Declarations and Exclusions

Vox Populunacy

In California, judges are most commonly appointed by the Governor, but all sitting judges must periodically stand for election.   That judicial election/reconfirmation process famously resulted in the voters' removal of California Chief Justice Rose Bird and two other justices from the state Supreme Court in 1986.

At the trial court level, when a judge is up for reconfirmation by the voters, it is possible for a candidate to run against that judge, seeking to take his or her place on the bench.   Most trial judges are unopposed -- and therefore keep their seats for another cycle -- but occasionally one will be voted out in favor of an opponent.   (Running to replace a sitting judge, or running in an election to fill the vacancy of a retiring judge, is the way in which one can become a California judge without first being appointed by the Governor.)

This year, only one current judge out of 140 on the Los Angeles Superior Court drew a challenge, and the outcome reflects rather badly on the electorate. 

In this past Tuesday's election in Los Angeles County, voters inexplicably chose to remove 20-year veteran judge Dzintra Janavs in favor of one-time attorney turned bakery owner Lynn Diane Olson.  The match up was well described in the Los Angeles Times' April 17 editorial endorsing Janavs for reelection:

Office No. 120: Dzintra Janavs is a charming, commanding, experienced and often brusque and impatient judge who earned the distinction of being the only one to draw a challenge among the more than 140 Los Angeles Superior Court judges up for election this year.  The challenge comes from Lynn Diane Olson, an attorney who has been on "inactive" status for most of her career while she ran Manhattan Bread and Bagel, in Manhattan Beach, with her husband.  Olson could articulate no good reason to challenge Janavs, except to say that a judge should have to defend her seat.  Olson may make the better bagel.  Janavs would remain by far the better judge.

[Underscoring, and bagel hyperlink, added.]

Judge Janavs has presided for over a decade in one of the central "Writs & Receivers" courtrooms in downtown Los Angeles, meaning that she has had a steady diet of complex injunctions, administrative mandamus proceedings, and the like -- tough stuff requiring intellectual heft and solid judicial demeanor.  Looking back, I would have to say that she ruled against my clients as often as she ruled in favor of them.  She was all of the things that the Times says, above all experienced, very smart, attentive and hard-working.  Even when I disagreed with one of her rulings, I had to admit that she had listened closely to my arguments and was able to articulate detailed reasons for not being persuaded by them.

The speculation prior to the election was that Ms. Olson had chosen to challenge Judge Janavs in particular not because of any quarrel with Judge Janavs' rulings or qualifications, but because the judge has a "foreign-sounding" name.  (Judge Janavs was born in Lithuania, and has the accent to prove it.)  Given that the average voter is usually completely in the dark about anyone running for a judgeship, it is all too conceivable that the sound of a name might be the particular irrelevant factor deciding how a vote is cast.

Hail and farewell, your Honor, you will be missed.

The local legal newspaper, the Los Angeles Daily Journal, reported the Olson-beats-Janavs story today, and it includes a surprise appearance by Harvey Rosenfield, the architect of Proposition 103, last seen bucking up Insurance Commissioner John Garamendi's [now-successful] campaign for the Democratic nomination for Lieutenant Governor.  The Journal does not make its content available online for non-subscribers, so I quote with emphasis added:

'It came down to her unusual name, nothing more,' said consumer advocate and attorney Harvey J. Rosenfield.

Rosenfield, who was frequently in Janavs' court when she was assigned to hundreds of consumer cases related to an insurance reform measure he promoted, said he thinks the outcome reflects a flawed system.

'The politics are very simple,' Rosenfield said.  'Nobody knows who these people are.'

The public's knowledge of a candidate should not be based on the ability to raise money to get the message out, he said. . . .

'There's something unseemly and dangerous that judges have to raise money to run for office,' he said.

Rosenfield's point has merit . . . but it is a peculiar and somewhat inconsistent sentiment coming from a man who counts among his prouder achievements Proposition 103's transformation of the office of Insurance Commissioner from an appointed to an elected post, "accountable directly to the people." 

Elective Democracy: "unseemly and dangerous" or a guarantee of "accountability to the people"?  For Harvey Rosenfield, it all seems to depend on how each particular election comes out.

Rhetorical Heatwave Envelopes California

No one will ever mistake Insurance Commissioner John Garamendi for Theodore Roosevelt, physically or philosophically.   Still, there is a strong temptation to invoke TR-centric clichés such as "big sticks" and "bully pulpits" in pondering the Commissioner's latest moves in his ongoing dispute with the insurance industry over automobile rate regulation.*

Looking for a Certain Ratio

Displeased with the industry's publicity campaign against his proposed regulations, the Commissioner has unleashed a multi-front assault featuring his own press releases, and the threat of further public hearings and additional regulation, to compel insurers to reduce rates in both personal auto and homeowners insurance markets. 

The main fusillade comes in a Press Release issued today:

Commissioner John Garamendi Discloses Apparent 'Excess Profits' by Homeowner and Auto Insurers

SACRAMENTO – Today, Insurance Commissioner John Garamendi released a new report on the burgeoning profitability of Homeowners and Private Passenger Automobile Insurance companies.  The study discloses that for the past two years insurance companies have enjoyed a scenario in which the amount they pay for claims has dwindled, while the money they keep has soared.  The Commissioner has scheduled a hearing for July 20, at which he will examine this issue.  The following is his statement:

'For the past two years homeowners and automobile insurance companies in this state have profited immensely at the expense of consumers.  A new study from my office shows that the more money these companies keep from your premiums, the less they pay out in claims.  In my view, Californians are due for a break.  If my understanding of these results is confirmed by my full review and hearing, I am confident that I will be ordering a significant number of insurers to reduce their rates. . . .'

The study to which the release refers bears the benignly non-argumentative title, "Lower Claims, Higher Profits: Where Do Your Premium Dollars Go?" [PDF].  It does not, however, answer the question that its title poses, and gives a very incomplete picture of "profits" of any kind, let alone "excessive" profits.

