Every day, in one of the Google news searches I query via RSS, it seems like there are a handful of stories in California papers about the CDI’s plan to restrict territorial rating. This article at the Lake County Record-Bee is typical:
Lakeport Area Chamber of Commerce Executive Director Melissa Fulton believes that insurance companies should have the right to determine what the primary factors are. As a result, the chamber has taken a firm position opposing Garamendi’s proposal to severely deemphasize ZIP codes as a primary factor.
Those against Garamendi’s proposal say rural drivers’ rates will increase substantially when ZIP codes are no longer a major factor in determining how premiums are calculated. The reason, they say, is because urban drivers have more risk which is associated with the higher populations found in their areas.
But supporters of the Garamendi plan say that good drivers shouldn’t continue to subsidize bad drivers, no matter where they live.
While the supporters’ argument sounds nice, there are a couple of problems with that statement:
- The majority of drivers on the road have clean or fairly-clean driving records, making that variable less useful than you’d think in terms of predicting risk of loss.
- Past violation or accident history is less predictive than you might expect.
- Past violation or accident history has very little to do with cost differences in different regions of a state, the quirks of local courts in making damage awards, the propensity for stolen cars to disappear into Mexico, etc.
I’m familiar with an industry study of private passenger auto experience performed by EPIC Actuaries. One of the products of the study was a review of which rating/underwriting variables are most predictive of actual loss costs. For BI/PD, the most predictive variable was age/gender, the second most predictive was insurance score, and the third most predictive was geography.
I’ve said previously that I’m all for finding alternate ways to provide/fund/rate mandatory auto insurance coverage (if mandatory auto insurance is necessary). For one idea I think would work, see this post of mine from last November, which, in a nutshell, calls for minimum mandatory coverage to be underwritten by the state and funded through various transparent means, while leaving the market for excess and out-of-state coverage free and in the hands of private insurers.
The heart of the issue in California is that some folks are finding their auto insurance too expensive. I’d say that “fixing” that problem should be something handled within the operations of the state government, without imposing artificial restrictions on the private market (at least for “optional” coverage) — artificial restrictions which will reduce insurers’ willingness to compete and find ways to efficiently offer the best rates to consumers.