Insurance Czar Will Face New Challenges

In a state prone to fires, floods and earthquakes, which has more vehicles on the road than any other and ever-escalating home values, the job of policing its $119-billion insurance industry is crucial to Californians’ pocketbooks.

Voters will go to the polls this fall to elect the state’s fifth insurance commissioner since Proposition 103 was approved in 1988. The measure made the post an elective office, rather than filled through appointment by the governor, and gave the commissioner power to approve rate changes.

California’s insurance commissioner performs a tricky balancing act: making sure the industry stays robust so it can pay claims, while appeasing consumers who demand strong oversight.

Consumer advocates already are calling on the next commissioner for changes in auto insurance pricing, regulation of underwriting guidelines and revisions to ballyhooed reforms in the workers’ compensation market.

Insurers, meanwhile, are demanding less bureaucracy, are pushing back on proposed changes to auto insurance pricing and underwriting rules and are asking for a less adversarial relationship with the commissioner.

Despite the position’s power, the race to replace Insurance Commissioner John Garamendi, who is running for lieutenant governor, has been low-key, primarily because most of the debate will occur this fall between major party nominees.

In the June 6 primary, voters will choose between two Democrats to run against a Republican candidate in the fall. The two are Lt. Gov. Cruz Bustamante and John Kraft, a South Pasadena businessman who has yet to demonstrate that he will have the money to offset Bustamante’s familiarity to voters. Kraft ran unsuccessfully in 1994.

Republicans already have a putative nominee, Steve Poizner, a Los Gatos technology millionaire who has never held public office. Several minor party candidates are also running. Poizner has promised he would, if elected, combat insurance fraud, prepare the state for the next natural disaster and increase competition to reduce rates.

“The cost of insurance is a big chunk of most peoples’ budgets,� Poizner said in an interview. “For me, driving down the cost of insurance is going to be my top priority.�

In speaking engagements, Bustamante has stressed his experience on the Assembly’s insurance committee and as speaker of the Assembly. In his candidate statement in the voter information guide for the primary, however, the lieutenant governor focuses his campaign on his efforts to lose weight. The lieutenant governor’s campaign refused repeated phone calls and e-mail requests for an interview.

Poizner, who raised about $3 million in contributions as of May 4, has said he will not accept money from insurers. Bustamante, who had raised a little less than $800,000 during the same period, took $158,250, or 20% of his total contributions, from insurance companies and bail bonds firms.

Garamendi, a two-term insurance commissioner, will leave office with consumer advocates and insurers, however grudgingly, agreeing that he has lowered rates and stabilized the market.

Consumer advocates say the next commissioner must ensure the state doesn’t lose ground gained since 1988, when Proposition 103 was approved.

“An analysis of rates in California since Prop. 103 passed puts savings in auto insurance alone at $23 billion,� said Jamie Court, president of the Foundation for Taxpayer and Consumer Rights. “The question is, do those savings trends continue, or is the next commissioner going to slow that down, or reverse the trend entirely?�

But insurers argue that increased regulation comes at a price.

The regulatory process for insurers doing business in California is among the most onerous in the country, said Sam Sorich, president of the Assn. of California Insurance Companies.

“In other states, the law is different, insurance operates in a more competitive environment. The law doesn’t require the prior approval of every rate change,� he said.

Insurance companies complain that Proposition 103 hobbles their ability to change rates quickly and boosts administrative costs, forcing them to take some business, such as call centers, and jobs that go along with it to other states.

Even so, California is a goldmine for insurers. In 2004, the latest year for which figures are available, companies wrote more premiums here -- $56 billion -- for property and casualty insurance than in any other state, according to the National Assn. of Insurance Commissioners.

Insurance companies are also connected with the state’s lawmakers, spending $25 million on lobbyists, campaign contributions and perks for representatives since 2003. Critics charge the donations have made legislators reluctant to toughen regulations on insurers.

Consumers groups say that a top priority for the next commissioner is requiring insurers to change the way they price auto insurance, a yet unfulfilled provision of Proposition 103. Garamendi has proposed that insurers base rates on motorists’ driving records and miles driven. Currently, rates are largely set according to ZIP Code. Consumer watchdogs argue this places an unfair burden on poor residents in large cities.

Insurers disagree, saying risk is not a racial issue, but a geographic one, and that ordering them to recalculate auto rates ignores the realities of congested urban areas.

“It’s a priority for the insurance industry to preserve the link between underlying risk and the ultimate price of insurance, which the current commissioner is seeking to undermine,� said Rex Frazier, vice president and general counsel of the Personal Insurance Federation, a trade group that has contributed to Bustamante’s campaign. “If you push rates down in Los Angeles, then they pop up everywhere else.�

Garamendi hopes to file new regulations to require a change in auto insurance pricing by the end of summer, said Norman D. Williams, the assistant deputy commissioner.

The next commissioner will be charged with ensuring the new rules are implemented and could face litigation from insurance companies.

A similar battle can be expected when the next commissioner reviews underwriting guidelines. Advocates are demanding that insurers not penalize policyholders for making legitimate claims.

“The word is out there on the street that if you file a claim, your rates are going to go up, and you’re going to get non-renewed,� said Amy Bach, director of United Policyholders, a San Francisco-based nonprofit. “I think a lot of people don’t file claims anymore because they are afraid.�

Garamendi has tried repeatedly to regulate underwriting practices, but has been unable to convince the Legislature that he should be allowed to do so. The insurance industry has also resisted, saying some people file claims for damage to their homes caused by neglect.

Changes in workers’ compensation law will also be on the new commissioner’s plate, specifically the debate among Democratic legislators, unions and Gov. Arnold Schwarzenegger over how to fine-tune laws that overhauled the insurance system. The laws were an attempt to stop increases in premiums that forced many companies to leave the state.

The changes have saved employers at least $8.1 billion since 2002, according to a study commissioned by the state Department of Industrial Relations sent to the governor in February.

“I think that it’s hard to deny that the reforms have been a big success in terms of reducing the costs of workers’ comp,� said Frank Neuhauser, a workers’ compensation expert at UC Berkeley’s Survey Research Center.

But unions believe the reforms went too far, reducing permanent disability payments for some workers by up to 70% because a new rate schedule was unclear about how workers should be compensated for different injuries, Neuhauser said.