The focus of the study is on the "loss ratio" reported by various insurers.  The loss ratio for a given period of time is calculated by dividing the insurer's earned premium in to the sum of claims or losses paid and claims-related expenses incurred in that period.  A loss ratio of .67, for instance, indicates that $.67 of every $1.00 of earned premium was spent paying or adjusting claims.

While a lower loss ratio improves an insurer's odds of being profitable, it does not tell the entire story.  In addition to the cost of claims paid on its policies, an insurer must also carry the additional costs of selling, underwriting and administering those policies.  If an insurer went an entire year without having a single claim, it would still have to bear those expenses; the premium received would never, even in the most claim-free year, become "pure profit" because those underwriting expenses would still be incurred.  Those expenses -- the costs of doing business other than loss-related costs and any dividends paid to policyholders (by a mutual insurer) -- are reflected in the "expense ratio," calculated by dividing the earned premium into the total of non-claim/non-dividend expenses.

To more accurately assess profitability, we need to look to the "combined ratio," in which the loss ratio is added together with the expense ratio (and the dividend ratio, if applicable) to provide a total overview of how much of each premium dollar is consumed by necessary costs generally.  If a company's combined ratio is a number less than 1.00, there is something left over the technical term for which is "underwriting profit"; if the ratio is greater than 1.00, then more than one dollar of every premium dollar is being consumed by costs and the insurer experiences an "underwriting loss." 

As exemplified in the charts and statistics in this article and elsewhere, combined ratios of less than 1.00 are the exception, rather than the rule, in the property/casualty insurance business.  Of course, insurers can still wind up ahead, and often do, thanks to their investment income, but profitability based solely on the amount charged to the consumer for the product, the insurance policy, is a relative rarity.  This is especially true with a product such as auto insurance, in which each insurer's policy is largely identical in coverage to every other insurer's policy, so that "low price" becomes the primary point of competition among insurers.

Maybe, just maybe, it is true that the industry is reaping "excessive" profits based on "overcharging" for auto or homeowners policies.  Whether or not that is the case, looking only at loss ratios as the Commissioner's report does, rather than the broader picture provided by combined ratios and other statistics, will not provide the answer to that question -- and the Commissioner should be clever enough to know it.

• [UPDATE 05/27/06:  Doug Simpson on his always excellent weblog, Unintended Consequences, cross-references Commissioner Garamendi's allegations while providing an overview of the issues that are raised by accusations of "excessive" profits in general, with a particular focus on the FTC's recent report on claimed "price gouging" in petroleum markets.  Read it here: "FTC Post-Katrina Gas Price Study Useful Re Other Market-Driven Industries."]

A Pro-Garamendi Editorial Cuts Both Ways

Even before today's Press Release, the Commissioner had added a number of links on the Department of Insurance home page responding to the industry's publicity campaign.  Among them is a page collecting editorials that favor his proposed regulations.  One of them, from the Modesto Bee of March 14, begins in a questioning vein:

What should be the most important criteria for determining how much you pay for auto insurance?

Most people believe their rates should be based on three things: Driving record (tickets, accidents, etc.), miles driven (do you commute or just go for groceries?) and driving experience.

That's why voters passed Proposition 103 in 1988, making those the most important criteria in setting prices for auto insurance.  That proposition should have forced insurance companies to change the way they do business.  But it didn't. . . .

I suspect insurers, too, would "believe" the driving record, etc., should be the primary factor in pricing their product -- if driving record gave an accurate indication of the risk being undertaken.  Unfortunately, the potential for an automobile to be lost, damaged, involved in an accident, etc., is dependent not just on the Very Excellent Driver who owns it, but also on the Not-So-Excellent Motorists with whom that driver shares the road and the Persons With Honesty Issues who might attack it or steal it.  The bigger picture comes out further down the page, where the ModBee editorialist writes:

The insurance companies are making some scary claims about how Garamendi's proposed changes will affect rural ratepayers.  They say the new rules will force rural residents to pay more for insurance so that city residents can pay less.  Such arguments are supposed to resonate in places such as Modesto and Turlock.

That's unlikely.  Modesto's ZIP codes are well-known to the National Insurance Crime Bureau, which compiles the auto-theft rankings that Modesto has led for the past two years.  The commissioner's office and the industry each did actuarial studies, which concluded that drivers in only five California counties would see rates go down; Stanislaus [County, in which Modesto is located] was one of the five.

So it seems that even supporters of the proposed regulations agree: No matter what they tell you in the movies, "believing" in a thing doesn't make it so.

* Organization, Man

* Administrative Note: Rather than provide post-by-post links to earlier Decs&Excs coverage of these issues, I have launched a new archive category, "Politics of Insurance - Campaign 2006," in which the continuing saga of Commissioner Garamendi, automobile rate regulation, the 2006 statewide election cycle and related hurly-burly can be followed blow by staggering blow.

Garamonday Morning Update:The Commisioner Speaks and a Bakersfield Broadcaster Succumbs to "Blackmail"

The Commissioner Strikes Back and Speaks Out:

In the previous installment of Decs&Excs' continuing coverage of Insurance Commissioner John Garamendi's allegations of "political extortion" against the insurance industry, I pointed to a Sacramento Bee editorial that opined: "That wasn't a crime. It's called politics, free speech, democracy in the raw."

Yesterday, the Bee provided the Commissioner the opportunity to respond.  He takes rather a different view of the industry's activities.  Because this is the clearest statement yet of the logic by which the exercise of political speech might be viewed as unlawful, it is worth quoting at length:

The auto insurance industry opposes these new rules and has the right to express its opinion.  But the laws of California and the United States prohibit any offer of a quid pro quo deal to influence an official's decision, and that is exactly what the industry offered to me: Delay my plan to enact new auto pricing rules until the next commissioner arrives, or else face a $2 million negative advertising campaign.  This was not, as the industry has suggested, 'a friendly heads up.'  It was an 'either/or' demand and clearly a quid pro quo message.

