California’s Group Insurance Rates

 California’s approach to insurance regulation, which dates back to Proposition 103 in 1988, is both egregiously bad and greatly under-discussed. The race to succeed Ricardo Lara as the state’s Insurance Commissioner, an elected official with wide powers, is now down to two Democrats: Jane Kim, a former member of the San Francisco Board of Supervisors who has been endorsed by Bernie Sanders, and State Senator Ben Allen, who recently received the endorsement of the California Democratic Party. The positions occupied by Kim and Allen are covered in detail in an excellent article by Rex Frazier - the President of the Personal Insurance Federation of California, an industry lobbyist who represents carriers in front of the CDI.

Prop 103 was drafted by Harvey Rosenfield, who founded the non-profit Consumer Watchdog in 1985; and Consumer Watchdog has done more than almost anyone else to create the state’s current regulatory structure. The most important thing to understand about the Prop 103 approach to regulation is that it pushes for simplicity - because every complexity in how an insurance company goes about its business is assumed to be an attempt to outfox vulnerable consumers. Actuarial validity is a mere figleaf in the face of Rosenfield’s interventions.

 To give a few examples: California is the only state in the nation which does not permit the use of telematics in auto insurance. They’re one of the only states which does not permit the use of credit scores; and until November 2024 (but not in time to reprice ahead of the Palisades fires!), they did not permit the use of catastrophe models for underwriting homeowners insurance. These models have been de rigueur in the rest of the insurance industry since Hurricane Andrew in 1992, but California was still underwriting the risk of wildfires and even earthquakes based on the average of the previous 20 years of losses. I promise you - I am only scratching the surface of the illiberal and restrictive regulations that the State of California imposes on its insurance carriers.

Hence, it’s surprising that the California Insurance Code permits insurers to offer discounted plans to “groups”; and that “group insurance rates shall not be considered to be unfairly discriminatory, if they are averaged broadly among persons insured under the group plan.” In other words, California insurers can’t offer cheaper rates to people with a good credit score; but they can offer better rates to investment bankers and Equinox members!

 Fortunately for the lovers of simplicity at Consumer Watchdog, Kim has pledged to “close the loophole allowing insurers to charge higher rates to blue collar workers than white collar”: as Frazier has it,

“This sounds like a familiar Consumer Watchdog and Consumer Federation of America proposal that would limit the use of “affinity groups” where insurers can offer discounts based on group membership (e.g., occupations like teachers, nurses, accountants, lawyers; or, graduates of a particular college) under the “group insurance” provision of Proposition 103 (CA Ins. Code Section 1861.12). Critics of the current affinity group system focus on white collar groups, like the discounts available to members of the California Medical Association (CMA), but the CMA points out that the group discounts provide premium relief for young residents in their association. Insurers have previously pointed out the benefits of the current group insurance discounts in the market, including that most discounts go to blue collar groups. After reviewing this same proposal, each of the previous three Insurance Commissioners (Poizner, Jones, Lara) have rejected taking away the currently-allowed discounts authorized under Proposition 103.”

 So - to what groups are insurers offering discounts? Are they being unfair? I pulled the discounts offered by 30 California home and auto insurers (it’s a remarkably competitive market, despite what regulators might have you believe!) to find out.

 On the face of it, Kim has a point: while group sizes vary significantly, I found 582 entries for white-collar groups, versus just 89 for blue-collar ones. For example, ‘Farmers’ have a special plan for CPAs, Dentists, Educators, Engineers, Physicians/Surgeons, Scientists, Veterinarians, Architects, Lawyers/Judges, Audiologists, Librarians, and Real Estate - tempora mutantur, et nos mutamur in illis, I suppose. GEICO offers discounts to a rather more interesting group - Ambassadors, Coroners, and Morticians, as well as Ship Captains, Wastewater Treatment Plant Operators, and Nuclear Reactor Operators. Meanwhile, their definition of a “skilled artisan”, a discount worth up to 19%, includes Classical Musicians (but not rock stars), Restaurant Managers (but only non-fast food), and Non-High Tech Salespersons - High Tech Salesmen are Professionals, who get a 40% discount. Meanwhile, a Business Vice President and Private Investor are stuck on the Skilled Artisan plan. Most insurers offer discounts to their own employees - GEICO to anyone who works at Berkshire, Farmers to anyone at Zurich, and so on. Entertainingly, Travelers offer discounts to their competitors’ employees - Chubb, Kemper, Aflac, Aetna, Cigna, AmTrust - as well as a wider list of over 500 corporations, including Lufthansa, The Cheesecake Factory — and Hooters. Meanwhile, Mercury have exactly one corporate partner - Bank of America.

The blue-collar jobs which do get discounts are primarily public safety: firefighters, police, and EMTs; but Mercury and Travelers both exclude volunteer firefighters. Nobody is giving a discount to tradespeople like plumbers, truckers, and food service workers per se. That said, in 2022 GEICO began to offer discounts to union members - the Service Employees International Union (up to a million members in California), California School Employees Association (250,000 members), United Farm Workers (now just 5,000 members - I hope Cesar Chavez is turning in his grave), and CA firefighter and peace-officer associations. It’s not all bad news for the working class.

While many groups are based on employment, that is far from the only category. GEICO offers a discount both to veterans (who, in USAA, have their own exclusive insurer) and also to NAACP members; AARP members over 50 have an exclusive discount with The Hartford; Mercury offer discounts to Costco members. More bizarrely, Travelers offer discounts to members of the Benevolent and Protective Order of Elks and the Ancient Arabic Order of the Nobles of the Mystic Shrine, fraternal societies founded in the nineteenth century; they also offer discounts to the United States Power Squadrons, a non-profit dedicated to teaching people boating skills. Meanwhile, GEICO offers deals to members of the American Kennel Club, Mensa, and the American Guild of Organists, as well as around 100 Greek life institutions, including ZBT and Kappa Sigma. Meanwhile, some insurers have exclusive relationhips: CSAA and Auto Club exist to serve AAA members, while Anchor General only serves members of an “acceptable travel club” who need non-standard insurance, and Wawanesa offers an entirely different rating plan to members of California Coast Credit Union, an institution founded in 1929 in San Diego with 200,000 members. 

 All this is great fun. I am so glad that there is levity and eclecticism in the world, and that the Elks and Shriners have their discounts. But we should afford more precise user segmentation to our actuaries; in an ideal world, we would not do away with group discounts, but liberalise underwriting so that the many insurers who want to do business in California can participate freely in a free market.