RiskProf

A Nice Summary of Prop 103

George Wallace is back and he has a nice summary of Proposition 103.!  Also there is an interesting aside… George Joseph a founder of Mercury Insurance is betting a $1 million that no one can prove insurance consumer advocates’ claim that insurance consumers have saved $23 billion due to Prop 103.

What Happens When You Mix Prop 103 with Anti Prop 103?

Is it the end the universe as we know it?

Some claim that California Prop 103 was beneficial to the California auto consumer.  Others claim that ham handed regulation under Prop 103 keeps prices from being even lower than they are.  As a result there is a push to undo Prop 103.

Some of the arguments in favor of Prop 103 are strange.  For example, consumer advocates all seem to be upset by industry efforts to assign people to risk categories in a way that more accurately reflects their risk.  This is what insurers do.  Low risks get low prices and high risk get higher prices. One bugaboo in California is the use of zip codes which Prop 103 implies cannot be a rating factor.  The Proposition basically requires rates to be made based on the driver’s record, the number of miles driven annually, and the driver’s experience.  Thus, the environment (zip code or neighborhood) in which one drives is immaterial.   Many see this as a way to prevent red lining, but it is possible that certain neighborhoods have higher risks of property damage or crime.  Shouldn’t an insurer be able to take this into account?  What if the population density of the zip code was associated with a higher probability of a traffic accident?  Shouldn’t the insurer be able to take this into account?   What about the people in low risk zip codes?  The state, by prohibiting discrimination based on zip codes, is taxing people who live in rural areas to subsidize those who live in urban areas.  This doesn’t make sense, but there is strong aversion to zip codes by consumer advocates.

Repeal of Prop 103 would allow rates to be set in a competitive market.  People who like Prop 103’s utility style rate hearing process are afraid of markets or they don’t trust them.  I just don’t see why they don’t stop at regulating insurance prices, though.  I think plasma TV’s are still too expensive.  I’d like the state of Georgia to reduce the price so I can get this one for $200.  (I think that is pretty fair price and my little sigmas would love to play Playstation 2 games on that baby.)  I’d also like Georgia to sue the manufacturer for economic discrimination if it doesn’t want to sell to me at that price!.  What is unique about auto insurance that requires public utility style regulation.  Insurers are not monopolistic entities.  In fact the market for auto insurance is probably about the most competitive insurance market there is.

One other thing the proponents point to is the fact that California had high insurance prices prior to Prop 103 and afterwards enactment, the prices did go down.  However they decreased everywhere.  The 1990’s were the boom time for reduction in auto loss claims.  Cars were getting better, roads were getting better (even if the drivers weren't), and insurance losses were falling.  This reduction in losses meant that auto insurance premiums fell everywhere—including California.  Thus, the conclusion that Prop 103 actually brought all these benefits to the good people of California is not necessarily true.  It could be true, but there is no way to empirically verify this conclusion.  The equally likely result is that California, like other states, benefited from good loss experience.

For a short summary of the Anti Prop 103 approach see David Appell’s report and for a paper that seems to think that Prop 103 has been benign see Dwight Jaffe and Tom Russell’s paper from the Brookings-AEI Auto Insurance Monograph.  See also David Appell’s critique of Jaffe and Russell.

Thanks to a reader’s suggestion for this post.  I’ll probably be posting more on this as more about the Anti Prop 103 gang comes to light.

Technorati Tag  prop 103