The negative ads were timed to air in the few short weeks before the June primary election in which I am running for lieutenant governor and during my finalization of the regulations.  The threat was an obvious and desperate effort to stop these new rules by any means necessary.

Even more obviously, this extortion attempt crossed the bounds of acceptable political discourse.

As we have seen in recent months, there is a crisis in American governance.  Political scandals have plagued our state and nation, and elected officials too often have betrayed the trust of voters in exchange for favors.  I won't be a part of that corruption.  And if the insurance industry's extortion attempt is, as you contend, an example of politics as usual, then we have a serious problem in our democracy.  And you should be just as outraged as I am.

Decs&Excs Comments:

• The Commissioner concedes that the insurance industry "has the right to express its opinion," so the supposed crime here has to relate to the industry's decision to tell the Commissioner in advance that it was going to do so.  It is hard to imagine that Garamendi would be any happier with the industry if it had simply begun running the ads without warning.

• The logic of the Commissioner's argument conflates two distinct notions: "extortion" and "quid pro quo."  Both concepts involve trying to influence action by describing the consequences of not taking that action.  In true extortion, the argument is "a bad and unlawful thing will be done to you if you don't do as you're told."  In a true quid pro quo the argument is "we will do something nice (and not necessarily lawful) for you if you do as we're asking."  Extortion involves threats; quid pro quo is essentially a form of bribery, or what the Commissioner refers to as "betray[ing] the trust of voters in exchange for favors."  Does the situation here fit either definition?  Not really.

• There is no true "extortion," because the consequence with which the Commissioner was "threatened" was, as he concedes, conduct that is entirely lawful.

• The supposed "quid pro quo" offered by the insurers was that they would not run the ads if the Commissioner simply did the thing that the ads were intended to persuade him to do.  That is, if the Commissioner made the ads unnecessary, the industry promised it would not waste its money on unnecessary ads.

• The promise or threat made by the insurance industry in Garamendi's version was, ultimately, nothing more offensive than: "If you don't do as we're suggesting, we'll go to the public with our arguments and ask the public to persuade you."

The Ads Begin, the Press Reacts:

Out in the world, the ads themselves have begun to be broadcast: versions hit the airwaves in San Diego and Kern Counties last Tuesday, and in 19 additional counties the following day.

An exemplar version of the ad (targeted particularly at Santa Barbara and San Luis Obispo Counties) can be viewed in Windows Media format on the main page at the official site of the insurer-sponsored Californians to Stop Unfair Rate Increases, or you can click here at Decs&Excs to view either the large or small versions of the ad.

Say what you will about the merits of the insurance industry's position, it is more than somewhat of a stretch to call this a "negative" ad -- unless "negative" is defined as "not in agreement with Commissioner Garamendi."  It certainly cannot be characterized as an "attack" ad, which is the way in which it was characterized in the Commissioner's original, Department-endorsed press release.  (We Californians know "attack ads" when we see them, and we are being treated just now to a variety of examples of the form in the sniping between the Democratic contenders for the nomination for Governor.) 

Worse for the Commissioner than being caught in a bit of overstatement is the fact that the ads might actually be working in swaying public opinion.  At least one television station -- the NBC affiliate in Bakersfield -- has produced a story that roundly endorses the insurers' arguments:

BAKERSFIELD - Car insurance rates will likely increase in Kern County if the State's Insurance Commissioner John Garamendi gets his way.

A couple of months ago, the idea was first proposed to increase rates in the valley while rates in the big cities would be lowered.

Now there’s a TV ad campaign opposing the rate hike idea in California’s Central Valley and it’s picking up momentum.

The video version of that report -- which incorporates most of the Kern County version of the insurers' ad -- is accessible at the link above.

Coming Soon:  Decs&Excs reviews the candidates to replace John Garamendi as Insurance Commissioner . . . and shakes its metaphorical head in dismay.

    ~~~

UPDATE [1222 PDT]: 

Now, these are the ads that Commissioner Garamendi should actually be concerned about:

• Bill Bradley's New West Notes reports on the first advertisements by Garamendi's actual opponents in the race for Lieutenant Governor.

Garamendipitously We Roll Along

When last Decs&Excs checked in on Insurance Commissioner John Garamendi, he was demanding that the insurance industry be investigated by assorted law enforcement agencies for engaging in "blackmail" and "extortion."  The industry's "crime" consists in daring to challenge the Commissioner's proposed revisions to auto insurance rate regulations -- in part by claiming that the revisions will actually raise auto insurance rates for many non-urban Californians -- at the same time as Garamendi is running for the Democratic nomination for Lieutenant Governor.  Prior posts on this subject are below: #1, #2.

Here are some of the latest developments in this story:

• I have been trying to track down the "Insurance Department study" cited by the industry's spokespeople in support of their claims, thus far without success.  I am continuing my inquiries and will report further if I am able to get my hands on the source material.

• The Sacramento Bee on Tuesday published a skeptical editorial suggesting, as I have done, that there is not much of substance in the Commissioner's accusations:

For the public watching all this, it's hard to see the crime here.  People in our democracy, even a powerful special interest, are free to denounce decisions government officials make that they don't like.  It's done all the time.  Ask Gov. Arnold Schwarzenegger.  Public employee unions spent millions to attack him during the last special election.  That wasn't a crime. It's called politics, free speech, democracy in the raw.

Garamendi's letter to the FBI looks like politics too, a creative way to blunt the political attack from the insurance industry that the candidate in a tough race for lieutenant governor knows is coming.

• With the calm demeanor and understated tone for which the Huffington Post is so well known, HuffPo commentator Michelle Kraus concludes that the Garamendi-insurer hubbub is a sign of a broader and more sinister "Republican Grand Plan to Hijack California."

Look carefully, and the specter of the plan coalesces and clarifies before your horrified eyes. . . .

[T]he stage is set for election extortion and blackmail against the current Insurance Commissioner in his race for Lt. Governor.  The insurance companies have decided to pounce upon long-term worthy public servant Insurance Commissioner John Garamendi so that they don't have to deal with him again. . . .

