California Proposition 17: An actuarial view

I’m not big on California’s micromanagement of laws via referendum in general, but one measure being voted on Tuesday involves personal auto rates, so I thought it was worth a mention.

Thanks to Proposition 103, California restricts rating factors. There are three primary factors and 16 secondary factors. One of these is relevant here. Companies can grant a persistency discount – the longer you are a customer, the more you save. Proposition 17 would extend this. A company could offer a discount based on your longevity in the system, regardless of which company you stayed at.

CAS Exam 5 (ratemaking) students will remember the persistency discount from Sholom Feldblum’s paper on Asset Share pricing. An auto insurer can offer a discount to long-term customers because they don’t have a lot of accidents. The reason is a bit clearer if you look at the converse. A driver who is in a lot of wrecks either gets dropped or gets hit with a big rate increase. Both events turn him into an active shopper.

If you don’t get in any accidents, you and all the other good drivers have been profitable, and as time passes, the company can confidently lower your rate and still get an adequate return. And it would rather do that than lose you, because you are a better risk than most insurance shoppers who, recall, are likely to have poor driving records.

(An aside: Health insurance is the opposite. Loss ratios drift higher with longevity, at least with individual plans. The longer you live, the more likely you are to get sick.)

But Proposition 17 would allow a company to offer a discount if a driver has been at a competitor for a long time. Mercury Insurance Group is the big force behind the referendum, spending $10 million on it.

Proponents say most consumers will save money. Opponents point out, in essence, that every dollar one consumer saves will be a dollar another consumer pays and contends the people who would pay more – say a laid-off worker who lets his policy lapse – are not able to afford it.

I don’t have a strong feeling, but my thought experiment runs this way: The current system favors entrenched players. It’s going to be pretty hard to pluck a good customer away from State Farm or Allstate if the law allows them to offer a discount that competitors cannot.

Balanced against that is the uninsured motorist problem. The proposition could shift costs onto the recently unemployed or longtime mass transit users, both of whom make less than median income. The high cost makes them less likely to buy insurance at all, which is a genuine social concern. Eighteen percent of California drivers are uninsured, eighth worst in the United States. (The national average is 13.8 percent.)

Anyhow, the state’s description of the initiative is here. A supporter’s view is here. An opponent’s view is here.

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