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Campaign For Consumer Rights

1750 Ocean Park Boulevard | #200 | Santa Monica, CA | 90405-4938 Tel: 310-392-0522 www.StopTheSurcharge.org

January 25, 2010 The Honorable Jerry Brown Attorney General California Department of Justice 1515 Clay Street, Suite 2000 Oakland, CA 94612 Re: The Mercury Insurance Initiative – Initiative No. 09-0028 By Electronic and U.S. Mail Dear Attorney General Brown: We have uncovered new evidence that the Mercury Insurance initiative, which qualified for the June ballot last Wednesday, will indisputably lead to increases in auto insurance premiums for many California consumers. In fact, when confronted with the evidence from Mercury’s own web site, spokespeople for Mercury Insurance have now publicly acknowledged to the San Francisco Chronicle that some people will pay more because of the initiative (Exhibit A). I write to ask you to review this new material carefully, and as you prepare the new Title and Summary for the initiative that will appear in the Voter Guide, Ballot Pamphlet and other official materials distributed to the voters, you include the fact that this measure will allow insurance companies to raise auto insurance premiums, not just lower them.

1. Mercury Insurance Levies Enormous Surcharges in States Where the Law Allows Insurance Companies to Consider a Consumer’s Coverage with Other Insurers

Mercury has repeatedly suggested that it’s initiative is intended to change California law to conform to the insurance laws of other states, where insurance companies are allowed to consider “the absence of prior insurance.”1 We have tested how Mercury Insurance Company itself rates consumers in such other states. We began with our next-door neighbor Nevada. We went to Mercury’s web site and requested a quote for a consumer with a Las Vegas address. The very first question is “Are you currently insured?” We answered that question both ways and answered every other question the same. If the answer was “Yes,” the quote returned was $835.00. When I answered “No,” Mercury’s charge rose 73% to $1,448.00.

1 The Findings contained in the Mercury Insurance initiative state: “The vast majority of states allow insurers to offer a discount to ALL drivers who maintain ongoing auto insurance. This measure will simply bring California into line with other states like Texas, New York, Oregon, Washington and Florida.” Section 2(f).

The Honorable Jerry Brown Attorney General January 25, 2010 You can watch for yourself as I went through this process on Mercury’s web site by going to: http://youtu.be/8M1sry1QT1c. Along with scans of the relevant pages from Mercury’s web site, I have included a disk with a copy of the video as Exhibit B. We received similar quotes from Mercury’s own web site for consumers in other states that Mercury references in the findings of its initiative. Here are the results: in Texas, the Mercury surcharge is 33% for a person whose coverage lapsed while they were serving in the military, and 74% for a driver who didn't have auto insurance because they did not have an automobile. In New York the "no prior insurance" surcharge was 81% and in Florida, stating that you do not have prior insurance can lead to a 227% surcharge. (Mercury does not sell auto insurance in the other states it identifies in the initiative. A quote from Safeco Insurance in Washington, however, led to a 74% premium hike for a driver who did not have insurance because he had not owned a car in the immediate past.) These quotes are attached as Exhibit C.

2. Mercury Insurance Imposed a Prior Insurance Surcharge in California, which was Later Determined by the Insurance Commissioner and the Courts to be a Violation of Proposition 103

We don’t actually have to go outside California borders to determine that many consumers’ auto insurance premiums will go up substantially, and perhaps enormously, under the changes proposed by Mercury’s initiative. For many years Mercury Insurance Company unlawfully applied a “continuous coverage” discount to its California customers – the same practice it proposes to legalize through its initiative. In 2003, we obtained insurance quotes from Mercury’s web site that revealed that Mercury imposed an enormous surcharge on motorists who noted a lack of prior insurance on their application. We tested several customers throughout California and found that when altering only the person's prior insurance history, Mercury’s surcharge was between 34% and 57% more for those who did not have prior insurance. One such driver paid a 41% surcharge because he had a lapse in coverage, as shown in the quotations attached as Exhibit D. In response to Mercury’s misconduct, the Insurance Commissioner commenced a rulemaking process that led to a 2002 regulation barring Mercury from applying “persistency” discounts so as to penalize the previously uninsured. In rejecting Mercury’s argument that its prior insurance “discount” was “a reward, not a penalty,” the Insurance Commissioner stated:

Under California ratemaking principles, a company’s class plan is revenue neutral. Therefore, a discount to one group of persons based on a particular characteristic, results in a surcharge to those who do not meet such a qualification. The costs of a discount to a person previously insured is borne by those who do not have prior insurance. The use of the discount proposed by the commentators, therefore, is in effect a surcharge to those without prior insurance. (Exhibit E, p.6, emphasis added.)

The Honorable Jerry Brown Attorney General January 25, 2010 At the same time, Mercury was sued in Los Angeles Superior Court by its own customers for its violation of Proposition 103. (Donabedian v. Mercury Insurance Co. (2004) 116 Cal.App.4th 968.) Mercury tried to escape liability in the lawsuit by seeking an amendment to Proposition 103 in the Legislature. In assessing the Mercury legislation, the Insurance Commissioner stated: “Those without prior insurance would end up paying significantly more in premiums to offset the discount offered to those meeting this expanded form of persistency.” (Exhibit F.) Governor Gray Davis vetoed the first Mercury amendment in 2002. At the same time, however, he asked the Insurance Commissioner to prepare a study of the impact that Mercury’s proposal would have had upon motorists. According to the report that the Insurance Commissioner prepared:

Since insurance is a mechanism, which provides for the sharing of total losses among all insureds within an insurance company, the discounts given to one group of insureds are not simply money saved. The total losses of the insurance company will not change. The sharing mechanism works by making the remaining group who do not qualify for the discounts pay more. People who do not have prior insurance are surcharged under portable persistency. Many of these people are those that can least afford to pay for insurance or who already have high premiums caused by other rating factors. This discourages them from buying insurance, which may add to the number of uninsured motorists and ultimately drives up the cost of the uninsured motorist coverage for every insured. (Exhibit G, page 6 of the study; italics added.)

Governor Davis signed the Mercury amendment in 2003. The text of that measure is virtually identical to that of the Mercury initiative.2 It was invalidated by the courts precisely because it imposed surcharges that punished those who did not have prior insurance coverage, a violation of Proposition 103. The California Court of Appeal determined:

Sen. Bill 841 would permit insurers to surcharge previously uninsured drivers to fund discounts for drivers with prior or persistent insurance. The Foundation for Taxpayer and Consumer Rights v. Garamendi (2005) 132 Cal. App. 4th 1352 at 1366 [emphasis added].

Conclusion

The evidence marshaled in this letter reflects not only thorough analyses of the Insurance Commissioner and the courts regarding Mercury’s long-sought amendment to Proposition 103. We provide proof from Mercury itself that under its proposal, insurance companies will be

2 Exhibit H is a copy of the bill as signed by the Governor.

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Persistency Study

Table of Contents Executive Summary 1

Introduction 2

Enumeration of Driver Discounts 3

Persistency Rating Factor 3

Loyalty Persistency Justification 4

Problems with Portable Persistency 4

Impact of Removal of Portable Persistency 5

Conclusion 6 Exhibits Exhibit A - Listing of Mandatory and Allowable Optional Rating Factor under CCR 2632.5 Exhibit B - Additional Possible Rating Factors

Exhibit C - Loyalty and Portable Persistency among Top 50 Auto

Insurers

Exhibit D - Justification of Loyalty Persistency Discount

Exhibit E - Impact of Removal of Portable Persistency

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Persistency Study Executive Summary This study reviews the justification for use of loyalty and portable persistency in rating personal automobile insurance policies. Our review of the data shows that loyalty persistency is a justified rating factor as it has a substantial relationship to the risk of loss. In addition our review shows, as years of loyalty persistency increase, the indicated discounts also increase. Portable persistency however, is in direct conflict with the intent of Proposition 103 and CIC 1861.02 (c) that states “the absence of prior insurance coverage in and of itself, shall not be a criterion for determining eligibility for a Good Driver Discount policy, or generally for automobile rates, premiums, or insurability.” Its use also creates other complications. Removing portable persistency will have an impact on an individual insured’s premium, but the overall net impact on all insureds will be zero. The study also reviews allowable rating factors under California Code of Regulations and any additional rating factors that might be permissible under Proposition 103. Our research indicates that California’s allowable rating factors cover most of the characteristics that have a relationship to the risk of loss, while other additional rating factors not currently allowed might be problematic.

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Introduction Governor Gray Davis vetoed Senate Bill 689 based on the belief that it violates the intent of Proposition 103 and undermines the Department of Insurance’s pending persistency regulations. However, the Governor asked the California Department of Insurance (CDI) to undertake a study to enumerate any and all driver discounts that are consistent with the expressed will of the electorate with their passage of Proposition 103, including a continued examination of the issue of portable persistency. Proposition 103 states that rates and premiums for an automobile insurance policy should be determined by the following rating factors in decreasing order of importance: (1) The insured’s driving safety record. (2) The number of miles he or she drives annually. (3) The number of years of driving experience the insured has. (4) Such other factors that the commissioner may adopt by regulation that

have a substantial relationship to the risk of loss. The commissioner adopted 16 optional rating factors, which are listed under California Code of Regulations Title 10 Chapter 5 section 2632.5 (Exhibit A). One of these factors is persistency. Persistency was not originally defined. However, California Insurance Code Section 1861.02 (c), which was enacted by Proposition 103, states “the absence of prior automobile insurance coverage, in and of itself, should not be a criterion for determining eligibility for a Good Driver Discount policy, or generally for automobile rates, premiums or insurability.” On September 26, 2002 the commissioner adopted RH 402, which defines persistency to only include insurance coverage with the insured’s current carrier or affiliates of the current carrier. Senate Bill 689 would have defined persistency to include insurance coverage with the current carrier, an affiliate or another carrier. Persistency with another carrier is equivalent to prior insurance, which would violate the intent of Proposition 103.

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Enumeration of Driver Discounts Discounts, when used in rating an automobile insurance policy, are usually given to insureds who meet certain criteria, such as, completion of driving training courses. For those insureds who do not meet these criteria, the discounts will not apply. Since insurance is a mechanism, which provides for the sharing of total losses among all insureds within an insurance company, the discounts given to one group of insureds are not simply money saved. The total losses of the insurance company will not change. The sharing mechanism works by making the remaining group who do not qualify for the discounts pay more. Therefore, there are no pure discounts, only different means of distributing losses among all insureds. In this sense, discounts and rating factors are interchangeable. In fact, the California Code of Regulations (CCR) 2632.2. gives this definition for rating factors “The term “rating factor” is defined as any factor, including discounts, used by an insurer which establishes or affects the rates, premiums, or charges assessed for a policy of automobile insurance.” The CCR 2632.5 stipulates three mandatory factors and sixteen allowable optional factors (Exhibit A). The CDI team sent out a nationwide survey to other State Departments, and our research indicates that California’s allowable rating factors cover most of the rating factors used in other states. Exhibit B lists additional rating factors being used in other states. However, some of these factors can be categorized as surrogates for rating factors that are already allowed in California, others are problematic on many fronts as much as they tend to verge on giving credence to potentially unfairly discriminatory or illegal practices. These factors are generally also considered difficult to monitor though a correlation to the risk of loss can potentially be demonstrated, such as the use of cellular telephones. Persistency Rating Factor Loyalty persistency has been defined as insurance coverage with the insured’s current carrier or affiliates of the current carrier. Portable persistency has been defined as insurance coverage with another carrier or prior insurance. Many insurers have used persistency as a rating factor for automobile insurance coverage. Exhibit C lists the top 50 auto insurers in California and whether or not they use persistency in their rating plan and whether they have loyalty or portable persistency. In terms of written