This Commissioner just could not, and would not, turn his back on the people of the state for his own personal gain.  Instead, John Garamendi has continued to fight for the People of California.  He would not stand down and let the People lose money that they deserved.

On May 9th, Garamendi launched an FBI investigation and an investigation by the Attorney General against these insurance carriers for the aforementioned strong arm tactics.  If he is to survive, if he is to be successful so he can continue his life's work as a true Public Servant (remember when that was not an oxymoron?), if we are truly fed up with the fixing of elections, we must rally to his defense, covering his back with our own.  It must stop here!

California Voters - it's time to say no - to election rigging and lobbying by big industry.  It's time to take back the democratic process and fight for a candidate that will not bend.  We need to take back our power and raise our voices and help candidates that are honest like John Garamendi.  Trust me when I tell you that this is not a ploy to gain attention. . . .

Apart from its hair-tearing intensity and occasional outright misstatement -- FBI investigations are "launched," if at all, by the FBI and not by state officials, and the Commissioner's accusations against the insurance industry do not include, as Kraus would have it, "election-fixing"  -- this commentary is remarkable for the amount of pure confusion it deploys.  The insurers' campaign is characterized as somehow part of a wider Republican "plan" to retake control of state government, but its impact will be felt in the Democratic primary election.  If Garamendi is defeated in the upcoming primary, with or without input from the insurance industry, the upshot will not be a Republican filling the office of Lieutenant Governor.  It will be another Democrat, freely chosen by Democrats, running to fill the post -- and probably winning it, given California Republicans' longstanding congenital inability to capture statewide offices other than the Governorship.   (The Republican candidate for Lieutenant Governor in November will be Tom McClintock, whose deep-dyed conservatism will appeal to the Republican base but will not necessarily appeal to the broader electorate.)

Does Dr. Kraus claim that Democrats should vote for John Garamendi in their primary because he is better qualified than his opponents, state Senators Jackie Speier (who just received the endorsement of the San Francisco Chronicle, not a particularly GOP-friendly institution) and Liz Figueroa?  She does not.  In a neat bit of misdirection, Dr. Kraus argues that Garamendi should receive all good Democrats' votes for Lieutenant Governor to teach those nasty insurers a lesson, rather than because John Garamendi actually deserves the position on his own merits.

For those who may want to ask her about her commentary in person, Dr. Kraus will be among the hosts of a Garamendi fundraising reception later today in Los Altos.

If This Be Extortion . . . .

And now, another lengthy post as Decs&Excs makes a foray into investigative journalism:

Yesterday, I began reporting on Insurance Commissioner John Garamendi's allegation that he was being "blackmailed" by representatives of the insurance industry, and his ensuing demand for state and federal investigation.  I opined that what the Commissioner was describing as "attack ads" -- which are, we must recall, distasteful but not at all unlawful in themselves -- might in fact be communications criticizing or disagreeing with the Commissioner's policies at a time when, coincidentally, he is running for Lieutenant Governor.  Upon further inquiry, I am increasingly inclined to that view, and to the suspicion that the Commissioner's hyperbolic characterizations and his demands for law enforcement intervention are directed more to silencing opposing points of view than they are to tracking down actual unlawful activity.

Exhibit "A"  would have to be the website of Californians to Stop Unfair Rate Increases [CSURI]: http://www.stopunfairrates.org/index.html.  That site makes no secret at all about its intentions to defeat the Commissioner's proposals to abolish "ZIP Code rating" of auto insurance policies, and states its premise plainly on its homepage:

Tell Insurance
Commissioner John
Garamendi to STOP his
department's unfair
regulation that would
raise our rates.

A new regulation from the
Department of Insurance would
arbitrarily and unfairly reduce rates
in big cities, but increase rates for
the rest of us.

In support of its argument, the site cites figures from a "Department of Insurance study" showing that by mandating that driving record be given more weight than the location at which the insured vehicle is principally located, the regulations would lower insurance rates in five primarily urban counties while increasing rates, in many cases by more than 20 percent, in the remainder of the state.  The least populous counties would receive the largest increases.  (I plan to look into the provenance of that "study," to confirm or deny the accuracy of these characterizations.)

What does CSURI seek as an alternative?

Rather than focusing time and resources on new regulations to increase costs for millions of California drivers, the department should spend more time focusing on two real problems for our state – uninsured drivers and insurance fraud, two major problems that are driving up insurance rates for everyone.

(Emphasis added.)

My principal quarrel with the presentation and the CSURI site is that it is not so forthcoming as it could be in disclosing that there is in fact significant insurance industry money behind it.  The site's "Who We Are" page lists a number of public officials from the most-affected counties and several taxpayer and business groups, but no insurers or insurance industry organizations.  On the other hand, CSURI's initial press release calls CSURI a "diverse group of local elected officials, chambers of commerce, tax groups and insurance companies" and the industry has not been making any particular secret of its involvement with this campaign in press reports, such as the Insurance Journal story quoted here yesterday. 

• Note: Calling oneself a "diverse coalition" is standard practice/camouflage for almost every advocacy group in California, regardless of the issue.  Most recently, California election watchers raised their eyebrows over the "diverse coalition" engaging in "independent" advertising expenditures on behalf on Phil Angelides in his effort to obtain the Democratic nomination for Governor.  The supposed "coalition" of firefighters, nurses, etc., was in fact funded almost entirely by a Sacramento-area real estate developer, Angelo Tsakopoulos, and his family.  It ain't pretty, but electoral politics works that way wherever one looks these days.

Where are the "attack ads" that have so upset the Commissioner?  So far, they are not in evidence, although CSURI's site incorporates a draft script [PDF] of a television advertisement that would, on a county-by-county basis, reiterate the basic theme that the proposed regulations will lower rates for those undeserving city dwellers while raising rates in [insert name of your bucolic rural county here].

