October 12, 2009
Pursuant to Elections Code Section 9005, we have
reviewed a proposed statutory initiative related to automobile and
residential property insurance and insurance brokers (A.G. File No.
09‑0029).
Background
State Regulation of Insurance. The
state regulates many aspects of California's insurance market. Pursuant
to Proposition 103, a statewide initiative enacted by voters in 1988,
the Insurance Commissioner is responsible for reviewing and approving
rate changes for property and casualty insurance lines—such as
automobile, homeowners, and earthquake insurance—before revisions to the
rates can take effect. Under this prior approval process, the Insurance
Commissioner examines and regulates an insurance company's expected
profit to ensure the rates allow for a fair rate of return.
Some specific rate-setting rules apply to
automobile insurance. As required under Proposition 103, automobile
insurance rates and premiums are determined by the application of
specific factors in decreasing order of importance: (1) the insured's
driving record, (2) the number of miles driven annually, and (3) the
number of years of driving experience. Under current law, the fact that
someone did not previously have automobile insurance may not be used as
a criterion for determining automobile rates, premiums, or insurability.
Insurance Premiums and Fees. Under
current law, an insurance premium is defined as being the amount of
money that the insurance company charges to a policyholder to provide
coverage for a specified risk. However, the Insurance Commissioner does
not consider certain types of fees to constitute premiums. These include
penalties imposed on policyholders for paying an insurance bill from a
checking account with insufficient funds, membership dues in an
organization that offers insurance, and installment finance charges.
State insurance laws and regulations do not set forth any specific
limits on how much in fees can be charged to policyholders.
Insurance Agents and Brokers.
Certified insurance brokers and agents doing business in California
receive a "broker-agent" license. Under current law, insurance
agents engage in insurance transactions on behalf of an insurance
company. Insurance brokers work on behalf of the consumer in insurance
transactions other than those involving life insurance. The Insurance
Commissioner regulated and licensed more than 305,000 agents and brokers
in 2008.
Existing state law regulates the collection of
fees by brokers in connection with insurance transactions. For example,
a broker must disclose the amount of the fee to a consumer and obtain
their signed written consent to the payment. In addition, the broker
cannot be an agent of the insurer that would provide coverage. The
amount of broker fees is not, however, limited by the Insurance
Commissioner and information on them is not systematically reported to
him. Also, state insurance regulations permit a broker to collect fees
both from the consumers they represent as well as to receive commissions
from insurance companies as part of an insurance transaction.
Taxation of Insurers and Brokers.
Under current law, insurance companies doing business in California pay
an insurance premium tax in lieu of a state corporate income tax. The
tax is based on the amount of insurance premiums earned in the state
each year for automobile insurance as well as for other types of
coverage, such as fire and health insurance. The tax is not imposed on
certain insurance fees. In 2008, insurance companies paid about
$1.8 billion in premium taxes on the various types of insurance policies
in California. In addition, fees paid to brokers are not treated as
premiums but instead under state income tax law as income to the broker.
Major Provisions
This measure contains provisions that (1)
establish additional statutory provisions relating to setting insurance
rates, (2) define insurance fees as premiums subject to regulation, and
(3) limit insurance broker fees. We describe these provisions in more
detail below.
Provisions on Insurance Rate-Setting.
Consistent with existing law relating to automobile insurance, this
measure creates an additional statutory provision stating that the
absence of prior insurance could not be used as a criterion for
determining rates, premiums, or insurability. This measure, however,
differs from existing law in that it applies this provision both to
automobile and residential property insurance.
Consistent with existing laws governing
automobile insurance, this measure creates an additional statutory
provision stating that an insurer would not be allowed to take into
account a customer's claims experience in determining automobile
insurance rates, premiums, or insurability. This measure further states
that prior claims experience could not be considered in calculating any
insurance discount or surcharge. However, these restrictions on
considering claims experience would not apply to discounts given to good
drivers, as permitted under Proposition 103.
Provisions Related to Fees. This
measure specifies that installment fees or any other amounts paid by a
policyholder on a periodic basis constitute payments of premiums.
Additionally, the measure specifies that insurance companies cannot
charge more than the direct cost, including the printing and mailing
cost, of collecting installment payments from their customers.
Limits Imposed on Broker Fees. The
measure limits the charging of broker fees in connection with insurance
transactions. Specifically, if a broker collects a fee from a customer
as part of an insurance transaction, the broker would be prohibited from
additionally collecting a commission from the insurer. The
measure specifies that broker fees must be fair, reasonable, and not
unfairly discriminatory. The Insurance Commissioner would be directed
under the measure to adopt rules to enforce this provision, including,
but not limited to, rules establishing broker fee limits and broker
duties.
Fiscal Effect
The provisions of this measure relating to the
regulation of automobile and residential property insurance could result
in a change in the total amount of premiums and, therefore, insurance
premium taxes collected by the state. Specifically, the provisions of
this measure that treat installment fees and any other amount billed to
a policyholder as premium could result in an increase in insurance
premium tax revenues. On the other hand, insurance agents working on
behalf of an insurance company may choose as a result of the changes
made by this measure to work on behalf of the consumer as a broker, thus
lowering the amount of revenues collected from the insurance premium
tax. The net fiscal effect of these changes cannot be determined, but is
unlikely to be significant.
Summary of Fiscal Effects
This measure would probably have no significant
fiscal effect on state and local governments.
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