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premium, the top 50 auto insurers have a combined market share of 90.4% in California. Within the top 50 companies, 46 companies use persistency in their rating plan, only 4 companies do not use persistency at all. All 46 companies that have persistency use loyalty persistency. 24 companies among the 46 companies also extend their persistency to portable persistency. Loyalty Persistency Justification The CDI team studied the class plan filings and the rate filings for the top 20 auto insurers. Class plan filings provide justification of the company’s selection of the rating factors it will use based on the methodology specified under CCR 2632.7. Among the top 20 companies, 9 companies use loyalty persistency only. For these 9 companies, Exhibit D pages 2 to 12 lists by company the indicated discounts or surcharges for loyalty persistency by coverage. The Adjusted Indicated Relativity, Column 3 of these pages, gives the indicated variation of charges among various loyalty persistency categories derived from the company’s historical loss costs. By applying the adjusted indicated relativity to the company’s average annual premium per vehicle, the indicated annual discounts or surcharges are derived for the various loyalty persistency categories. Since each company uses different ways to categorize the loyalty persistency, a summary page, Exhibit D page 1 is presented to show the by company all coverage combined indicated discounts or surcharges for 3 distinct loyalty persistency categories, 0 years, 3 years, or 6+ years. Exhibit D demonstrates that loyalty persistency is justifiable as one of the optional rating factors for automobile insurance coverage. Furthermore, almost all companies show that as years of persistency increase, the indicated surcharges gradually reduce and become indicated discounts. Problems with Portable Persistency As previously stated from CIC 1861.02 (c), “the absence of prior insurance coverage in and of itself, shall not be a criterion for determining eligibility for a Good Driver Discount policy, or generally for automobile rates, premiums, or insurability.” Proof of prior insurance is required for portable

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persistency and those applicants that lack prior insurance will be charged a higher rate. Therefore, portable persistency can arguably be said to be equivalent to prior insurance. This is in direct conflict with the aforementioned statute. Besides the legal conflict there are other problems with portable persistency. These problems include: 1) People who do not have prior insurance are surcharged under portable

persistency. Many of these people are those that can least afford to pay for insurance or who already have high premiums caused by other rating factors. This discourages them from buying insurance, which may add to the number of uninsured motorists and ultimately drives up the cost of the uninsured motorist coverage for every insured.

2) Portable persistency discriminates against those insureds, who did not

own a car or were in the military. They were not irresponsible but had no reason to have prior insurance.

3) Portable persistency can be difficulty to verify, especially for those

insurers that require proof of portable persistency for more than a year. Impact of Removal of Portable Persistency The adoption of RH-402 defines persistency to only include loyalty persistency. Insurance companies that have been using portable persistency need to make class plan revisions to remove persistency references to non-affiliated companies. Among the top 20 auto insurers, 11 companies extended their persistency definition to also include portable persistency. These 11 companies are shown in Exhibit E page 2 to 11. The last column of these pages lists by company the average annual portable discounts per vehicle that would be removed by the adoption of RH-402. Exhibit E page 1 is a summary page for the above 11 companies which shows the average annual portable discounts and percentages of these portable discounts to average premiums for a specific category of insureds, 0 years loyalty persistency and 3 years portable persistency. For this category of insured, the impact of removal of the portable discount is between 0% and 16%.

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It is important to realize that the overall losses an insurer incurs, or the overall premiums an insurer collects will not change by this class plan revision. The effect of the removal of portable discounts will have to be offset by an overall reduction of premiums for every insured within the company. Therefore, the potential premium increase to those insureds that are receiving a discount from portable persistency would be less than what is indicated in this exhibit. Also those insureds who are not currently receiving a discount from portable persistency will pay a lower premium due to this offset. The overall net impact of removing portable persistency will be zero for an individual company as well as industrywide. Conclusion California Code of Regulations Title 10 Chapter 5 section 2632.5, enumerates the allowable rating factors that may be used for rating private passenger auto insurance. These rating factors are broadly defined and give insurers the flexibility of establishing their individual rating plan for automobile policies. There are other rating factors as shown in Exhibit B, which could be potentially incorporated into the current regulation, but the problems associated with these rating factors may outweigh the benefit.

Our review of the class plan filings of insurance companies indicates that there is a correlation between the loyalty persistency and the risk of loss for personal auto insurance policies. This justifies the use of loyalty persistency as one of the allowable rating factors in California. Portable persistency data by itself is not available, but portable persistency is in direct conflict with current statues and presents numerous other problems. Removing portable persistency will have an impact on an individual insured’s premium, but the overall net impact on all insureds will be zero.

Exhibit A Listing of Mandatory and Allowable Optional Rating Factors under CCR 2632.5 Mandatory Rating Factors 1) The insured’s driving safety record 2) The number of miles he or she drives annually 3) The number of years of driving experience the insured has Allowable Optional Rating Factors 1) Type of vehicle 2) Vehicle performance capabilities, including alterations made subsequent

to original manufacture 3) Type of use of vehicle (pleasure only, commute, business, farm,

commute mileage, etc.) 4) Percentage use of the vehicle by the rated driver 5) Multi-vehicle households 6) Academic standing of the rated driver 7) Completion of driver training or defensive driving courses by the rated

driver 8) Vehicle characteristics, including engine size, safety and protective

devices, damageability, repaireability, and theft deterrent devices 9) Gender of the rated driver 10) Marital status of the rated driver 11) Persistency 12) Non-smoker 13) Secondary Driver Characteristics 14) Multi-Policies with the same or an affiliated company 15) Relative claims frequency 16) Relative claims severity

Additional Possible Rating Factors

Additional Rating Factor Pro

Homeownership Some insurers believed that aHomeowner might be a more matureand stable driver.

Credit Scores Industry argues that credit scores arerelated to the risk of loss.

College Degree Insureds with higher education may be abetter risk.

Comprehensive Claims Free Seems allowable in every other State.Insured should be more careful withtheft claims.

Abstainers Sober drivers cause less accidents.

Rehabilitation A DUI conviction is forgiven if they gothrough an alcohol rehabilitationprogram.

Cell phone Insureds not using the phones causeless accidents

Internet Expense Savings

Exhibit B

Con

Surrogate for other maturity factors such asyears licensed and marital status.Discriminates against those of lower socialeconomic status who may not findhomeownership a viable option.

The scores may contain unfair elements notrelated to the risk of loss. Potentiallydiscriminates against those of lower socialeconomic status.

Discriminates against those with less education or of lower social economic status.

Our Legal interprated that ComprehensiveClaims are considered accidents. CIC 491said an insurer can not surcharge a risk for anon-at fault accident.

Hard to monitor who drinks or doesn't drink.

DUI 7th year restrictions

Hard to monitor. Some states or cities have lawthat only allow hands free cell phone use whiledriving.

May discriminate against those who don't haveeasy internet access.

Exhibit C

Rec# Group # NAIC # COMPANY_NAME WP Mktshr Persistency Loyalty Portable

1 176 25178 State Farm Mut Auto Ins Co 1,154,066,042 13.63% Yes Yes No2 212 21652 Farmers Ins Exch 992,095,740 11.72% Yes Yes No3 1278 15539 California State Auto Asn Inter-Ins 722,374,039 8.53% Yes Yes No4 1318 15598 Interins Exch Of The Automobile Club 692,642,288 8.18% Yes Yes Yes5 12 12963 21st Century Ins Co 515,729,325 6.09% Yes Yes Yes6 8 19240 Allstate Ind Co 510,810,108 6.03% Yes Yes Yes7 660 27553 Mercury Ins Co 460,461,055 5.44% Yes Yes Yes8 8 19232 Allstate Ins Co 278,088,880 3.28% Yes Yes Yes9 660 11908 Mercury Cas Co 152,296,253 1.80% Yes Yes Yes10 163 24740 Safeco Ins Co Of Amer 136,352,328 1.61% Yes Yes No11 814 25089 Coast Natl Ins Co 135,535,763 1.60% Yes Yes Yes12 200 25941 United Services Auto Assoc 133,541,938 1.58% Yes Yes No13 200 25968 USAA Cas Ins Co 117,054,717 1.38% Yes Yes No14 84 22268 Infinity Ins Co 116,871,580 1.38% Yes Yes Yes15 31 35882 Geico General Ins Co 113,927,650 1.35% Yes Yes No16 8 17230 Allstate Prop & Cas Ins Co 97,217,633 1.15% Yes Yes Yes17 553 13137 Viking Ins Co Of WI 95,350,491 1.13% Yes Yes Yes18 155 27804 Progressive West Ins Co 83,058,432 0.98% Yes Yes Yes19 31 22063 Government Employees Ins Co 68,510,674 0.81% Yes Yes No20 140 23787 Nationwide Mut Ins Co 64,970,922 0.77% Yes Yes No21 33 20117 California Cas Ind Exch 58,581,005 0.69% Yes Yes No22 155 37605 Marathon Ins Co 54,281,555 0.64% Yes Yes Yes23 660 38342 California Automobile Ins Co 53,414,622 0.63% Yes Yes Yes24 111 23035 Liberty Mut Fire Ins Co 52,661,766 0.62% No No No25 79 23728 National General Ins Co 47,725,064 0.56% No No No26 91 30104 Hartford Underwriters Ins Co 46,657,440 0.55% Yes Yes No27 958 11762 Vesta Fire Ins Corp 45,689,181 0.54% Yes Yes Yes28 140 19100 Amco Ins Co 43,809,577 0.52% Yes Yes Yes29 1179 10683 Wawanesa General Ins Co 43,518,312 0.51% Yes Yes No30 517 20532 Clarendon Natl Ins Co 38,107,956 0.45% Yes Yes No31 273 13250 Workmens Auto Ins Co 37,615,797 0.44% No No No32 215 19852 Financial Ind Co 36,530,737 0.43% Yes Yes Yes33 1179 31526 Wawanesa Mut Ins Co Us Branch 33,203,261 0.39% Yes Yes No34 944 37648 Permanent General Assur Corp 32,143,732 0.38% Yes Yes Yes35 1278 37770 Western United Ins Co 31,617,341 0.37% Yes Yes Yes36 218 34622 Glens Falls Ins Co 31,540,873 0.37% Yes Yes No37 10221 Alistar Ins Co 29,473,106 0.35% Yes Yes Yes38 212 21687 Mid-Century Ins Co 28,710,676 0.34% Yes Yes No39 31 22055 Geico Ind Co 28,518,408 0.34% Yes Yes No40 140 42579 Allied Prop & Cas Ins Co 28,127,451 0.33% Yes Yes Yes41 922 40029 Explorer Ins Co 24,942,300 0.29% Yes Yes Yes42 91 29424 Hartford Cas Ins Co 24,606,255 0.29% Yes Yes No43 1172 24422 Legion Ins Co 24,188,527 0.29% Yes Yes Yes44 12 43761 American Intl Ins Co Of CA 21,431,681 0.25% Yes Yes No45 407 12220 Superior Ins Co 20,384,237 0.24% Yes Yes Yes46 31 41491 Geico Cas Co 20,287,877 0.24% No No No47 304 32352 Prudential Prop & Cas Ins Co 19,555,597 0.23% Yes Yes No48 802 13544 California Capital Ins Co 19,340,998 0.23% Yes Yes No49 323 10693 Civil Svc Employees Ins Co 19,294,851 0.23% Yes Yes No50 816 13161 Commerce West Ins Co 19,234,308 0.23% Yes Yes Yes

TOTAL 7,656,150,349 90.43% 46 Yes 46 Yes 24 Yes

Loyalty and Portable Persistency among Top 50 Auto Insurers

Justification of Loyalty Persistency Discount

Company Loyalty Persistency

Category * Average Annual

Premium per Vehicle Indicated Discount

Indicated Discount Percentage

Indicated Surcharge

Indicated Surcharge Percentage

State Farm Mutual Auto Ins Co $986

0 years $221 22.40%3 years $226 22.90%6 years $53 5.40%

Farmers Ins. Exchange $1,0080 years $404 40.07%3 years $29 2.90%6 years $25 2.45%

SAFECO Ins Co $8460 years $172 20.34%3 years $30 3.56%6 years $96 11.34%

$879GEICO Insurance Companies 0 years $62 7.00%

3 years $35 4.00%6 years $35 4.00%

United Svcs Auto Association ** $7700 years $15 2.00%

10+ years $0 0.00%

USAA Casulaty Ins. Co. ** $8600 years $0 0.00%

10+ years $17 2.00%

Nationwide $8060 years $45 5.64%3 years $35 4.30%6 years $84 10.48%

California State Auto Association $8990 years $74 8.24%3 years $74 8.24%6 years $92 10.27%

* Basic categories are 0 years, 3 years and 6+ years of persistency. Some companies were modified as data was not available in these categories.** The significance is the indicated 2% difference between persistent and non-persitent insureds.