Throughout the CSURI site, one finds John Garamendi being criticized by name.  In nearly every instance, however, he is referred to as "Insurance Commissioner John Garamendi," i.e., in his official capacity.  His aspirations to become Lieutenant Governor are, so far as I can tell, never referred to either directly or by implication.  And the Commissioner can hardly object to the proposed regulations being characterized as "his" given his longstanding practice (of which I have complained before) of claiming virtually every act of the Department of Insurance as his very own in the ongoing flurry of Departmental press releases.

So I repeat: based on the evidence I have been able to turn up so far, the Commissioner's "blackmail" scheme is in truth nothing more controversial than the entirely lawful expression of views with which the Commissioner, in good faith, does not agree.  The actual "crime" here is the purely metaphorical offense of a prominent public official, protected by the privileges that come with elected office, essentially defaming an entire industry and attempting to silence legitimate criticism.

More to come as this story plays out.

Postscript: Here Comes Harvey...

On a Proposition 103-related controversy like this one, it will come as no surprise that Commissioner Garamendi's critique of his critics as criminals is being echoed by Prop. 103's primary architect, Harvey Rosenfield.  In an opinion piece in today's Los Angeles Times, Rosenfield tries to leverage the Commissioner's charges in support of another of his pet issues, campaign finance reform:

By exposing the disease at the heart of our political system, Garamendi's announcement is likely to generate support for the cure: a voter initiative headed for the November ballot that would slash the influence of special interest money.  It would cap corporate campaign contributions, including to initiative campaigns, and set up publicly funded elections.

Mr. Rosenfield is apparently following this story via weblogs.  He -- or someone using his name -- left a comment on this post at Jonathan Stein's decidedly insurer-unfriendly California Personal Injury and Insurance Blog.  (As to the substance of Jonathan's post: criticism of disgraced former Commissioner Quackenbush is generally well taken, and I will offer additional comment on the wisdom, or not, of having an elected Insurance Commissioner in an upcoming post.)

Decs&Excs would also welcome Mr. Rosenfield's comments, and yours.

Extortion! Blackmail! Auto Insurance Rating Factors!

Who would ever have suspected that High Drama could surround the ongoing argument over "ZIP Code" rating of auto insurance policies?  And yet, yesterday, the running dispute between California Insurance Commissioner John Garamendi and the insurance industry over auto insurance rates boiled over into foaming, finger-pointing hubbub.  It must be an election year.

Previously ...

First, to recap how we got here:  When voters passed Proposition 103 in 1988, they imposed rate regulation on most lines of insurance in California.  For automobile insurance, Proposition 103's supporters urged that the new regime required that rates be set first and foremost based on the insured's own driving record, with other risk factors diminished or disregarded.  Through a series of regulatory revisions, insurers were given the flexibility to utilize factors other than driving records, and many insurers began to emphasize geographical factors -- where the insured car is principally located -- more heavily than other considerations.  This approach drew criticism from Prop. 103 supporters, who characterized it as a "betrayal" of the Proposition's intent. 

At the beginning of this year, Commissioner Garamendi introduced proposed regulations that would make it compulsory to weight driving record above any and all other factors.  Insurers balked, arguing that they have actuarial data to prove that location really is more closely tied to the degree of risk than is the personal accident history of the driver.  Further, they argued, elimination of ZIP Code rating will benefit urban motorists, whose rates will likely go down, at the expense of more rural insureds, who will likely see significant increases.  One prominent insurance executive briefly floated the possibility of an insurer-backed initiative campaign to counter the Commissioner's proposals.  Decs&Excs caught up with the story in early February.

Maneuvering Since February

Shortly after our last report, the ballot initiative being supported by Mercury Insurance CEO George Joseph was withdrawn.  Commissioner Garamendi went forward with the regulatory process, holding public "workshops" and hearings on the proposed regulations.  On April 26, a revised version of the regulations began circulating for comment.  The revisions do not affect the substance of the original proposal.  (The current revisions are available from the Department's site, here.)

For their part, insurers secured an amendment to a pending Assembly bill, AB 2840: the bill's original provisions relating to surplus lines brokers were deleted, to be replaced by provisions that effectively prohibit the Commissioner from taking further action to alter existing rating factors for automobile insurance unless those changes are supported by an elaborate study to be conducted through the California Research Bureau, a division of the State Library.  AB2840 has passed out of one committee and is scheduled for further hearings on May 10.

Uproars and Outbursts

Additionally, insurers gathered resources for an advertising and public relations campaign intended to persuade the public to oppose the new regulations.   At least, that is how the industry characterizes their intentions.  Yesterday, however, the Commissioner fired off a Press Release in which he gives a very different characterization.  According to the release, the insurers' advertising campaign is actually a form of "political blackmail" or "extortion."  Here is how the Commissioner describes his first learning of the insurers' plans, in a phone call on April 24:

'On that afternoon I received a telephone call from Darry Sragow, a lawyer and political consultant whom I have known for many years.  Mr. Sragow said that we needed to talk about a very serious problem for me.  As we spoke later that evening, he informed me that he had been contacted by a female representative of either the insurance industry or an insurance company.  She gave him a message to deliver.  That message gave me a choice – either delay implementation of the new regulations until the next Commissioner takes office, or face a $2 million attack campaign in the days leading up to the June primary election, in which I am running for Lieutenant Governor.'

So, what is really going on here? 

Is the insurance industry really planning an "attack campaign" on Commissioner Garamendi personally, intended to produce his defeat in the Democratic primary?  (Mr. Garamendi is seeking the nomination for Lieutenant Governor against two Democratic state Senators, Liz Figueroa and Jackie Spier.  The victor will face conservative Republican Tom McClintock in November.) 

Or, is the Commissioner trying to demonize what would otherwise be perfectly permissible 1st Amendment-protected efforts of the industry to be heard on an issue of public concern -- the proposed auto rate regulations -- because the timing of that effort happens to coincide with his quest for higher office?  It is not hard to imagine a scenario, after all, in which the latter sort of campaign could negatively affect Garamendi in the primary: "Gosh, Muriel, if that Mr. Garamendi wants to raise our insurance rates, I'm surely going to support someone else for Lieutenant Governor when I vote in the primary."

