a year and years of driving experience. Other auto insurance rating factors could be used prior to approval by the elected insurance commissioner. The proposition also required the insurers to offer a discount of at least twenty percent to the drivers with a good driving record as defined in the proposition. Initially, the insurers used factors such as the place of residence of the driver, age, sex, marital status among other factors to determine the magnitude of the premium (Sugarman).

The other thorny auto insurance issue that the proposition 103 addressed was the geographical “redlining” (Sugarman). Geographical “redlining” is when an insurance company drew a boundary on the geographic area it was willing to offer auto insurance services. Generally, many insurers avoided high-risk areas. Thus, these regions remained with very limited options for insurance companies. The insurance prices were high and services relatively poor in such regions. The proposition 103 compelled the insurer to offer an insurance policy to any driver who met initiatives requirement regardless of geographical location (Sugarman).

Elected Insurance Commissioner

Before the passage and adoption of the proposition 103, the insurance commissioner was appointed by the governor. The proposition 103, however, provided for the populist election of the occupier of that position in future. The consumers were allowed to democratically elect the insurance commissioner (Sugarman).

Other Provisions of the Proposition 103

Other than the auto insurance and elected insurance commissioner, the proposition 103 address other issues such as pricing for homeowners’ insurance, commercial liability insurance including medical malpractice and product liability insurance, the provision on the repeal of insurance immunity of insurance from the antitrust federal laws and provisions to allow banks enter insurance business. The proposition also had provision to legalize collective auto and homeowner insurance policies (Sugarman).

Discussion

It is clear that the changes introduced by the proposition 103 had a significant change to the manner in which insurance business was conducted in California State before 1988. The proposition favored the policyholders who for some time felt oppressed by the insurers. The policyholders felt the insurers had the monopoly to run the industry. The insurers controlled the business single-handedly. The insurers, on the hand, were not happy with the passage of the proposition 103. This is evidenced by the attempts to smash it before it is passed (Shultz) and the unsuccessful appeals to the California Supreme court (Sugarman).

The insurers felt that the provision of the proposition could affect the auto insurance business negatively. This is evidenced by the many insurers (400 insurers) who applied for exemptions from the rollback of auto insurance rates. Economists argue that the price rollback could force some weaker insurers to leave the industry due to low predicted returns (Dwight M. Jaffee, Thomas Russell).

The insurance premium pricing criteria for drivers called for seriousness in driving (Dwight M. Jaffee, Thomas Russell). The at least twenty percent discount offered to “good drivers” called for safer driving. This incentive definitely was to enhance welfare directly and/or indirectly. The drivers would benefit from reduced premium rates as well as invaluable safer driving while insurers would benefit from reduced claims by the drivers.

The stricter regulations on auto insurance rating led to insurers devising other means of maximizing their profits. They, for instance, came up with ways of controlling auto fraud so as to reduce payment of losses on fraudulent claims (Dwight M. Jaffee, Thomas Russell).

Opinion

I agree that the passage of the California proposition brought good changes to the insurance business in California State. The proposition gave consumers opportunity to choose an insurance commissioner who represented their views. The proposition also helped the disadvantaged car owners in areas perceived by the insurers as business unfriendly a right to seek insurance service from any insurance company available. The auto insurance rates were also rolled back and policyholders benefited from the regulated premium rating.

Conclusion

From the above discussion, it is clear that the California proposition 103 on insurance regulation brought positive changes to consumers. The insurers were not comfortable with it simply because it was to remove them from their comfort zone where they enjoyed abnormal profits by doing little. The proposition’s provision for direct election of insurance commissioner was giving the consumers power to control the industry in California State. The insurers rose up and became more creative and diligent in service provision unlike before. They had to work on ways of maximizing profits at the required rating margins set by the elected insurance commissioner.

Works Cited

Dwight M. Jaffee, Thomas Russell. "The Regulation of Automobile Insurance in California." 2001.

Shultz, George. "Insurance Rates, regulations, Commissioner. Initiative Statute." 1988. .

Sugarman, Stephen D. California's Insurance Regulation Revolution: The First Two Years of Proposition 103. 27 San Diego: L. Rev. 683, 1990. .