Justification of Loyalty Persistency Discount Exhibit DPage 1

* Basic categories are 0 years, 3 years and 6+ years of persistency. Some companies were modified as data was not available in these categories.** The significance is the indicated 2% difference between persistent and non-persitent insureds.

Exhibit EPage 1

Impact of Removal of Portable Persistency Based on a risk who has 0 years with current company and 3 years with prior companies

Company

Years of loyalty persistency with current company

Years of portable persistency from prior companies

Current persistency

relativity

Persistency relativity after

removal of portable

persistency

Average annual

premium per vehicle

Impact of removal of

portable persistency

Percentage Impact of

removal of portable

persistency

21st Century Ins. Co. 0 years 3 years 0.020 0.050 $1,081.70 $32.45 3.00%

Mercury Ins. Co. 0 years 3 years 0.009 0.169 $810.85 $129.72 16.00%

Mercury Casualty Co. 0 years 3 years 0.007 0.167 $1,153.15 $183.93 15.95%

Allstate Indemnity / Allstate Ins Co * 0 years 3 years 1.000 1.000 $862.66 $0.00 0.00%

Allstate Property 0 years 3 years 0.850 1.000 $1,488.15 $223.22 15.00%

Coast National Ins. Co. 0 years 3 years 0.919 1.000 $764.78 $62.10 8.12%

Infinity Ins. Co. 0 years 3 years -0.150 0.000 $1,129.37 $169.41 15.00%

Viking Ins Co. of Wisconsin 0 years 3 years -0.160 0.000 $929.65 $148.93 16.02%

Progressive West Ins Co 0 years 3 years -0.150 0.000 $1,348.31 $202.25 15.00%

Interinsurance Exchange of Southern California (AAA) ** 0 years 3 years 0.000 0.000 $852.28 $0.00 0.00%

* For Allstate Indemnity and Allstate Insurance 5 years of prior insurance is required to qualify for the discount. ** For AAA 31 years of prior insurance with one company is required to qualify for the discount.

Exhibit EPage 1

Impact of Removal of Portable Persistency Based on a risk who has 0 years with current company and 3 years with prior companies

* For Allstate Indemnity and Allstate Insurance 5 years of prior insurance is required to qualify for the discount. ** For AAA 31 years of prior insurance with one company is required to qualify for the discount.

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Summary and Response to Comments Re: Section 2632.5(d)(11) Comment No. 1: Commentator: Martin F. Sullivan, Sr., Sullivan & Sullivan, General Insurance Agency Date of Comment: January 24, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner

has considered the comment and has not changed the proposed regulations in response to the comment.

(a) Involuntary Loss of Persistency Discount

The commentator requests that the Commissioner not adopt any modification of the persistency regulation contained in California Code of Regulations, Title 10, Section 2632.5(d)(11). The commentator’s grounds are that, under the proposed regulation, when an insurer transfers an entire line of its book of business to another insurer, its insureds will involuntarily lose their persistency discount.

(a) Involuntary Loss of Persistency Discount While it is true that insureds changing insurers involuntarily lose their persistency discounts, California Insurance Code Section 1861.02(c) limits the ability of insurers to consider prior insurance. California Insurance Code Section1861.02(c) contains no exception for involuntary change of insurance company. The situation is not likely to occur frequently and will not affect many insureds. Insurers obtaining a new book of business will have an incentive to price their product competitively. Additionally, through use of sequential analysis is mandated by California Code of Regulation Title 10, Section 2632.7, the weight, or premium effect, of persistency, or any other optional factor, is minimized in that it must be less than the three mandatory factors.

(b) Persistency Discount as a Reflection of Driving Experience

The commentator asserts that a persistency discount based on prior insurance, as applied to motorcycle riders, fairly reflects improved driving abilities of experienced motorcyclists.

(b) Persistency Discount as a Reflection of Driving Experience

The experience of drivers is reflected in their rates by the mandatory rating factors for years of driving experience. To cause them to be replicated in the optional rating factor for persistency is to duplicate, and unduly amplify. the statistical significance of driving experience.

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(c) Proposed Regulation Creates a Substantial Adverse Financial Impact on Consumers

The commentator states that the proposed persistency regulation will have a substantial financial impact upon motorcycle riders, who largely depend on their evidence of prior insurance as a basis for receiving a discount on premium. The commentator indicates that “previous insurance is the only way [the commentator] can think of that verifies that a motorcycle rider has actually been riding for the past year.” Because the proposed persistency regulation will limit persistency to the amount of time insured with the present insurer or affiliate, many motorcycle riders with a history of coverage under prior insurance carriers will lose their persistency discount.

(c) Proposed Regulation Creates a Substantial Adverse Financial Impact on Consumers

The proposed definition of persistency will not affect motorcycle riders as the commentator suggests. Other rating factors available to the commentator may be used, aside from persistency, to ascertain whether a rider has been riding a motorcycle recently. (See, e.g., Cal. Code Regs, tit. 10, § 2632.5, subds. (c)(1), (c)(2), (c)(3), (d)(3), (d)(4) and (d)(7).) Limiting persistency credit to renewals with the present insurer or affiliate will not prevent insurers from ascertaining whether a rider is accustomed to riding a motorcycle. Any concomitant discount, therefore, may still be realized by the insured.

Comment No. 2: Commentator: R.A. Hilliard, Hilliard & Associates Insurance Brokers Date of Comment: February 15, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner


(a) The Proposed Regulation Penalizes One-half to Two-thirds of the State’s Insureds

The commentator asserts that one-half to two-thirds of the insureds in the State will be penalized because when they change insurers they will lose a discount.

(a) The Proposed Regulation Penalizes One-half to Two-thirds of the State’s Insureds

The proposed regulation is not intended to change the substantive terms of the current regulation. Insurance Code section 1861.02, subdivision (c) prohibits use of prior insurance in determining automobile rates, premiums or insurability. The proposed regulation simply clarifies the definition of persistency.

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(b) The Regulation Unfairly Favors Large and Established Insurers

The commentators assert that large and established insurers will have more insureds and will therefore be able to offer their existing customers persistency discounts to the disadvantage of small and newer insurers.

(b) The Regulation Unfairly Favors Large and Established Insurers

California Insurance Code Section 1861.02(c) prohibits offering new customers a “persistency” discount. Allowing a company to offer a persistency discount to customers that maintain insurance with the insurer offering the discount reflects the fact that the costs of renewing business are less than the cost of acquiring a new customer. It is reasonable that consumers should receive some benefit for those lower costs. A company need not be at a competitive disadvantage because it is unable to offer new customers a persistency discount. Persistency is one small portion of the overall rating scheme. Companies wishing to draw new business from their competitors can offer other permissible discounts and competitive service.

Comment No. 3: Commentator: Dick Hodge Date of Comment: February 25, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner has

considered the comment and has not changed the proposed regulations in response to the comment.

(a) The Proposed Regulation as a Penalty for Changing Insurers

The commentator asserts that the regulation constitutes a penalty to insureds who wish to change insurers.

(a) The Proposed Regulation as a Penalty for Changing Insurers

See Response to comment 2(a).

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Comment No. 4: Commentator: Jim DeVito, Progressive Insurance Companies Date of Comment: February 20, 2002 Type of Comment: Written Summary of Comment: Note: Progressive’s comment refers to input by the Personal Insurance Federation of California. Those comments were not submitted in response to the proposed regulatory language. Rather, they were submitted in response to a request for input on persistency that was completed prior to the CDI’s notice of hearing in this matter. The request for input did not contain the currently proposed regulatory language, but did contain similar language, as well as language for a regulation proposed by the Foundation for Taxpayer and Consumer Rights. Those comments, which are included in the rulemaking file, were the same arguments as made in Progressive’s issues (a), (b), (c) and (d).

Response to Comment: The Commissioner has considered the comment and has not changed the proposed regulations in response to the comment.

(a) The Form of the Current Regulation is Adequate

The commentator asserts that the current regulation (California Code of Regulations, Title 10, Section 2632.5(d)) which provides no definition of “persistency” is adequate and should not be changed.

(a) The Form of the Current Regulation is Adequate

As evidenced by the comments of insurers, such as Progressive, which currently provide persistency discounts to new customers, the current regulation does not provide adequate guidance to insurers. California Insurance Code Section 1861.02(c) prohibits providing new customers a “persistency discount.” The proposed regulation makes clear the only legally acceptable interpretation of California Code of Regulations, Title 10, Section 2632.5(d)(11).

(b) The Concept of Persistency Distinguished from the Absence of Prior Insurance

The commentator asserts that the concept of persistency is different from the concept of absence of prior insurance. He asserts that persistency is continuity of insurance, whereas absence of insurance is unrelated to maintenance of insurance.

(b) The Concept of Persistency Distinguished from the Absence of Prior Insurance

Application of a persistency discount to new customers still results in higher premiums and disadvantageous rating of those without prior insurance, in violation of California Insurance Code Section 1861.02(c). New customers without prior insurance cannot qualify for a

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“persistency discount” and are thus charged greater premium because of application of one factor – the absence of prior insurance.

(c) Relationship to Risk of Loss The commentator asserts that there is evidence of an actuarial relationship between risk of loss and maintenance of insurance. The commentator asserts that the court of appeals decision in Spanish Speaking Citizens Council v. Low (1st Dist., 2001) 85 Cal. App. 4th 1179; 103 Cal. Rptr. 2d 75 (referred to by the commentator as Spanish Speaking Citizens v. Quackenbush) favors interpretations of statute that preserve a substantial relationship to risk of loss.

(c) Relationship to Risk of Loss The fact that there may be a probablistic relationship between maintaining insurance and risk of loss does not override the policy created by California Insurance Code Section 1861.02(c). Because of a variety of policies not all factors may be considered in determining insurance rates, regardless of whether there is a correlation between the class and the risk of loss.

(d) Effect on Competition The commentator asserts that the regulation will inhibit competition among insurers.

(d) Effect on Competition See response to comment 2(b).

Comment No. 5: Commentator: Drew E. Pomerance; Roxborough, Pomerance & Nye (c) Date of Comment: February 26, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner has


(a) Ambiguity of Regulatory Language Regarding “Proof of Prior Insurance”

The commentator is satisfied with the definition of “persistency” contained in the proposed regulation. However, the commentator asserts that the language “however when such evidence concerns proof of prior insurance, this section shall apply” is ambiguous. Another commentator has suggested that this paragraph be stricken entirely because it is “unnecessarily ambiguous.”