The answer, one supposes, will lie in the ads themselves.  The Insurance Journal reports that the insurers' $2 million budget "will allow the coalition to educate households in the following counties: Butte, Del Norte, Humboldt, Imperial, Inyo, Kern, Kings, Mendocino, Nevada, Lake, Plumas, Santa Barbara, San Benito, San Diego, Solano, Tulare and Yolo."  Those are mostly-rural counties, the sort that the industry contends will see rate increases if ZIP Code rating is abolished. 

If the insurers are indeed only intending an "educational" campaign directed to voters whose rates will likely go up, that certainly sounds like legitimate political discourse, regardless of its impact on the Commissioner's aspirations to the Lieutenant Governorship.  If, on the other hand, the ads that begin to circulate actually are personal "attacks" on the candidate, that will be a different story (although still subject to 1st Amendment protections in this weblogger's opinion).

Developing . . . .

UPDATE [1450 PDT]:

The drama and demonization escalate: 

Either there is something seriously disturbing afoot on the part of the insurance industry, or else the Insurance Commissioner is risking a public political meltdown.  In a Press Release issued at midday today -- read it here -- the Commissioner shares the text of a letter he has directed to the FBI, the U.S. Attorney's office and the state Attorney General, demanding that they investigate what he persists in characterizing as an unlawful threat, blackmail or extortion.  Excerpt:

'I firmly believe that this amounts to a serious attempt to blackmail me in my role as California’s elected Insurance Commissioner. Clearly, I was offered a significant advantage. If I abandoned my responsibilities and delayed implementing the will of the voters, I would not be hit by a $2 million negative advertising campaign in the final weeks leading up to the June election.

'I do take this threat very seriously, but I will continue to carry out my constitutional duties and the expressed will of the voters in passing Proposition 103. Apparently, the people making this threat had hoped to hear otherwise. They mistakenly believed that I would consider the outcome of the next election to be more important than my obligations as Insurance Commissioner. They were dead wrong. 

'While this threat was unsuccessful, I believe it is now my responsibility to stand up to this powerful special interest group and set in stone that they cannot engage in, much less succeed with such tactics. This is a serious threat not only to me, but also to the Insurance Commissioners who follow. They, and all other regulators, must be allowed to protect the consumers of California and carry out the laws of the State and people in an atmosphere free of coercion, blackmail and extortion.

As we said above: developing ....

This Post Does Not Have a Funny Title

As detailed below, California Insurance Commissioner John Garamendi is not well today.  Having no personal quarrel with him -- although I disagree with him often enough on matters of policy -- I wish Mr. Garamendi a speedy and uneventful recovery from surgery and a prompt and healthy return to his family and to his office.

That said, I have to add that I am aggravated with the Commissioner's staff and with the way in which they chose to get the word out concerning the Commissioner's illness.

In order to keep track of what is going on at the California Department of Insurance, I maintain an e-mail subscription to the Department's latest Press Releases.  [Interested persons can get their own subscriptions here.]  Several times a week, I will learn that the Department has arrested or convicted or obtained a confession from some participant or other in an insurance fraud scheme, or learn of new proposed regulations such as the recent proposals on "ZIP Code" rating of auto policies. 

While the releases are often informative, they also display a recurring and annoying thematic tic: They never announce that "the Department" or any staffer within the Department has done anything.  Instead, the releases are always framed in terms of "Commissioner John Garamendi," individually, having done or announced or accomplished this or that.  The persistent emphasis on Mr. Garamendi personally only serves to reinforce the notion that he is a man concerned more with his own political fortunes and his personal quest for higher office than he is with the job that he is supposed to be fulfilling at the moment for the People of the State of California.  (Even those who are more inclined than I am to be supportive of the Commissioner's substantive policies regularly criticize him for the transparency of his ambition.)

Here, then, is the full text, with emphasis added, of the Official Press Release issued today by the California Department of Insurance concerning the health of the Insurance Commissioner of the State of California:

INSURANCE COMMISSIONER JOHN GARAMENDI UNDERGOES MITRAL VALVE PROCEDURE TODAY

While working on his ranch this weekend, Insurance Commissioner John Garamendi experienced some discomfort.  Family members took him to the hospital, where physicians diagnosed a problem with the mitral valve in his heart.  The Commissioner is scheduled for corrective surgery today.  His surgeon anticipates a swift and full recovery.  The Commissioner does not anticipate a significant disruption in his duties as Insurance Commissioner or in his campaign for Lieutenant Governor.

According to the American Heart Association, 5 million Americans each year experience valvular heart problems.  Additional information will be released following the procedure.

The gratuitous health statistic in the closing paragraph is a nice touch, but the glaring problem here is the use of an official State communication to refer to, and tacitly to endorse, an incumbent office holder's election campaign -- a campaign, mind you, for a different State office.  I would hope, especially given that he has more compelling things to hold his attention at the moment, that the uncomfortably self-serving quality of this release comes from an overzealous staffer and not from Mr. Garamendi himself.

When Californians were persuaded to vote in favor of Proposition 103, they were told that making the office of Insurance Commissioner an elective post, rather than an appointment by the Governor, would make the Department more "responsive" to  consumers.  Unfortunately, and foreseeably, all that was really accomplished was the creation of yet another Sacramento holding pen for career politicians and yet another outlet for the "permanent campaign."

Get well, Commissioner.

Risk Has Two Faces

Scientists sometimes speak of the "observer effect," the principle that the observation of a phenomenon may itself alter the phenomenon being observed.  A similar effect can be found in reports on risk: frequently, the manner in which a risk will be described is affected by the the predisposition of the describer. 

