Insurers are pulling back from California’s auto insurance market and have allegedly sought to become “invisible” as they struggle with a pandemic rate moratorium, something that has led an agency association boss to query whether the insurance commissioner could be holding them “to ransom” over COVID-19 refunds with potentially disastrous consequences for consumers.
“A lot of us are talking about what’s going to catch the department’s attention – is it going to be a large player pulling out of the marketplace, is it going to be an insolvency?” American Agents Alliance (AAA) executive director Mike D’Arelli told Insurance Business.
“The larger companies can certainly sustain it, but the smaller domestic companies cannot, and there are companies that are really burning cash right now – it’s a little bit scary.”
The two-year plus rate stalemate is piling pressure on California’s independent agents, as D’Arelli warned that “double-digit” hikes may eventually be required to keep up with loss costs as inflation bites.
Insurers have recently employed tactics to make themselves less visible, including removing themselves from quoting platforms and pulling advertising in a bid to slow down new business submissions.
In August, auto giant GEICO shut down its California agent offices and halted telephone business, meaning that customers could only obtain online quotes. Progressive CEO Tricia Griffith has also blamed the backlog for the insurer’s slowdown in the state.
The result of market wide hesitance is frustrating for independent agents, who D’Arelli claimed are being “disincentivized” to place new business.
Under COVID-19, people drove less as insurer profits soared, which led some – including advocate group Consumer Watchdog and the California Department of Insurance (CDI) – to argue that insurers should absorb premium refunds.
The state’s 137 licensed auto insurers took in $17 billion of premium in 2020, representing the largest auto insurance market in the US, according to CDI figures.
Lara, who is running for re-election in November, has claimed to have saved Californian drivers $2.4 billion through return of premiums. The insurance commissioner could be chasing a further $3.1 billion from the state’s auto insurers, according to Consumer Watchdog.
However, a 2021 California appeals court judgment, in a case in which it was found that State Farm did not have to backpay $100 million to customers it allegedly overcharged for homeowners’ and renters’ coverage, has cast doubt in the market over whether the commissioner has the power to order refunds.
The department has “no power at all” to do so, in D’Arelli’s view, with the AAA having written to the commissioner urging a restart on rate processing.
“I can tell you that it’s been a while since my phone has really blown up with an issue that’s really under the skin of consumers and agents,” he said.
“This is clearly the carriers’ plight, but we’re on the front lines with the consumers every day, trying to find solutions and stretch their dollars and balance that with coverage, and it’s just getting quite tenuous.”
The appeals court judgment, and the commissioner’s response to it, has exacerbated the problem confronting consumers, according to Harvey Rosenfield, Consumer Watchdog founder. The state now faces “dozens” of lawsuits from people looking to recoup premium refunds under Proposition 103, a set of rules approved in 1988 that give certain powers to insurance purchasers including the right to elect a commissioner and – according to Rosenfield – the entitlement to chase refunds from their insurers where necessary.
“The insurance commissioner weighed in and inexplicably told the Supreme Court not to worry, he could take care of the problem,” Rosenfield told Insurance Business.
“The appropriate thing was to get the Supreme Court to uphold what they already said in 1988 and 1989, but when the state regulator tells the state Supreme Court ‘don’t worry, you don’t have to take this case’, not surprisingly, the state Supreme Court decided not to hear the case.”
While premium refunds are high on Consumer Watchdog’s agenda, Rosenfield said the organization would be opposed to any move to block rate increases in a bid to force payouts.
“Our position is that insurers should comply with the law and repay people what they owe before trying to charge people more, but it should be done through a different process, it shouldn’t be done through imposing a de facto moratorium on rate increases,” said Rosenfield.
“The logic of that fails – let’s say Insurer A still owes me money that it overcharged me, what happens if I’ve left them, and I go to another company; suppressing Insurer A’s rate increase isn’t going to help me because I’ve moved on.”
“What the commissioner should be doing is creating a regulation to require insurance companies to specify how they are going to pay the refunds with interest,” Rosenfield said.
As for whether it could take an insurer insolvency for the commissioner to take note, Rosenfield was sceptical.
“The law requires the commissioner to protect consumers against insolvency,” he said.
CDI declined to comment specifically on allegations made by the AAA but did supply a general statement.
“Californians have many choices today for auto insurance in this highly competitive market and we will make sure it remains that way,” Michael Soller, California’s Deputy Insurance Commissioner, said.
Data collected from insurers themselves has shown that “many of them failed to fully return premium that they overcharged consumers during the first seven months of the pandemic,” according to Soller.
As part of the department’s rate review, it is “looking at the data collected during the height of the pandemic and comparing it to what they gave back to consumers so that insurance companies’ ultimate rates accurately reflect the risk and cost of accidents,” the deputy insurance commissioner said.
“We will not stop fighting against unfair and excessive rates or unfiled rates charged to consumers, especially during the pandemic.”