(a) Ambiguity of Regulatory Language Regarding “Proof of Prior Insurance”

The Commissioner has considered and rejects the comment that the language in paragraph 2 of the proposed regulation is ambiguous. It is possible for an insurer to use prior insurance as a means of verifying driving safety history. (See RH-01015532.) If those methods of verification prevent consumers without prior insurance from obtaining insurance, or would affect the rate offered a consumer, RH-402 would prohibit that practice.

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Comment No. 6: Commentator: Jeffrey J. Fuller and Janine Gibford, Assoc. of California Insurance Companies Date of Comment: February 27, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner


(a) Actuarial Justification for Use of Prior Insurance and Consistency with Proposition 103

The commentators assert that use of prior insurance as an optional rating factor, through application of the optional persistency rating factor, is actuarially justified and consistent with the purposes of Proposition 103.

(a) Actuarial Justification for Use of Prior Insurance and Consistency with Proposition 103

Notwithstanding the question of whether, taken as an non-differentiated whole, previously uninsured drivers are a poorer risk than the previously insured, allowing rating of insureds based on whether or not they previously had insurance is contrary to the intent and language of California Insurance Code Section 1861.02(c). Even if drivers with an absence of prior insurance present a greater risk of loss, this factor cannot be considered in rating such drivers because a statute specifically precludes such a practice.

(b) When Insurers Offer New Insureds Persistency Discounts Persons without Prior Insurance Are Not Penalized

The commentators also assert that persons without prior insurance are not financially penalized. The commentators assert that small insurers will be unable to offer rates that attract insureds from large established insurers, because of a pricing advantage resulting from application of the persistency discount.

(b)When Insurers Offer New Insureds Persistency Discounts Person without Prior Insurance Are Not Penalized

Under California ratemaking concepts, a company’s class plan is revenue neutral. Therefore, a discount to one group of persons based on a particular characteristic results in a surcharge to those who do not meet such a qualification. The costs of a discount to a person previously insured is borne by those who do not have prior insurance. The use of the discount proposed by the commentators, therefore, is in effect a surcharge to those without prior insurance. The use of a discount for those remaining with the insurer applying the persistency discount reflects the decreased costs of renewing an insured, as opposed to the

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cost of recruiting and initially underwriting a new insured.

(c) The Proposed Regulation as Unreasonably Discriminatory Against New Customers With Prior Insurance

The commentators also assert that prohibiting use of prior insurance with other insurers as a basis for application of the persistency discount unreasonably discriminates against insureds wishing to change insurance companies.

(c) The Proposed Regulation as Unreasonably Discriminatory Against New Customers With Prior Insurance

The proposed regulation does not unreasonably discriminate against insureds desiring to change insurance companies. It places any company’s new customers who were previously uninsured on an even footing with its new insureds who were previously insured. While the general intent of Proposition 103 was to focus on an insured’s driving history, it also clearly intended to give drivers without prior insurance an opportunity to obtain insurance. The Commissioner is not free to overrule California Insurance Code Section 1861.02(c).

(d) The Proposed Regulation as an Impediment to Investigation of Insureds

The commentators assert that the proposed regulation would prevent insurers from verifying anything about a new insured’s prior insurance history, thereby preventing insurers from adequately verifying an insured’s prior driving safety record.

(d) The Proposed Regulation as an Impediment to Investigation of Insureds

Nothing in RH402 prohibits use of prior insurance for the mere verification of information. The Commissioner has proposed another regulation, RH01015532, which sets out allowable methods of verification of driving safety record. California Code of Regulation Title 10, Sections 2632.13 and 2632.5 allow use of information from a prior insurer for some purposes.

Comment No. 7: Commentator: Lorelle Kitzmiller, Executive Director, American Agents Alliance (“AAA”) Date of Comment: February 22, 2002 Type of Comment: Written Summary of Comment:

Response to Comment: The Commissioner has considered the comment and has not changed the proposed regulations in response the to comment.

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(a) The Rates for New Insureds Who Have Insurance with Another Insurer will Increase Under the Effect of the Proposed Regulation

The elimination of persistency discounts for new customers, who previously had insurance with other insurers, will result in higher insurance rates for consumers who change insurers. AAA asserts that such a result is contrary to the purposes of Proposition 103.

(a) The Rates for New Insureds Who Have Insurance with Another Insurer will Increase Under the Effect of the Proposed Regulation

See response to Comment 2(b).

(b) The Proposed Regulation Will Inhibit Competition Among Insurers

The elimination of persistency discounts for new customers will limit the ability of consumers to change insurers, and inhibit competition in personal automobile insurance.

(b)The Proposed Regulation Will Inhibit Competition Among Insurers


(c) The Proposed Regulation Will Limit the Number of Insurers in the Market

The proposed regulation may force some insurers to leave the market. Insurers contemplating entering the market will be discouraged from entering the market, because they are unable to draw insureds from other insurers, because they cannot match the rates with internal persistency discounts.

(c) The Proposed Regulation Will Limit the Number of Insurers in the Market

The comment is premised upon speculation that insurers will not be able to draw new business from other insurers. The Commissioner rejects the premise that the regulation will unduly limit competition. See also the response to Comment 1(a).

Comment No. 8: Commentator: Douglas L. Hallett, Mercury Insurance Group Date of Comment: February 27, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner has


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(a) The Proposed Regulation as a Restriction on Competition

The commentator asserts that the Commissioner should not adopt the proposed regulation because precluding application of a persistency discount based upon prior insurance will restrict competition in the automobile insurance market.

(a) The Proposed Regulation as a Restriction on Competition

See response to comment 2(b).

(b) The Proposed Regulation as an Inhibitor of Various Policy Concerns

The commentator asserts that allowing a broad interpretation of the term “persistency,” including use of prior insurance or lack thereof as a rating factor furthers the following policy concerns:

(1) Rewarding individual conduct (the maintenance of insurance);

(2) “Incentivizing compliance with the mandatory insurance law”;

(3) reducing acquisition costs; .

(b) The Proposed Regulation as an Inhibitor of Various Policy Concerns

(1) Rewarding individual conduct (the

maintenance of insurance) The Commissioner acknowledges that giving a credit to the new insured with prior insurance is a reward for maintaining insurance. It may act as an incentive to the maintenance of insurance. However, it is not the only policy concern expressed by Proposition 103 generally, and specifically as codified in California Insurance Code Section 1861.02(c). The competing concern of encouraging the uninsured to join the pool of insured drivers is furthered by the proposed regulation. Increasing the pool of insured drivers will ultimately benefit all insured persons, by lowering the cost of uninsured/under insured motorist coverage.

(2) “Incentivizing” compliance with mandatory insurance laws

This appears to be another way of stating that it rewards maintenance of insurance and thereby encourages purchase of insurance. See part (1) above.

(3) Reducing acquisition costs A discount for persons with prior insurance

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(4) rejection of the proposed regulation will enhance competition.

reduces the acquisition costs for the new insured with prior insurance. However, it does so to the disadvantage of the previously uninsured, and in violation of California Insurance Code Section 1861.02(c). In addition the insurer does not experience reduced acquisition costs for new policyholders.

(4) rejection of the proposed regulation will enhance competition


(c) Use of Prior Insurance as a Reward Not a Penalty

The commentator asserts that allowing use of prior insurance rewards persons with continuous insurance coverage. It does not penalize those without prior insurance.

(c) Use of Prior Insurance as a Reward Not a Penalty

Under California ratemaking principles, a company’s class plan is revenue neutral. Therefore, a discount to one group of persons based on a particular characteristic, results in a surcharge to those who do not meet such a qualification. The costs of a discount to a person previously insured is borne by those who do not have prior insurance. The use of the discount proposed by the commentators, therefore, is in effect a surcharge to those without prior insurance. The use of a discount for those remaining with the insurer applying the persistency discount reflects the decreased costs of renewing an insured, as opposed to the cost of recruiting and initially underwriting a new insured.

(d) The Proposed Regulation Is Not Required By CIC §1861.02(c)

The Commentator asserts that California Insurance Code Section 1861.02 (c) cannot be interpreted to mean that absence of prior insurance with other insurers is prohibited as a rating factor. The commentator asserts that the language “in and of itself”, contained in California Insurance Code Section 1861.02 (c), must be interpreted to mean that absence of prior insurance is prohibited as a rating factor only if there are no other rating factors. The commentator concludes that the prohibition

(d) The Proposed Regulation Is Not Required By CIC §1861.02(c)

The commentator’s interpretation of California Insurance Code Section 1861.02 (c) reads the statute as: “The absence of prior automobile insurance coverage, …, shall not be the criterion …” [emphasis shows commentator’s implied change in the statute]. The statute refers to “a criterion”. [Emphasis added]. That is to say the absence of prior insurance cannot be applied as a rating factor at all. The commentator asserts that the language “in

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contained in California Insurance Code Section 1861.02 (c) applies only if the sole rating factor available is prior insurance

and of itself” contained in California Insurance Code Section 1861.02 (c), must be interpreted to mean that absence of prior insurance is prohibited as a rating factor only if there are no other rating factors, and the only rating factor available is prior insurance. The Commissioner respectfully disagrees with this interpretation. The commentator does not specify whether his reference to other rating factors refers to the mandatory rating factors specified in California Insurance Code Sections 1861.02(a) (1), (2) and (3), or to the optional rating factors which California Insurance Code Section 1861.02 (a) (4) authorizes the Commissioner to adopt. The commentator’s assertion that California Insurance Code Section 1861.02(c) applies only if there are no other rating factors suggests a situation that cannot occur. There cannot be a situation in which there are no other rating factors available. There are always the three mandatory Rating factors established by Proposition 103. [See California Insurance Code Section 1861.02(a)(1),(2) and (3).] The commentator’s interpretation of California Insurance Code Section 1861.02 (c) makes that section meaningless. Proposition 103 requires application of the mandatory rating factors. Therefore, there cannot be a situation in which there are no other rating factors, and the absence of prior insurance would never be prohibited. It is an undisputed rule of statutory interpretation that holds that a reasonable interpretation of any statute should not make the statute, or another statute, meaningless. [See Hale v. McGettigan (1896) 114 Cal. 112, 118; 45 P. 1049, 1051.] If the commentator intends to suggest that the Commissioner has no authority to promulgate an optional rating factor prohibiting use of prior insurance in rating and underwriting the commentator ignores the broad authority of the Commissioner to adopt optional rating factors. (See Spanish Speaking Citizens Foundation, Inc. v. Low (2000) 85 Cal.App.4th 1179, 1187 [103

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Cal. Rptr. 2d 75].) However, the Commissioner is bound by the restrictions of California Insurance Code Section 186.02(c). The clear interpretation of the statute’s prohibition on use of “prior insurance” is that the term “prior insurance” precludes consideration of prior insurance with other insurers, but that the term “prior insurance” does not imply a prohibition on renewals of a policy with the same insurer or its affiliate.

(e) The Statute Is Sufficiently Clear Attached to the commentator’s letter of February 27, 2002 is a letter to the Commissioner dated September 17, 2001. That letter was not in response to this notice of proposed action and public hearing. The September 17, 2002 letter raises two arguments not included in the February 27, 2002 letter. The first argument is that no regulation is necessary because the statute, Insurance Code Section 1861.02(c), is sufficiently clear.

(e) The Statute Is Sufficiently Clear The fact that consumer groups and various insurers have submitted comments on this regulation with varying interpretations of Insurance Code Section 1861.02(c) is evidence that the interpretation of the statute in light of the regulatory scheme is necessary.