By choosing between absolute numbers or percentages, it is easy to make a risk sound either more or less severe.  For instance, in reports identifying apparent links between thus-and-such a product or this-or-that behavior and the development of cancer or other serious illness, those who disapprove of the product or behavior will assure us that it "doubles" or "triples" the risk of becoming ill.  Their opposition will prefer to point to actual numbers, e.g., "Yes, the risk is doubled: from 1 in 3 zillion to 1 in 1.5 zillion!" or "The average American is more likely to win three consecutive Academy Awards and the Nobel Peace Prize than to become ill from use of our product."  Or a number will be tossed out that sounds large in absolute terms -- say, "10,000 a year" -- without reference to the size of the pool from which that number is drawn: 10,000 is a less impressive number if the total pool is measured in hundreds of millions or billions.  I find it is a good policy to ask, when a frightening or reassuring statistic is blithely bandied about, "How might this same information be expressed in different but still accurate terms, and why do you think the speaker chose the particular version he/she did?"

These comments are triggered by a random coincidence of items appearing online over the weekend.  Compare and contrast these expressions of risk:

Example #1: 

Here is the opening sentence of an Insurance Journal item entitled "Safety Advocates Urge Back Seat Belts for 'Tweens'":

With 8- to 12-year-olds dying at a rate of more than one a day in automobile crashes, safety groups are pushing for more youngsters to remain belted in the back seat.

Sounds awful, doesn't it?  And, of course, each individual instance is awful for those immediately affected and it is a very good practice to wear a safety belt whenever and wherever you travel in an automobile.  But is the "one a day" statistic a sound basis for public policy?  365 cases (366 in a leap year) out of a constantly regenerating population of nearly 300 million will strike some as a pretty small number.  Those who favor that second expression of the facts may also prefer . . .

Example #2: 

In the New York Times, Freakonomics authors Stephen Dubner and Steven Levitt ask the question "How Many Lives Did Dale Earnhardt Save?", jumping off from the fact that while crashes continue to occur regularly in NASCAR races, not one driver since Earnhardt has been killed in one of those crashes.  In the course of that analysis, Dubner and Levitt offer this version of the annual death toll on American highways:

On U.S. roads, meanwhile, roughly 185,000 drivers, passengers and motorcyclists have been killed during this same time frame [five years].  Those 185,000 deaths, though, came over the course of nearly 15 trillion miles driven.  This translates into one fatality for every 81 million miles driven.  Although traffic accidents are the leading cause of death for Americans from ages 3 to 33, this would seem to be a pretty low death rate (especially since it includes motorcycles, which are far more dangerous than cars or trucks).  How long might it take one person to drive 81 million miles?  Let's say that for a solid year you did nothing but drive, 24 hours a day, at 60 miles per hour.  In one year, you'd cover 525,600 miles; to reach 81 million miles, you'd have to drive around the clock for 154 years.  In other words, a lot of people die on U.S. roads each year not because driving is so dangerous, but because an awful lot of people are driving an awful lot of miles.

So Robert Frost was apparently right: "All the fun's in how you say a thing."

"ZIP Code Rating" Makes Some Folks Go Postal

As discussed below, California Insurance Commissioner John Garamendi is fighting hard to eliminate the actuarially-sound- but-politically-unpopular practice of "ZIP Code rating," in which personal auto insurance rates are largely determined by where the insured lives. 

While the Commissioner works his way through the regulatory process, Insurance Journal reports on some enterprising Northern Californians' unsuccessful self-help approach to the problem:

Several hundred California residents who say they're paying too much for car insurance tried and failed to convince the U.S. Postal Service to allow them to migrate to a ZIP code where insurers charge cheaper rates.

The Palo Alto residents argued they were unfairly paying too much because they share a ZIP code with the neighboring city of East Palo Alto, where rates are often higher because of increased accidents and break-ins, community organizers said.

* * *

Two neighborhood groups asked the Postal Service to allow them to join other Palo Alto ZIP codes or create their own.

But their request was turned down because it would be too costly to adjust postal boundaries for reasons other than speeding mail delivery, Rep. Anna Eshoo, D-Palo Alto, who handled the request, said in a letter last week to community organizers.

For extra credit: A brief history of the ZIP Code, containing no references to insurance, is available here.

Dangling Propositions

Sure, it's already the second week of February, but it's never too late to wish Decs&Excs readers a Happy New Year with our first post of 2006 -- and an interesting year it looks to be for followers of California insurance issues, beginning with a resurgence of interest in insurance rate regulation under Proposition 103 and looking ahead to the selection of a new Insurance Commissioner in November's election.  There will be more to say on the race for Commissioner shortly, but we'll begin our year with an update on our old friend, Prop 103.

By way of background: Proposition 103 was a ballot initiative passed by the voters of California in November, 1988.   It was one of five competing initiatives on the ballot -- two sponsored by the insurance industry, two sponsored by consumer advocates and a fifth sponsored by a single insurance company -- proposing to change the way insurance business was done in the state, with a particular focus on containing the cost of automobile insurance.  Insurers' proposals focused on shifting California to a "no-fault" system of auto-related compensation while the consumer advocates' proposals emphasized rate controls and mandatory rate reductions.   When the dust settled on election night, one of the consumerists' initiatives -- Proposition 103 --  had emerged the victor.

A principal feature of Prop 103 was imposition of a mandatory rollback of auto insurance rates: insurers were required to reduce their rates to what they had been on November 8, 1987, and then to cut those rates by 20%.   The California Supreme Court promptly declared that portion of the initiative to be unconstitutional, on the ground that it violated due process requirements by depriving insurers of the opportunity, permitted to every other business enterprise, to at least attempt to obtain a reasonable return on investment. 

Most of the other provisions of the initiative survived judicial scrutiny, including three provisions that continue to affect California property and casualty insurance today.  Those provisions

• Shifted the state from an "open rating" system, in which insurance rates were set in the open market, to a "prior approval" system, under which a particular insurance rate can only be charged if it is first reviewed and approved by the Department of Insurance;

• Provided that automobile insurance rates should be set based primarily on three factors: the insured's driving record, the number of miles the insured drove annually, and the insured's years of experience; and

• Changed the office of Insurance Commissioner from an appointed post, selected by the Governor, to an elected position.

