November 12, 2009
Pursuant to Elections Code Section 9005, we have
reviewed a proposed statutory initiative related to insurance (A.G. File
No. 09‑0050).
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, residential property, and earthquake insurance—before
revisions to the rates can take effect. Current law also allows any
person or third-party entity to initiate or intervene in any rate change
application. When such a petition occurs, the Insurance Commissioner
must hold a hearing to determine if the petition has merit. Currently,
the Insurance Commissioner has the authority to order refunds for
violations of law in settlements obtained at rate hearings. Under state
law, insurance companies are charged fees to cover the state's cost to
regulate the industry.
Insurance Premium Tax. 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 they earned in the state
each year for various types of insurance coverage. In 2008, insurance
companies paid about $149 million in premium tax on residential property
insurance policies in California.
Requirements for Determining Rates,
Premiums, and Coverage. Current law specifically requires rates
and premiums for automobile insurance policies to be determined mainly
using certain factors, such as the number of miles driven by an insured.
Additionally, the fact that someone did not previously have automobile
insurance may not be used as a criterion for determining automobile
rates, premiums, or in making decisions about whether someone will
receive insurance coverage.
No similar provisions apply for residential
property insurance. However, state law currently prohibits a residential
property insurance company from increasing premiums, denying a discount,
or refusing to issue or renew insurance coverage based on certain types
of information. Specifically, in making these decisions, an insurer may
not consider information obtained from third-party organizations
supported by insurance companies regarding whether an individual
policyholder has inquired about the scope or nature of their insurance
policy. However, current law does not explicitly prohibit an insurer
from increasing residential property insurance premiums or refusing to
renew coverage because a policyholder asked questions about the kind of
losses covered by their insurance policy.
Eligibility Guidelines. Currently,
insurance companies are required, by regulation, to maintain eligibility
guidelines for every line of insurance they offer. These guidelines are
used by the insurance company to determine who or what types of property
may be insured and to determine the rate that needs to be charged to
insure that risk. The Commissioner may require an insurance company to submit its
eligibility guidelines in order to obtain prior approval of the rates.
Under certain circumstances, these guidelines are not considered public
documents.
Major Provisions
This measure (1) restricts the use of certain
information by companies that sell residential property insurance in
California, (2) requires that certain residential property information
be disclosed to the public, and (3) requires that various types of
insurers issue refunds of premiums when it is determined they collected
them as a result of a violation of insurance laws.
Restrictions on Use of Certain Information
by Residential Property Insurers. This measure prohibits a
company selling residential property insurance from using certain types
of information on prior insurance claims to determine rates or premiums.
For instance, insurers could not consider information about claims filed
by someone that they were currently insuring, or by someone applying for
coverage, relating to losses that were due to natural causes such as
floods, or claims that were filed but not paid, or claims involving a
property that is no longer owned by the policyholder. In addition, a
residential insurance company could not increase premiums, deny a
discount on an insurance policy, or refuse to issue or renew insurance
coverage based on whether a policyholder had previously made an inquiry
about his or her insurance coverage. The measure also states that
information on whether someone previously had insurance coverage could
not be used as a criterion for determining rates or premiums or deciding
whether someone received residential property insurance coverage. The
measure also restates that a similar prohibition applies to automobile
insurance.
Public Disclosure and Public Hearings.
This measure requires an insurance company that sells residential
property insurance to submit a copy of its eligibility and risk
classification rules and procedures to the Insurance Commissioner within
30 days of the enactment of the measure. These are defined in the
measure as the criteria, rules, and procedures used by an insurance
company to determine who may be insured and the amount of premium they
pay. The same requirement would apply whenever a company subsequently
made changes to its rules and procedures. These documents would be
available for public review. The measure allows the Commissioner to hold
public hearings to determine whether an insurance company's eligibility
and risk classification rules and procedures comply with state law. The
Commissioner would be required to hold such a public hearing if any
person filed a petition requesting one.
Refund for Violations. This measure
requires that any insurance company found by a court or the Commissioner
to be in violation of state insurance laws to refund the amount of
insurance premium or other benefits they received, plus interest.
Fiscal Effect
The provisions of this measure that require
residential property insurance companies to submit certain information
to the Insurance Commissioner would increase the workload of the
Department of Insurance. The department could also incur costs to
conduct the additional public hearings required under this measure.
These costs would probably be minor, and would be offset through
regulatory fees charged to insurance companies.
The provision of this measure that would enact
new requirements restricting residential property insurers from making
decisions about insurance coverage could result in a change in the total
amount of residential property insurance premiums earned in the state by
insurance companies. This, in turn, could affect state premium tax
revenue. However, the impact of any change on revenues is probably not
significant.
Summary
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