(f) The Proposed Regulation Will Lead To Unfairly Discriminatory Rates

The second argument included in the September 17, 2001 letter that is not included in the February 27, 2002 letter is that prohibiting persistency discounts for new insureds will lead to unfairly discriminatory rates, in violation of Insurance Code Section 1861.05(a). The commentator asserts that there is a correlation between maintenance of insurance and risk of loss. The commentator asserts that that correlation exists for new customers with prior insurance and an insured’s long-standing customers. The commentator asserts that to allow a discount for an insured’s customers, on renewal, and not allow that discount to new customers is unfairly discriminatory.

(f) The Proposed Regulation Will Lead To Unfairly Discriminatory Rates

What is “unfairly discriminatory” under California Insurance Code 1861.05(a) must be determined in a manner consistent with California Insurance Code Section 1861.02(c). Because California Insurance Code Section 1861.02(c) precludes use of prior insurance in rating and qualification for insurance, the restriction cannot be construed as “unfairly discriminatory.” The Commissioner cannot ignore the language of Insurance Code Section 1861.02(c).

Comment No. 9

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Commentator: Douglas A. Lutgen, CSAA Inter-Insurance Bureau Date of Comment: February 28, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner has


(a) The Bright Line Rule of Continuous Insurance is Unduly Harsh in Some Circumstances

The commentator asserts that some insureds may have lapses in insurance that would prevent their long time insurer from providing them a persistency discount. The commentator points to inadvertent brief lapses in coverage, such as those which befall military personnel who cancel their insurance when transferred overseas and then return to their previous insurer. The commentator notes that some consumers may leave their current insurer based on the “lowball” estimate by unscrupulous producers. Those consumers may learn after the insurer completes its investigation and underwriting process that the policy they have purchased is more expensive than the coverage with the company the insured has just left. The commentator urges that a six-month grace period be included with the regulation. The six-month period is based on the average length of a policy. This would allow consumers dissatisfied with a new insurer to return to the previous insurer with a persistency discount.


The Commissioner has considered the comment but has not adopted its recommendations. Insurance Code Section 1861.02(c) does not provide for an exception to the prohibition on the use of prior insurance as a rating factor. The Commissioner is of the view that "persistency," in its commonly understood form, means to be continuously insured by the same insurance company. A lapse of insurance is not “continuous.’ The policy of California Insurance Code Section 1861.02(c) is best served by a regulation that implements its plain meaning, and does not open the possibility of numerous means of avoiding compliance.

(b) The Proposed Regulation is Ambiguous as to Whether Changes in Policy Terms with the Same Insurer are not Renewals

The commentator asserts that the use of the term “renewal” in the first sentence of the proposed regulation is ambiguous. The commentator suggests that the regulation can be read to mean that an insured that “switches

(b) The Proposed Regulation is Ambiguous as to Whether Changes in Policy Terms with the Same Insurer are not Renewals

The Commissioner respectfully disagrees that the proposed regulation is ambiguous. After the first sentence, which the commentator focuses on, comes the second sentence, which reads: “Persistency credit may also be applied when

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to a different type of automobile insurance within the same company, such that the policy is actually newly-issued” would not fall under the technical definition of “renewal.” The commentator provides as an example, situations where a person changes “from a regular owner’s policy to a named non-owner policy.” The commentator submitted proposed alterations to the regulatory language.

issuing a separate new automobile policy for a person who is not the named insured on a policy, but is otherwise currently insured.” (Emphasis added.) By stating “also,” the regulation makes clear that technical “renewals” are not the only method by which an individual may receive persistency credit. The proposed regulation makes clear that an individual seeking “a separate new automobile policy” may receive persistency credit, so long as the individual is “otherwise currently insured.” Currently insured is also defined by the proposed regulation, and encompasses situations like the commentator’s proposed hypothetical, where a person changes from a regular owner’s policy to a named non-owner policy. The proposed regulation makes clear that “currently insured” “means a person who is presently covered for automobile insurance by the insurer or affiliate…” Thus, the commentator’s request for amended language is unnecessary.

Comment No. 10 Commentator: Ronald S. Veltman, 21st Century Insurance Date of Comment: February 28, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner has


(a) The Use of Prior Insurance as a Rating Factor is Actuarially Supported

The commentator asserts that continuous prior insurance with prior insurers, or with the insurer applying the rating factor, should be allowed as a rating factor because there is data that shows a substantial relationship to risk of loss.

(a) The Use of Prior Insurance as a Rating Factor is Actuarially Supported

See response to comment 3(c).

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(b) The Proposed Regulation Contradicts CIC §1861.02(c)

The commentator asserts that the term “in and of itself” in California Insurance Code Section 1861.02(c) specifically allows use of prior insurance with other insurers as a rating factor. The commentator asserts that the term “in and of itself” means that prior insurance cannot be used as a rating factor only when it is the sole rating factor available.

(b) The Proposed Regulation Contradicts CIC §1861.02(c)

See response to comment 7(d)

(c) The Proposed Regulation Will Preclude the Procedures Authorized by CIC §11580.17

The Commentator asserts that the proposed regulation will preclude methods of confirming the condition of automobiles, which the legislature has specifically authorized.

(c) The Proposed Regulation Will Preclude the Procedures Authorized by CIC §11580.17

The commentator implies that insurers must rate customers without prior insurance differently than it rates drivers with prior insurance. Nothing in Insurance Code Section 11580.17 requires that the previously uninsured be rated in a manner different from those with prior insurance. The statute sets out conditions under which an insurer can require physical inspection of the condition of vehicles not previously covered for comprehensive and collision coverage. California Insurance Code Section 11580.17 is irrelevant to rating and determining premium.

(d) Absence of Prior Insurance as Basis for Surcharge for Inability to Confirm Driving History

21st Century uses proof of prior insurance as a means of verifying prior driving safety history. The commentator states 21st Century surcharges drivers who are unable to provide verification of their driving history. The commentator asserts that the proposed regulation will unnecessarily disturb established methods of determining driving safety record.

(d) Absence of Prior Insurance as Basis for Surcharge for Inability to Confirm Driving History

The commentator proposes that insurers should be allowed to impose a condition on the previously uninsured that will automatically impose higher rates on them, and negate the intent of Insurance Code Section 1861.02(c). Any optional rating factors the Commissioner adopts must comply with Insurance Code Section 1861.02(c). Additionally, this issue is addressed in the Commissioner’s proposed accident verification regulation. [(See RH-01015532.]

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(e) Persons with Prior Insurance Should Be Rewarded for Maintenance of Insurance

The commentator asserts that a discount for a new customer who previously maintained insurance is an appropriate recognition and reward for having previously complied with the mandatory insurance laws.

(e) Persons with Prior Insurance Should Be Rewarded for Maintenance of Insurance

The Commissioner acknowledges that certain persons would receive a benefit if their prior insurance were used as a rating factor. The commentator implies that new customers without prior insurance have previously been violating the mandatory insurance laws. This is not necessarily true. Many drivers do not own their vehicle and drive vehicles owned by others, and which are insured. Those persons may have an exemplary driving history, yet they are penalized by insurers who use prior insurance as a rating factor.

(f) The Proposed Regulation Will Impede A Competitive Market

The commentator asserts that the proposed regulation will stifle competition.

(f) The Proposed Regulation Will Impede A Competitive Market


Comment No. 11: Commentator: Pamela Pressley, Foundation for Taxpayer and Consumer Rights Date of Comment: February 28, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner has


(a) The Proposed Regulation Does Not Define Persistency and is, Therefore, Vague

The commentator asserts that the proposed regulation is ambiguous and vague. The commentator asserts that “persistency” is not defined in the regulation and it therefore will not prevent insurers from practices that violate Insurance Code Section 1861.02(c).

(a) The Proposed Regulation Does Not Define Persistency and is, Therefore,

Vague While the term “persistency” is not explicitly defined, the regulation creates an operative definition. The word “persistency” has historically been understood to mean to continue or persist. The term is commonly used and understood in the insurance industry to mean remaining with an insurer. Over time some insurers have expanded the meaning of the term such that it impermissibly conflicts with

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California Insurance Code Section 1861.02(c). (b) The Regulation Will Allow Insurers to

Use Prior Insurance as Part of a Period of Persistence in Violation of Insurance Code Section 1861.02(c)

The commentator asserts that insurers may offer a persistency discount on the first renewal by including, as part of the period of persistency, prior coverage with other insurers.

(b) The Regulation Will Allow Insurers to Use Prior Insurance as Part of a Period of Persistence in Violation of Insurance Code Section 1861.02(c)

Under the proposed regulation insurers might offer a persistency discount on the first renewal, however, they would not be able to utilize the prior insurance with another carrier as part of the period of persistency. On page 10 of the comments submitted, the commentator correctly interprets the appropriate language from the regulation which would preclude an insurer’s use of prior insurance under the hypothetical posed by the commentator. The language of the proposed regulation is clear on this point. The proposed regulation prohibits an insurer from applying a persistency credit “at any time, when based in whole or in part upon automobile insurance coverage provided by a non-affiliated insurer.” [emphasis added]. The use of the terms “at any time” and “or in part” specifically precludes use of prior insurance as part of the period of persistence.

(c) The Department of Insurance Should Also Notice and Publish the Regulatory Language Proposed by Mark Savage and the S.C.L.C.

The commentator believes that the Department of Insurance, by proposing the current regulation, has not gone far enough to prevent insurance companies from using the absence of prior insurance to the detriment of consumers, and therefore asks the Department to also adopt the S.C.L.C.’s proposed regulatory language.



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Comment No. 12: Commentator: Mark Savage, Southern Christian Leadership Conference and Consumers Union of U.S., Inc. Date of Comment: February 28, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner has


(a) The Proposed Regulation Should Include Explicit Prohibitions on the Use of Prior Insurance for Any Rating Purpose

The commentator asserts that the regulation does not go far enough in precluding the use of prior insurance for rating purposes. The commentator asserts that the regulation may allow insurers to place customers without prior insurance in lower tiers, or with affiliated companies offering less desirable and more costly coverage.


An insurer can apply only those rating factors that are the mandatory rating factors of California Insurance Code Sections 1861.02(a) (1) (2) and (3), or the optional rating factors specifically adopted by the Commissioner pursuant to California Insurance Code Section 1861.02 (a) (4). The regulation specifically authorizes only the application of a credit for persistency. It authorizes no other use of persistency in rating. An insurer using persistency in any other manner would be using an unapproved rating factor, and would be in violation of existing law. Additionally, for Good Drivers, California Insurance Code Section 1861.16(b) requires insurer groups to offer the lowest rate within the group, and California Code of Regulations Title 10, Section 2360.0-2360.7 address similar concerns.

(b) The Department of Insurance Should Also Notice and Publish the Regulatory Language Proposed by the Commentator.

The commentator believes that the Department of Insurance, by proposing the current regulation, has not gone far enough to prevent insurance companies from using the absence of prior insurance to the detriment of consumers, and therefore asks the Department to also adopt the commentator’s proposed regulatory language.

(b) The Department of Insurance Should Also Notice and Publish the Regulatory Language Proposed by the Commentator.

The commentator’s proposed language would prohibit any insurance company from considering whether a consumer has evidence of prior insurance for any reason whatsoever. However, under the current state of the law, insurers are able to consider a consumer’s past insurance for various reasons, so long as the insurer is not using the absence of prior

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insurance to affect the rates, premiums or insurability. (See, e.g. Cal. Code of Regs., tit.10, § 2632.13, subds. (f)&(g).) Thus, an insurer may check a consumer’s prior insurance history as one possible way to obtain an accident verification history, so long as a consumer is not required to provide prior insurance history in order to verify an accident history (See RH-01015532). Likewise, as part of inspecting a vehicle, an insurer may check prior insurance policies only to determine whether or not vehicles were previously insured for comprehensive or collision coverage. (See Ins. Code § 11580.17.)

