Research & Commentary: Insurance Price Controls and California Proposition 103

Published March 2, 2012

In the mid-1980s, high premium costs and a tidal wave of auto insurance litigation led to vast public outrage against auto insurers. Under California’s referendum process, voters in 1986 narrowly approved Proposition 103, which completely remade the state’s auto insurance system.

Insurers were required to roll back their rates 20 percent below what they were in November 1987. Those rates were then frozen for a year, and future rate changes were subject to enormous new regulations. Prop 103 also required insurers to offer a 20 percent rate cut to any “good driver” and banned the use of residence location and credit scores in determining rates.

Supporters of Prop 103 say the program has been a huge success, claiming the price controls saved California consumers $23 billion in the decade between 1989 and 1998. They argue requiring insurers to justify their rate increases has kept rates down and increased the level of accountability for insurers. Consumer groups in California are now pushing to add health care insurance to the lines covered under Prop 103.

Opponents of Prop 103, which include insurance groups such as the National Association of Mutual Insurance Companies (NAMIC) and pro-market groups such as The Heartland Institute and Cato Institute, counter these claims by showing government price controls on insurance do not lead to better results for consumers and have failed in many of the states where they have been implemented. A NAMIC study found many of the improvements in California’s insurance system after Prop 103 were the result of legal decisions limiting frivolous claims, statewide and private efforts to eliminate fraud, and new safety laws such as stricter DUI and seatbelt laws.

The following articles examine California’s Proposition 103 and the effectiveness of insurance price controls.

Revisiting the Lingering Myths about Proposition 103: A Follow-Up Report
This report from the National Association of Mutual Insurance Companies, American Insurance Association, and Property and Casualty Insurance Association of America addresses and counters the claims of successes of Prop 103 and identifies the factors that actually improved insurance rates in California.

The Regulation of Automobile Insurance in California
Dwight M. Jaffee and Thomas Russell evaluate the effects of regulation on California’s automobile insurance market. They conclude drivers in California have little to regret from Proposition 103 and the regulatory regime it introduced.

Why Not the Best? The Most Effective Auto Insurance Regulation
The Consumer Federation of America identifies California under Proposition 103 as the state with the highest standards for excellence in insurance regulation. The paper argues Proposition 103 offers the best model in the nation for other states to follow in regulating auto insurance.

Analysis of the Consumer Federation of America Report: “Why Not the Best?”
David Appel critiques the Consumer Federation of America’s report, “Why Not the Best?” He concludes there’s little support for the CFA’s allegations regarding “remarkably effective provisions of Proposition 103.”

Automobile Insurance Regulation, Direct Democracy, and the Interests of Consumers
Writing soon after passage of Proposition 103, Benjamin Zycher of the Rand Corporation reviews the sources of the perceived crisis in the California market for auto insurance and the politics of Prop 103. He then explores the economic and regulatory implications of the new law and draws conclusions that he argues should be of interest to those in other states faced with similar regulatory proposals and political pressures.

Initiative to Expand California Prop 103 Ignites Insurance Battle
Don Jergler of the Insurance Journal discusses a proposed ballot initiative to expand the scope of California’s Proposition 103 to include health insurance.

The Causes and Consequences of Rate Regulation in the Auto Insurance Industry
Dwight M. Jaffee and Thomas Russell examine why the auto insurance industry has emerged as a primary target for increased regulation. They use Prop 103 as a case study, identifying possible sources and consequences of rate regulation.