It seems to me I've heard that song before

Michigan initiative recalls California's Prop. 103 controversy

By Phil Zinkewicz

It’s an old joke, but it still holds some truth. Ask a lawyer how much are two plus two, and he’ll say he has to check recent case history and court decisions before he can answer. Ask an accountant how much are two plus two and he’s going to say he has to check with recent interpretations of FASB guidelines before he can answer. Ask an actuary how much are two plus two and he’ll answer, “How much do you want it to be?”

These days, even the most naïve person knows that you can spin just about anything you want to with statistics. Twenty-two years ago, the controversial California Proposition 103 passed the 1988 ballot and, today, the same groups that were for the passage of the proposition are still for it and the same opponents of its passage are against it, and both sides back up their positions with statistics.

Those in favor of the proposition say that it has saved California drivers upwards of $3 billion on average per year. Those against say that savings on auto insurance would have come about anyway because of changing market conditions at the time of Prop. 103’s passage, and they are trying to get the measure repealed. Nevertheless, a look back at Proposition 103 might be meaningful in light of a similar initiative currently being proposed in Michigan.

In 1988, in a David vs. Goliath scenario, California voters passed Proposition 103, which ordered insurance companies to roll back automobile insurance rates by 20%, required an ongoing 20% discount for good drivers and turned California basically into a prior approval state. Insurance companies were said to have spent $80 million in public relations and ad campaigns to defeat the measure. Nevertheless, California’s voters, by a narrow margin, opted to accept the proposition, which had been authored by Harvey Rosenfeld, a well-known consumer activist.

Well, those in the insurance business who hated the rate rollback concept first time around undoubtedly will be watching the situation in Michigan right now. Last year, in November, the Michigan Board of State Canvassers voted 4-0 to construct an initiative, which may be voted upon by the people in the upcoming 2010 elections.

It will roll back insurance rates 20% and offer 20% discounts for good drivers. According to reports, the petition’s summary reads: “The purpose (of this measure) is to protect consumers from unfair insurance rates and practices, to encourage a competitive insurance marketplace, to empower consumers with legal rights and to ensure that insurance is affordable for all residents.”

Local politicos support the measure, which is sponsored by a group called Fair Affordable Insurance Rates (FAIR). The Consumer Federation of America also supports the Michigan measure, saying it would prevent price gouging and require insurers to base rates primarily on a motorist’s driving record rather than factors such as ZIP codes or marital status.

Not surprisingly, insurance industry representatives oppose the initiative, arguing that, without cutting costs, the rate reductions may only cause hardships for insurers. “A 20% rate reduction puts us at risk with regard to solvency,” says Pete Kuhnmuench, executive director of the Insurance Institute of Michigan. “How does any business operate with 20% less in income when it can’t affect the expense side? We still have the obligation to pay those claims.” Kuhnmuench said that proponents of the initiative must collect 304,000 valid signatures by May 26 in order to have the measure placed on the November 2010 state ballot.

Doug Finn, who heads up the Professional Insurance Agents (PIA) in Michigan, told Rough Notes magazine that the Michigan initiative is just an extension of the “continuing adversar­ial relationship between insurers and the state’s governor.” Said Finn: “It’s just a way to circumvent credit scoring in the state, something which the governor opposes and which is currently being tested in the courts.”

Finn admits that, in terms of auto insurance rates, Michigan is the 12th most expensive state in the country. “However,” he adds, “Michigan is also among the most liberal in terms of benefits. For example, we have unlimited, lifetime medical injury protection in the event of an auto accident.” Finn likens the Michigan measure to California’s Proposition 103 in that it “uses improper channels” to achieve rate relief for consumers, one of those channels being government mandate.

Pat Borowski, senior vice president of PIA National, discussed Proposition 103 and the Michigan initiative in the social context. “Those who talk about insurance rates being too high have to ask themselves what the government would charge if it had control. It becomes an issue of social policy decision vs. the private sector.

“Just consider what has happened with ERISA, the credit card industry and Medicare,” she continues. “In Medicare, the government is trying to reduce offerings. So, when you consider insurance rates in the private sector, you have to consider what is being offered vs. what the social network would offer.”

Borowski said that, prior to Proposition 103, California’s residual auto market was relatively low. “After Proposition 103, the residual market grew rapidly,” she said.

Still, despite California’s problems, supporters of the Michigan effort are using the same rhetoric that brought in Proposition 103. Kim Bowman, chief of staff to State Senator Hansen Clarke (D-Detroit), has said that the Michigan initiative will allow those who aren’t insured to afford coverage and those who have coverage to realize a savings.

And detractors of the initiative are saying that rate rollbacks in the state are unrealistic. If approved, the measure would kill jobs because insurers will not do business if they cannot price their policies appropriately, they say.

Bowman has accused the insurance industry of making “windfall” profits. She recognizes that supporters of the Michigan initiative will have to raise serious money if they are going to hire a firm that will gather the necessary 304,000 signatures. “I don’t believe getting signatures will be an issue with this one,” she says.