(c) The Department Should Delete the Second Paragraph of the Proposed Language.

The commentator believes that the second paragraph of the proposed regulatory language should be deleted, because it is “unnecessarily ambiguous.”

(c) The Department Should Delete the Second Paragraph of the Proposed Language.

See response to comment 4(a).

(d) The Proposed Regulation Should Also Require That Insurers Provide Data Proving a Risk of Loss, and That the Persistency Factor Does Not Overlap With Another Rating Factor.

The commentator suggests that the Department must place the burden on the insurer to justify persistency’s substantial relationship to the risk of loss, and prove that the rating factor does not overlap with other factors being used.

(d) The Proposed Regulation Should Also Require That Insurers Provide Data Proving a Risk of Loss, and That the Persistency Factor Does Not Overlap With Another Rating Factor.

The commentator’s concerns are currently satisfied by other provisions in the California Code of Regulations, and therefore no alteration in the proposed regulatory language is necessary to satisfy these concerns. (See Spanish Speaking Citizens Foundation, Inc. v. Low (2000) 85 Cal.App.4th 1179, 1235 [103 Cal. Rptr. 2d 75].) This information is required as part of an insurer’s Class Plan.

Comment No. 13: Commentator: Samuel Sorich, National Association of Independent Insurers Date of Comment: February 28, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner has

considered the comment and has not changed the

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proposed regulations in response to the comment.

(a) The Proposed Regulation Will Prevent Insureds from Obtaining A Discount by Maintenance of Insurance

The commentator asserts that the loss of a persistency credit to insureds changing companies will result in higher rates for consumers changing insurers.

(a) The Proposed Regulation Will Prevent Insureds From Obtaining A Discount by Maintenance of Insurance


(b) The Proposed Regulation will Prohibit Fair Rates and Competition

The commentator asserts that the proposed regulation will discourage competition and lead to unfair rates.


See response to comments 2(a) and 2(b).

(c) The Proposed Regulation Does Not Take Into Account Actuarial Justification for Charging Higher Rates to Insureds Who Do Not Remain with One Company for an Extended Period, They Are Poorer Risks Than Those Insureds Maintaining Insurance with One Company for an Extended Period

The commentator asserts that actuarial evidence shows that “transient” insureds who change companies frequently are poorer risks than insureds who remain with one company for an extended time.

(c) The Proposed Regulation Does Not Take Into Account Actuarial Justification for Charging Higher Rates to Insureds Who Do Not Remain with One Company for an Extended Period, They Are Poorer Risks Than Those Insureds Maintaining Insurance with One Company for an Extended Period


(d) The Proposed Regulation is too Inflexible, and Will Prevent Insureds with Brief Lapses in Coverage from Receiving a Persistency Discount.

The commentator asserts that the proposed regulation will be unfair to insureds who have brief lapses in coverage, but have generally maintained insurance with one insurer.

(d) The Proposed Regulation is too Inflexible, and Will Prevent Insureds with Brief Lapses in Coverage from Receiving a Persistency Discount.


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Comment No. 14: Commentator: Bob Gnaizda, Greenlining Institute Date of Comment: February 28, 2002 Type of Comment: Written Summary of Comment: Response to Comment: The Commissioner has


(a) Decision on the Proposed Regulation should Be Delayed to Allow for Comment on Data Cited by Representatives of the Insurance Industry

The Commentator states that the Greenlining Institute “supports DOI’s amended regulations on persistency,” however, the Commentator believes that the statistical analysis provided by the insurance industry is flawed. Therefore, the Commentator requests a “forty day opportunity to examine the industry data and have employed a statistical expert to examine such data” or, in the alternative, the DOI should “employ such a statistical expert.”

(a) Decision on the Proposed Regulation should Be Delayed to Allow for Comment on Data Cited by Representatives of the Insurance Industry

Despite the existence of data reflecting a substantial relationship between motorists without prior insurance and the risk of loss, such data must still yield to Insurance Code section 1861.02(c). The Commissioner believes that the proper balance between the insurance industry data and Insurance Code section 1861.02(c) is found in the regulation as currently proposed. Thus, to the extent that the insurance industry’s data conflicts with Insurance Code 1861.02(c), the Commissioner rejects the relevance of the data. (See Response to comment 3(c).)

Comment No. 15: Commentator: Bob Gnaizda, Greenlining Institute Date of Comment: February 28, 2002 Type of Comment: Oral Summary of Comment: Response to Comment: The Commissioner has

considered the comment and has not changed the proposed regulations in response to the

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comment. (a) The Commentator states that the

Greenlining Institute “…agree[s] with the Department’s position on persistency…”

The Commentator indicates general support for prohibiting persistency credit, when it is based in whole or in part on a consumer’s prior insurance. (See Transcript, p.5, ln.1-3.) The Commentator refers to such a practice of giving credit for past membership in a group as the “Grandfather Clause.”

(a) The Commentator states that the Greenlining Institute “…agree[s] with the Department’s position on persistency…”

Insofar as the commentator supports the Commissioner’s proposed regulation, no response is required.

(b) The Commentator States That It is Unfair For Insurance Companies to Give Preferential Treatment to Long-time Customers, Unless the Amount of Credit Given is Minimal.

See Transcript, p. 6, lines 3-14.

(b) The Commentator States That It is Unfair For Insurance Companies to Give Preferential Treatment to Long-time Customers, Unless the Amount of Credit Given is Minimal.

Part of the cost associated with insurance premiums is derived from the expense of issuing an insurance policy for a particular insurance applicant. For persons who have been with the same company over a period of time, the costs to maintain an insurance policy with a current insured are less than the costs to open up a new file and obtain the data needed to issue an insurance policy for an applicant who is not currently insured by the issuing insurance carrier. Proposition 103 was designed, in part, to make insurance affordable for all consumers. (Spanish Speaking Citizens Foundation, Inc. v. Low (2000) 85 Cal.App.4th 1179, 1193-94 [103 Cal. Rptr. 2d 75].) The savings in cost for persons who have been “persistently” insured by the same carrier are, therefore, appropriately passed on to the consumer in order to make insurance more affordable. Whether those savings are “minimal” or substantial, the Commissioner is of the belief that consumers may receive a discount so long as it relates to the savings received and does not interfere with the prohibition against using the absence of prior insurance to affect premiums. Because this proposed regulation places those without prior insurance and those with prior insurance with another carrier on equal footing, the absence of

#151722 v4 23

prior insurance is not being used to affect premiums.

Comment No. 16: Commentator: Samuel Sorich, National Association of Independent Insurers Date of Comment: February 28, 2002 Type of Comment: Oral Summary of Comment: Response to Comment: The Commissioner has


(a) The Proposed Regulation Will Prevent Insureds from Obtaining A Discount by Maintenance of Insurance

The commentator asserts that the loss of a persistency credit to insureds changing companies will result in higher rates for consumers changing insurers.

(a) The Proposed Regulation Will Prevent Insureds From Obtaining A Discount by Maintenance of Insurance



The commentator asserts that the proposed regulation will discourage competition and lead to unfair rates.


See response to comment 2(a). The commentator suggests that the proposed regulation will deny insurers with prior insurance a discount that they deserve. The Commissioner’s intention is to clarify the provisions of California Insurance Code Section 1861.02(c), and assure uniform treatment of the persistency optional rating factor. Allowing drivers changing companies a persistency discount, whether desirable or not, would violate Proposition 103.

(c) The Proposed Regulation Does Not Take Into Account The Actuarial Justification for Charging Higher Rates to Insureds Who Do Not Remain with One Company for an Extended Period Because of a Correlation with Increased Risk of Loss for those Insureds As Compared to those

(c) The Proposed Regulation Does Not Take Into Account The Actuarial Justification for Charging Higher Rates to Insureds Who Do Not Remain with One Company for an Extended Period Because of a Correlation with Increased Risk of Loss for those Insureds As Compared to those

#151722 v4 24

Insureds Maintaining Insurance with One Company for an Extended Period

The commentator asserts that actuarial evidence shows that “transient” insureds who change companies frequently are poorer risks than insureds who remain with one company for an extended time.

Insureds Maintaining Insurance with One Company for an Extended Period

See response to comment 3(c). The commentator offered a description of an article by Sholom Feldblum, concluding that persons who maintained prior insurance were a better risk than those who did not have prior insurance. However, the Commissioner is not free to disregard California Insurance Code Section 1861.02(c).

(d) The Absence of Prior Insurance is Not a Criterion For Determining Eligibility For Persistency, and Therefore Does Not Violate Insurance Code Section 1861.02, subdivision (c).

The commentator asserts that the criteria for obtaining a “persistency discount” should be maintenance of insurance with one insurer for an extended period of time. The commentator asserts that under his proposed definition of “persistency” drivers who have continuously maintained insurance, but have frequently switched insurers would not qualify for a “persistency discount.” The commentator asserts that drivers who continuously maintain insurance but frequently change insurers will not be denied a “persistency discount” based upon “absence of prior insurance coverage.” The commentator asserts that they would be denied the persistency discount because of lack of continuous insurance with one company.

(d) The Absence of Prior Insurance is Not a Criterion For Determining Eligibility For Persistency, and Therefore Does Not Violate Insurance Code Section 1861.02, subdivision (c).


Comment No. 17: Commentator: Pamela Pressley, Foundation for Taxpayer and Consumer Rights Date of Comment: February 28, 2002 Type of Comment: Oral Summary of Comment: Response to Comment: The Commissioner has

considered the comment and has not changed the

#151722 v4 25

proposed regulations in response to the comment.


The commentator asserts that the proposed regulation is ambiguous and vague. The commentator asserts that “persistency” is not defined in the regulation and therefore will not prevent insurers from practices that violate Insurance Code Section 1861.02(c).




The commentator asserts that insurers may offer a persistency discount on the first renewal by including, as part of the period of persistency, prior coverage with other insurers.




The commentator believes that the Department of Insurance, by proposing the current regulation, has not gone far enough to prevent insurance companies from using the absence of prior insurance to the detriment of consumers, and therefore asks the Department to also adopt the S.C.L.C.’s proposed regulatory language.



Comment No. 18: Commentator: Janine Gibford, Assoc. of California Insurance Companies Date of Comment: February 28, 2002 Type of Comment: Oral Summary of Comment: Response to Comment: The Commissioner has


#151722 v4 26

(a) Actuarial Justification for Use of Prior Insurance and Consistency With Proposition 103

The commentator asserts that use of prior insurance as an optional rating factor, through application of the optional persistency rating factor, is actuarially justified and consistent with the purposes of Proposition 103.

(a) Actuarial Justification for Use of Prior Insurance and Consistency With Proposition 103

The Commissioner was not provided with any data which the commentator relied upon in concluding that insureds with prior insurance are better risks for insurers than those insureds without prior insurance. Notwithstanding whether, taken as an non-differentiated whole, previously uninsured drivers are poorer risks than the previously insured, allowing rating of insureds based on whether or not they previously had insurance is contrary to the intent and language of California Insurance Code Section 1861.02(c).

(b) By Offering Persistency Discounts to new Customers Persons without Prior Insurance Are Not Penalized, Rather, Persons with Prior Insurance Are Rewarded.

The commentator also asserts that persons without prior insurance are not financially penalized. The commentator asserts that the goal of persistency is to apply a “discount” but not a “surcharge” in order to reward persons with continuous insurance.

(b) By Offering Persistency Discounts to new Customers Persons without Prior Insurance Are Not Penalized, Rather, Persons with Prior Insurance Are Rewarded.