John Garamendi became California's first elected Insurance Commissioner in 1990.  When he leaves that post at the end of this year, he will have filled it for 8 out of the 16 years that it has been an elective position.  Throughout that time, he has declared his ambition to make the Department of Insurance "the nation's premier consumer protection agency."  A few days before Christmas 2005, he announced the introduction of new regulations to eliminate insurers' reliance on location -- so-called "ZIP Code rating" -- in setting automobile insurance rates.   Here is a report on the new regulations from Insurance Journal:

California Insurance Commissioner John Garamendi has announced that he will introduce new regulations next week that require insurers to base auto rates primarily on a driver's record and not on ZIP code.

According to the commissioner, he wants to fulfill the intent of voter-enacted Proposition 103 and to establish fairness and equity in automobile insurance rating system that has engendered controversy since the proposition took effect in 1988.

'When Proposition 103 was approved, it dealt with the basic fairness of how automobile insurance rates are set in California,' Garamendi said. The proposition created three mandatory factors on which auto rates had to be set: driving record; how many miles driven; and how long the person has been driving.

However, shortly [sic] after the proposition passed, a new insurance commissioner, Chuck Quackenbush, allowed 16 optional factors to also be used when setting auto rates.  [Quackenbush was elected in 1994, and the changes were made in 1996 -- gmw.]  Whether or not it was the intent, those optional factors were allowed to have more weight than the mandatory factors, Garamendi said. That lead to 'irrational rates in all areas across the state,' he said.

The Commissioner oversaw a "workshop" on his proposed regulations on January 12, and formal hearings are scheduled to take place in San Francisco on February 24.  An array of material related to the proposals is available on the Department's web site, including the proposed text [PDF] of the regulation.  The rule most resembles something out of a high school Algebra text, but its intended effect is simple: the three mandatory rating factors from the original Proposition must be applied in decreasing order of importance, and they may not be outweighed by any of the "optional" rating factors, such as the location at which the insured vehicle is principally garaged. 

Watching the issue from afar, RiskProf Martin Grace professes perplexity over the Commissioner's aversion to ZIP codes:

Some of the arguments in favor of Prop 103 are strange.   For example, consumer advocates all seem to be upset by industry efforts to assign people to risk categories in a way that more accurately reflects their risk.   This is what insurers do.  Low risks get low prices and high risk get higher prices.  One bugaboo in California is the use of zip codes which Prop 103 implies cannot be a rating factor.   The Proposition basically requires rates to be made based on the driver’s record, the number of miles driven annually, and the driver’s experience.   Thus, the environment (zip code or neighborhood) in which one drives is immaterial.    Many see this as a way to prevent red lining, but it is possible that certain neighborhoods have higher risks of property damage or crime.   Shouldn’t an insurer be able to take this into account?   What if the population density of the zip code was associated with a higher probability of a traffic accident?   Shouldn’t the insurer be able to take this into account?    What about the people in low risk zip codes?   The state, by prohibiting discrimination based on zip codes, is taxing people who live in rural areas to subsidize those who live in urban areas.   This doesn’t make sense, but there is strong aversion to zip codes by consumer advocates.

Partly in response to the Commissioner's latest moves, George Joseph, founder of Mercury Insurance, submitted drafts of a new initiative measure that he hoped to qualify for the November 2006 ballot.  Those proposals would have countered the Commissioner and locked in the ability of insurers to use location as a primary rating factor.  It would also have permitted discounting of premium for the benefit of those who maintain uninterrupted auto insurance over a long period of time, even if the coverage has been maintained through different companies.  (Another of Proposition 103's changes was imposition of a blanket ban on discounting or rebating on insurance premiums.)

Response to Joseph's proposals was predictable: howls of outrage and promises of counter-initiatives.  (See also Sacramento attorney Jonathan Stein's comments.)  Whether because they were not spoiling for another fight with Harvey Rosenfield and his minions or for reasons of their own, many insurers kept conspicuously mum about the Joseph initiatives and on January 28 Mr. Joseph let it be known that he dropping his initiative efforts for the time being in the face of a dearth of industry-wide support.

Yesterday's Los Angeles Times business section featured a front page profile of Mr. Joseph, in terms that a RiskProf would likely endorse, and highlights an intriguing wager the insurance man is prepared to offer:

In World War II, he navigated a B-17 bomber through 50 combat missions. After the war, he earned a degree in mathematics and physics from Harvard.  And the company he launched in 1962, Mercury General Corp., pioneered the use of ZIP Codes and other data in fine-tuning auto insurance rates.

So when California Insurance Commissioner John Garamendi recently announced plans to overhaul the way car insurance is priced — making motorists' driving records the No. 1 factor — it was almost as if he had proposed making two plus two equal five, at least to Joseph's way of thinking.

Insurance rates should be based on the statistical chances of a customer's filing a claim, the 84-year-old Joseph believes.  Armed with years of empirical evidence, Mercury and most of the state's other insurers have concluded that the best way to calculate those odds is to look at where a driver lives — specifically, his or her ZIP Code.

            * * *

[Having withdrawn his ballot initiative,] Joseph remains coy about his next move, declining to commit to challenging Garamendi's effort at upcoming hearings or in court.

But he clearly has not been deterred from his views.

He said private polling showed strong support for continuous-coverage discounts, even when voters were told that the insurance industry was backing them.  And he said the consumer benefits of Proposition 103 have been overblown.

Rosenfield and others credit the law with saving California drivers more than $23 billion, but Joseph said insurance rates are down since the late 1980s because of safer vehicles, anti-theft devices and a state court ruling that cut down on accident-related suits.

Beaming as he pointed to a thick spreadsheet, Joseph noted that in 1988, 50% of Mercury's property claims in California also involved bodily injury claims.  In 2004, he said, that number had fallen to 36%.

'I will bet $1 million that you can't prove to a qualified actuary that Prop. 103 has saved people anything like $23 billion,' he said.  'If Garamendi believes it's true, if Harvey believes it's true, that offer is open.'

Any takers?