In California insurance ratemaking requires that rates be determined in a revenue neutral manner. Therefore, a discount to one group of persons based on a particular characteristic results in a surcharge to those who do not meet such a qualification. The costs of a discount to a person previously insured is borne by those who do not have prior insurance. The use of the discount proposed by the commentator, therefore, is in effect a surcharge to those without prior insurance. The use of a discount for those remaining with the insurer applying the persistency discount reflects the decreased costs of renewing an insured, as opposed to the cost of recruiting and initially underwriting a new insured.

(c) The Proposed Regulation Harms Market Competition

The commentator also asserts that prohibiting use of prior insurance with other insurers as a basis for application of the persistency discount unreasonably discriminates against insureds

(c) The Proposed Regulation Harms Market Competition

The proposed regulation does not unreasonably discriminate against insureds desiring to change insurance companies. It places any company’s new customers who were previously uninsured

#151722 v4 27

wishing to change insurance companies.

on an even footing with its new insureds wishing to change insurance companies. The Commissioner must implement California Insurance Code Section 1861.02(c).

Comment No. 19: Commentator: Mark Savage, Southern Christian Leadership Conference and Consumers Union of U.S., Inc. Date of Comment: February 28, 2002 Type of Comment: Oral Summary of Comment: Response to Comment: The Commissioner has



The commentator asserts that the regulation does not go far enough in precluding the use of prior insurance for rating purposes. The commentator asserts that the regulation may allow insurers to place customers without prior insurance in lower tiers, or with affiliated companies offering less desirable and more costly coverage.


See responses to comments 11 (a) and (b).

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(b) The Proposed Regulation Should Also Require That Insurers Provide Data Proving a Risk of Loss, and That the Factor Does Not Overlap With Another Rating Factor.

The commentator suggests that the Department must place the burden on the Insurer to justify persistency’s substantial relationship to the risk of loss, and prove that the rating factor does not overlap with other factors being used.

(b) The Proposed Regulation Should Also Require That Insurers Provide Data Proving a Risk of Loss, and That the Factor Does Not Overlap With Another Rating Factor.

The commentator’s concerns are currently satisfied by the California Code of Regulations, and therefore no alteration in the proposed regulatory language is necessary to satisfy these concerns. (See Spanish Speaking Citizens Foundation, Inc. v. Low (2000) 85 Cal.App.4th 1179, 1235 [103 Cal. Rptr. 2d 75].)

Comment No. 20: Commentator: Steve Frisnia, Viking Insurance Company. Date of Comment: February 28, 2002 Type of Comment: Oral Summary of Comment: Response to Comment: The Commissioner has


(a) Maintenance of Insurance Has Relationship to Risk of Loss

The commentator asserts that there is evidence that there is an actuarial relationship between risk of loss and maintenance of insurance. He asserts that the proposed regulation will force companies to ignore this relationship when rating new customers without prior insurance.

(a) Maintenance of Insurance Has Relationship to Risk of Loss


(b) The Proposed Regulation Will Increase the Cost of Insurance for Some New Customers

Insurance rates are increasing and if consumers cannot take advantage of a credit for their prior insurance with a new insurer, insurance may become unaffordable for them.

(b) The Proposed Regulation Will Increase the Cost of Insurance for Some New Customers


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(c) The Proposed Regulation Will Decrease Competition.

The commentator asserts that the proposed regulation will make it difficult to attract new customers from other companies, and therefore, competition will be decreased.

(c) The Proposed Regulation Will Decrease Competition.

See Response to comment 5(b).

(d) The Proposed Regulation will Force Insurers to Charge Unfairly Discriminatory Rates to Persons with Prior Insurance.

The commentators also assert that prohibiting use of prior insurance with other insurers as a basis for application of the persistency discount unreasonably discriminates against insureds wishing to change insurance companies.

(d) The Proposed Regulation will Force Insurers to Charge Unfairly Discriminatory Rates to Persons with Prior Insurance.

See Response to comment 5(c).

Comment No. 21: Commentator: Douglas A. Lutgen, CSAA Inter-Insurance Bureau Date of Comment: February 28, 2002 Type of Comment: Oral Summary of Comment: Response to Comment: The Commissioner has



The commentator asserts that some insureds may have lapses in insurance that would prevent their long time insurer from providing them a persistency discount. The commentator points to inadvertent brief lapses in coverage, military personnel who cancel their insurance when transferred overseas, and then return to their previous insurer. The commentator notes that some consumers may leave their current insurer based on the “lowball” estimate by unscrupulous producers. Those consumers may learn after the insurer



#151722 v4 30

completes its investigation and underwriting process that the policy they have purchased is more expensive than the coverage with the company the insured has just left. The commentator urges that a six-month grace period be included with the regulation. The six-month period is based on the average length of a policy. This would allow consumer dissatisfied with a new insurer to return to the previous insurer with a persistency discount. Comment No. 22: Commentator: Ed Levy, American Agents Alliance Date of Comment: February 28, 2002 Type of Comment: Oral Summary of Comment: Response to Comment: The Commissioner has


(a) The Proposed Regulation Will Raise Rates for an Insurer’s New Customers

The commentator asserts that the proposed regulation, by denying new insureds a discount for their prior insurance, will raise insurance rates.

(a) The Proposed Regulation Will Raise Rates for an Insurer’s New Customers

The proposed regulation will not inevitably lead to over-all higher rates for consumers. Insurance rates under California law are determined in a “revenue neutral” manner. Therefore, a discount to one group of persons based on a particular characteristic results in a surcharge to those who do not meet such a qualification. Adopting the comment would violate Insurance Code Section 1861.02(c).

(b) The Proposed Regulation Will Make It More Expensive to Change Insurers

The comment urges the Commissioner not to adopt the proposed regulation because it will make it more expensive for consumers to change insurance companies, and will thereby stifle competition, and cause higher insurance rates.

(b) The Proposed Regulation Will Make It More Expensive to Change Insurers


(c) The Proposed Regulation Will Deter New Insurers From Entering the Market

(c) The Proposed Regulation Will Deter New Insurers From Entering the Market

#151722 v4 31

The commentator asserts that the proposed regulation will be a deterrent to new insurers entering the California market, because they will be unable to attract consumers from the consumer’s existing insurer.

See response to Comment 6(c).

(d) The Proposed Regulation Is Unfairly Discriminatory

The commentator asserts that the proposed regulation, by allowing existing customers after a period of coverage with the insurer to receive a persistency discount, but not allowing new customers to receive such a discount, will force insurers to unfairly discriminate against new insureds.

(d) The Proposed Regulation Is Unfairly Discriminatory


Comment No. 23: Commentator: Michael Fitzgerald, Product Manager, Esurance Company Date of Comment: February 28, 2002 Type of Comment: Oral Summary of Comment: Response to Comment: The Commissioner has


(a) The Commentator Disputes the Assertion that Insurance is Unavailable to California’s Uninsured Motorists

The commentator asserts that it is unclear whether the statistics referenced by Mark Savage, counsel for the Southern Christian Leadership Council and Consumers’ Union, Inc. truly reflect lack of access to insurance by California’s uninsured motorists. The commentator disputes Mr. Savage’s contention that insurance companies have used the absence of prior insurance indirectly to preclude writing coverage for drivers without prior insurance.

(a) The Commentator Disputes the Assertion that Insurance is Unavailable to California’s Uninsured Motorists

The Commissioner has not relied upon the statistics cited by Mr. Savage in proposing the current regulation. To the extent that the commentator’s comments suggest that insurers have not used the absence of prior insurance in deciding whether or not to issue a persistency credit. See Response to comment 4(b).

#151722 v4 32

The commentator asserts that the uninsured motorists have insurance available, but cannot afford the available insurance. (b) Prohibiting Persistency Discounts for New

Customers Impedes New Insureds’ Ability to Draw Customers Away from Established Insurers

The commentator asserts that established insurers provide customers a discount for remaining with those insurers. The commentator asserts that it will be difficult for new insurers to draw clients from established insurers if they cannot offer new customers a persistency discount.

(b) Prohibiting Persistency Discounts for New Customers Impedes New Insurers’ Ability to Draw Customers Away from Established Insurers


(c) Relationship to Risk of Loss The commentator asserts that insurers should be able to offer new customers a persistency discount because there is an actuarial correlation between maintenance of prior insurance and risk of loss.

(c) Relationship to Risk of Loss See response to comment 3(c).

95

Senate Bill No. 841

CHAPTER 169

An act to amend Section 1861.02 of the Insurance Code, relating toautomobile insurance, and declaring the urgency thereof, to take effectimmediately.

[Approved by Governor August 2, 2003. Filed withSecretary of State August 2, 2003.]

LEGISLATIVE COUNSEL’S DIGEST

SB 841, Perata. Automobile insurance: rates: persistency.Existing law, as enacted by Proposition 103, requires rates and

premiums for automobile insurance policies to be determined by theapplication of specified factors in decreasing order of importance,including the insured’s driving record, the number of miles drivenannually, and the number of years of driving experience, and allows theInsurance Commissioner to adopt additional factors by regulation thathave a substantial relationship to the risk of loss. Existing law alsoprovides that the absence of prior automobile insurance coverage, in andof itself, shall not be a criterion for determining eligibility for a GoodDriver Discount policy, or generally for automobile rates, premiums, orinsurability.

This bill would allow an insurer to use persistency of automobileinsurance coverage with that insurer, an affiliate, or another insurer as anoptional rating factor. Because the bill would authorize the use of anadditional factor in the determination of premiums for automobileinsurance policies, it would amend Proposition 103 and would requirea 2/3 vote.

The bill would declare that it is to take effect immediately as anurgency statute.

The people of the State of California do enact as follows:

SECTION 1. Section 1861.02 of the Insurance Code is amended toread:

1861.02. (a) Rates and premiums for an automobile insurancepolicy, as described in subdivision (a) of Section 660, shall bedetermined by application of the following factors in decreasing orderof importance:

(1) The insured’s driving safety record.(2) The number of miles he or she drives annually.

Ch. 169 — 2 —

95

(3) The number of years of driving experience the insured has had.(4) Those other factors that the commissioner may adopt by

regulation and that have a substantial relationship to the risk of loss. Theregulations shall set forth the respective weight to be given each factorin determining automobile rates and premiums. Notwithstanding anyother provision of law, the use of any criterion without approval shallconstitute unfair discrimination.

(b) (1) Every person who meets the criteria of Section 1861.025 shallbe qualified to purchase a Good Driver Discount policy from the insurerof his or her choice. An insurer shall not refuse to offer and sell a GoodDriver Discount policy to any person who meets the standards of thissubdivision.

(2) The rate charged for a Good Driver Discount policy shall complywith subdivision (a) and shall be at least 20% below the rate the insuredwould otherwise have been charged for the same coverage. Rates forGood Driver Discount policies shall be approved pursuant to this article.

(3) (A) This subdivision shall not prevent a reciprocal insurer,organized prior to November 8, 1988, by a motor club holding acertificate of authority under Chapter 2 (commencing with Section12160) of Part 5 of Division 2, and which requires membership in themotor club as a condition precedent to applying for insurance fromrequiring membership in the motor club as a condition precedent toobtaining insurance described in this subdivision.

(B) This subdivision shall not prevent an insurer which requiresmembership in a specified voluntary, nonprofit organization, which wasin existence prior to November 8, 1988, as a condition precedent toapplying for insurance issued to or through those membership groups,including franchise groups, from requiring such membership as acondition to applying for the coverage offered to members of the group,provided that it or an affiliate also offers and sells coverage to those whoare not members of those membership groups.

(C) However, all of the following conditions shall be applicable to theinsurance authorized by subparagraphs (A) and (B):

(i) Membership, if conditioned, is conditioned only on timelypayment of membership dues and other bona fide criteria not based upondriving record or insurance, provided that membership in a motor clubmay not be based on residence in any area within the state.

(ii) Membership dues are paid solely for and in consideration of themembership and membership benefits and bear a reasonable relationshipto the benefits provided. The amount of the dues shall not depend onwhether the member purchases insurance offered by the membershiporganization. None of those membership dues or any portion thereofshall be transferred by the membership organization to the insurer, or any

Ch. 169— 3 —

95

affiliate of the insurer, attorney-in-fact, subsidiary, or holding companythereof, provided that this provision shall not prevent any bona fidetransaction between the membership organization and those entities.

(iii) Membership provides bona fide services or benefits in additionto the right to apply for insurance. Those services shall be reasonablyavailable to all members within each class of membership.

Any insurer that violates clause (i), (ii), or (iii) shall be subject to thepenalties set forth in Section 1861.14.

(c) The absence of prior automobile insurance coverage, in and ofitself, shall not be a criterion for determining eligibility for a GoodDriver Discount policy, or generally for automobile rates, premiums, orinsurability. However, notwithstanding subdivision (a), an insurer mayuse persistency of automobile insurance coverage with the insurer, anaffiliate, or another insurer as an optional rating factor. The Legislaturehereby finds and declares that it furthers the purpose of Proposition 103to encourage competition among carriers so that coverage overall willbe priced competitively. The Legislature further finds and declares thatcompetition is furthered when insureds are able to claim a discount forregular purchases of insurance from any carrier offering this discountirrespective of whether or not the insured has previously purchased froma given carrier offering the discount. Persistency of coverage may bedemonstrated by coverage under the low-cost automobile insuranceprogram pursuant to Article 5.5 (commencing with Section 11629.7)and Article 5.6 (commencing with Section 11629.9) of Chapter 1 of Part3 of Division 2, or by coverage under the assigned risk plans pursuantto Article 4 (commencing with Section 11620) of Chapter 1 of Part 3 ofDivision 2. Persistency shall be deemed to exist even if there is a lapseof coverage of up to two years due to an insured’s absence from the statewhile in military service, and up to 90 days in the last five years for anyother reason.

(d) An insurer may refuse to sell a Good Driver Discount policyinsuring a motorcycle unless all named insureds have been licensed todrive a motorcycle for the previous three years.

(e) This section shall become operative on November 8, 1989. Thecommissioner shall adopt regulations implementing this section andinsurers may submit applications pursuant to this article which complywith those regulations prior to that date, provided that no suchapplication shall be approved prior to that date.

SEC. 2. This act is an urgency statute necessary for the immediatepreservation of the public peace, health, or safety within the meaning ofArticle IV of the Constitution and shall go into immediate effect. Thefacts constituting the necessity are:

Ch. 169 — 4 —

95

Because making a ratings discount portable will expand consumeraccess to insurance and consumer choice, and will result in increasedcompetition in the marketplace, it is necessary that this act take effectimmediately.

O

dh

Text Box

DRIVER A: Perfect driving record, insured without lapse for past five years Six Month Premium: $637

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Text Box

CALIFORNIA DRIVER B: Exact same characteristics as Driver A EXCEPT, did not need insurance at some point during past five years Six Month Premium: $900 -- 41% SURCHARGE

Customer/Drivers/Vehicles/Additional Information/Coverages/Quote/Billing/Complete Sale

AUTO QUOTE & PURCHASE Quote Summaryfor help with your quote call 1-800-4-Safeco (1-800-472-3326)

Denny, your quote is detailed below:

Your 6-month premium is:

$799.40 You qualify for our Full Pay Discount. If you choose to pay the entire premium at this time, your payment will be:

$761.70

Option 1 - Purchase Online

If you would like to complete your purchaseonline now, click the button below:

Option 2 - Speak to Agent

If you would like to discuss your quotewith a Safeco agent, click the buttonbelow:

Option 3 - Review/Modify

If you would like to adjust any quoteinformation, simply click the "Modify" linkbelow the appropriate policy sectionbelow.

Safeco's offer is dependent upon the accuracy and completeness of the information that you have provided us. Your premium may beincreased or your coverage may be cancelled should we discover any significant inaccuracies with the information supplied.

Note: The price and terms we quoted you were based in part on information we received from consumer reports. To view the notice weare legally required to provide you, please click here.

COVERAGE INFORMATION

1999 HOND

Vehicle Coverages Limit Premium

Combined Single Limit $100,000 $426.00

Bodily Injury

Property Damage

Basic PIP

Additional PIP

Underinsured Motorist $100,000/$100,000 $92.50

Comprehensive $250 $46.30

Collision $250 $202.40

UIM Property Damage $50,000 $14.50

Safeco Optimum Package Plus

New Vehicle Replacement

Roadside Assistance

Rental Reimbursement $22 per day $17.70

Original Parts Replacement / OEM

$799.40

Modify Coverage Information

CUSTOMER INFORMATION

Effective Date 01/22/2010

Safeco Company First National Insurance Company of America

Mailing Address 15050 1st Ave S City Burien

State WA

Zip Code 98148-1008

Current Insurance Status Currently Insured

Current Carrier State Farm Mutual

Prior Cancellation N

Modify Customer Information

DRIVER INFORMATION

Driver 1

First Name Denny

Middle Name

Last Name Milman

Gender Male

Marital Status Single

Relationship to Insured Insured

Birthdate 02/24/1962

Education High SchoolDiploma

Has license been suspended/revoked inlast 5 years?

N

Does this driver require an SR-22 filing? N

SR-22 Filing Begin Date

SR-22 Filing End Date

Add/Modify a Driver

VEHICLE INFORMATION

Vehicle 1

Model Year 1999

Make Honda

Model CIVIC DX

VIN

Primary Operator 1 - Denny -02/24/1962

Usage Work/School 4or more miles

Commute Miles 10

Commute Days 5

Annual Miles 15000

Anti-Theft Type

Loan or Lease? N

Zip Code 98148-1008

Vehicle purchased new?

Purchase Date

Add/Modify a Vehicle

ADDITIONAL INFORMATION

Residence Type Rented Apartment

Safeco Home Policy? N

Current Limits 100,000 / 300,000

Current Policy Expiration 01/31/2010

Current Policy Months 72

Customer/Drivers/Vehicles/Additional Information/Coverages/Quote/Billing/Complete Sale

AUTO QUOTE & PURCHASE Quote Summaryfor help with your quote call 1-800-4-Safeco (1-800-472-3326)

Denny, your quote is detailed below:

Your 6-month premium is:

$1,388.80 You qualify for our Full Pay Discount. If you choose to pay the entire premium at this time, your payment will be:

$1,321.70

Option 1 - Purchase Online

If you would like to complete your purchaseonline now, click the button below:

Option 2 - Speak to Agent

If you would like to discuss your quotewith a Safeco agent, click the buttonbelow:

Option 3 - Review/Modify

If you would like to adjust any quoteinformation, simply click the "Modify" linkbelow the appropriate policy sectionbelow.

Safeco's offer is dependent upon the accuracy and completeness of the information that you have provided us. Your premium may beincreased or your coverage may be cancelled should we discover any significant inaccuracies with the information supplied.

Note: The price and terms we quoted you were based in part on information we received from consumer reports. To view the notice weare legally required to provide you, please click here.

COVERAGE INFORMATION

1999 HOND

Vehicle Coverages Limit Premium

Combined Single Limit $100,000 $723.10

Bodily Injury

Property Damage

Basic PIP

Additional PIP

Underinsured Motorist $100,000/$100,000 $153.20

Comprehensive $250 $89.00

Collision $250 $364.60

UIM Property Damage $50,000 $26.30

Safeco Optimum Package Plus

New Vehicle Replacement

Roadside Assistance

Rental Reimbursement $22 per day $32.60

Original Parts Replacement / OEM

$1,388.80

Modify Coverage Information

CUSTOMER INFORMATION

Effective Date 01/22/2010

Safeco Company First National Insurance Company of America

Mailing Address 15050 1st Ave S City Burien

State WA

Zip Code 98148-1008

Current Insurance Status No Insurance - Did Not Own a Vehicle

Current Carrier

Prior Cancellation N

Modify Customer Information

DRIVER INFORMATION

Driver 1

First Name Denny

Middle Name

Last Name Milman

Gender Male

Marital Status Single

Relationship to Insured Insured

Birthdate 02/24/1962

Education High SchoolDiploma

Has license been suspended/revoked inlast 5 years?

N

Does this driver require an SR-22 filing? N

SR-22 Filing Begin Date

SR-22 Filing End Date

Add/Modify a Driver

VEHICLE INFORMATION

Vehicle 1

Model Year 1999

Make Honda

Model CIVIC DX

VIN

Primary Operator 1 - Denny -02/24/1962

Usage Work/School 4or more miles

Commute Miles 10

Commute Days 5

Annual Miles 15000

Anti-Theft Type

Loan or Lease? N

Zip Code 98148-1008

Vehicle purchased new?

Purchase Date

Add/Modify a Vehicle

ADDITIONAL INFORMATION

Residence Type Rented Apartment

Safeco Home Policy? N

Modify Additional Information

Initiative backed by car insurer makes ballot Wyatt Buchanan, Chronicle Sacramento Bureau Thursday, January 21, 2010 A controversial initiative that would impact automobile insurance rates qualified for the June ballot Wednesday, as proponents and opponents argued over whether it would help or harm consumers in the state. The measure would allow insurance companies to base their prices in part on a driver's history of insurance coverage, which is currently barred because of a voter-approved measure that passed in 1988. The initiative has been financed by the Mercury Insurance Group, and backers say that it would allow companies to offer some people lower rates. But opponents say it will cause rates to skyrocket for first-time buyers of car insurance or those who stop their coverage for whatever reason and then try to restart it. Chief among the opposition is the Santa Monica-based Consumer Watchdog, which was behind the 1988 measure that created the provision. Kathy Fairbanks, a spokeswoman for the campaign to pass the measure, conceded that costs could go up for some people, but said it would help most consumers. "We're focused on the more than 80 percent of drivers who follow the law and maintain coverage. We think it is unfair they are penalized under current law," Fairbanks said. The law now allows insurance companies to give rate discounts to people who maintain coverage with the company for a particular period of time. However, companies cannot take past coverage into consideration when setting rates for new customers. The 1988 provision barring past consideration was part of Prop. 103, a comprehensive measure intended to control the rising costs of insurance. Harvey Rosenfield, the founder of Consumer Watchdog, said the new measure is deceitful and could push the cost of insurance so high that more people simply would drive without it. That, in turn, could lead to higher insurance rates for everyone, he said. Rosenfield doubted whether insurance companies would even offer the discount in the first place, saying he thinks the real motive is the ability to raise rates through a "vicious penalty."

He illustrated that with a video where he applies for auto insurance online through Mercury in Nevada, with the first time saying he currently has insurance and the second time saying he does not. Nevada does not have the same restriction as California. In the first instance, the cost of insurance is $1,670 per year. Under the second, the cost is $2,896 for a year. "What this shows is Mercury has been lying to the public," he said. But Fairbanks said comparing Nevada to California is like comparing "apples to elephants," even though the only difference in the application was the status of insurance. Rosenfield said he also wants Attorney General Jerry Brown to change the title and summary of the measure that will appear in the voter guide to reflect the possibility of increased costs. He previously had accused Brown of omitting that possibility because Mercury is one of Brown's campaign donors. Brown's office said the wording change provided a fair and accurate description of the measure. Brown's spokesman at the time, Scott Gerber, recorded interviews with a Chronicle reporter on that topic without the reporter's consent. He later resigned. E-mail Wyatt Buchanan at [email protected].

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