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Proposition 103


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In 1988, voters in California approved
Proposition 103 by a narrow margin of 51%. Before
the passage of the proposal, California was one of the few states where the insurance industry was not regulated by the
government. Insurance companies did not have to seek approval for
premium rates, making the cost of insurance relatively high. Moreover, existing
laws shielded the state’s insurance industry from competition. Thus, neither
government supervision nor free market forces were allowed to play a role in
moderating the impact of the insurance industry on California’s economy. Proposition
103 sought to create a fair and more competitive marketplace for insurance and
impose regulations in the industry. More than a quarter a century later, the
passage of Proposition 103 and its subsequent implementation have dramatically
changed the course of California’s regulatory structure and by extension that
of the property-causality insurance industry in the United States. This paper
describes and analyses the changes introduced by Proposal 103.

Review of Changes Introduced by
Proposal 103

Proposal 103 introduced many changes whose
objective was to broaden the Department of Insurance’s role in regulating and
supervising the insurance sector. In the years preceding the passage of the
proposal, some political and economic
factors shaped debates about the need to review the state’s insurance laws.

Between the late 1970s and mid-1980s, insurance premiums in California
increased dramatically. It left consumers
at the mercy of insurance providers who had the discretion to change premium
rates arbitrarily and without involving consumers or their representatives
(Lencsis 61). Back then, California had the largest number of automobiles on
its roads compared to other states. Therefore, the increase in premium rates
made the cost of automobile insurance more expensive for Californian vehicle
owners than in other states. 

Consumer advocacy groups raised concerns about
lack of justification for the increase in insurance rates. To a large extent,
it was felt that the increase in
insurance rates was as a result of profligacy and greed on the part of
insurance companies. Central to these concerns was the claims that California’s
insurance industry was gradually abandoning its core role of providing a
mechanism for risk sharing and was instead
focused on profit maximization (Martin and Barth 59). In other words,
insurers were increasing rates to enhance their profitability. The insurers
responded to these claims arguing that the increase in rates was as a result of costly litigations against
insurance providers. In response to the concerns by consumer advocacy groups,
several competing referenda were filed.

The initiative aimed at containing cost drivers in the insurance industry and
made it less costly for the consumers. After a long and costly legal battle,
Proposal 103 was the only referendum that passed.

following are the main changes introduced by the proposal:


Proposition 103 introduced a requirement for the
rolling back and freezing of premiums for one year between November 1988 and
November 1989. Consequently, all automobile and other classes of property and
causality insurance premium rates were rolled back to a rate of 80% of the
level before the passage of the proposal.

The 20% rollback prevented excess rates from the previous year from being
locked in. The provision for premium rollback was immediately challenged in
court but failed. After a series of administrative law rulings and legal
findings, the Insurance Commissioner issued orders limiting rebate

Approval of Insurance Rates

Proposal 103 introduced a prior
approval regulatory system meaning that insurance providers cannot revise rates
without the consent of the insurance commissioner. Under this new initiative,
insurance providers were there on required to notify the Department of
Insurance of the desired rate changes. As justification for the request, the
insurance company must comply with the financial standards and disclosure
requirements as outlined in the regulation (Lencsis 58). Among other changes,
the prior approval system rewards consumers with reduced premiums for any loss
prevention efforts such as the installation of fire prevention mechanisms or
maintenance of a good driving record. Insurers are
on the other hand rewarded for innovative and research programs that
lead to reduced claims and losses. This
was received positively by insures.

of Rate Setting Formulae

Before the
passage of Proposal 103, insurance providers based auto insurance rates on
several factors, including the residential address of the insured. This led ted to major anomalies in the
calculation of premiums, including cases where two drivers living on opposite
sides of the road were charged different
premiums (Consumer Watchdog). Many
consumers viewed the location-based rating as amounting to discrimination and
thus a contravention of the law. Proposal 103 introduced fundamental changes to
the territory-based system of calculating rates. Under the new system, rates
were calculated based on the insured driving record, the number of years of
active driving and the number of kilometers driven. More other factors could be admitted in the calculation of rates but
only if they could be proven to be associated
with actual risks. The rate-setting formulae were also subjected to litigations
and eventually ended in administrative interpretation.   

for Good Driving Record

Proposal 103 introduced new changes about the
premium rates for drivers with safe driving records. Under the new system, good
drivers could qualify for at least 20% below the rate that they could otherwise
be required to pay for coverage. The proposal also required that all drivers
with safe records be issued with policies
(Lencsis 69). The criteria for ascertaining whether or not an insured driver has
good driving record included at least three years of driving experience, no
fault in the auto accident, and no violation point during the previous three
years. Insurers brought judicial relies on this initiative, which delayed its
implementation for three years. The initiative was
eventually implemented after a series of amendments.    

of the Insurance Commissioner

Proposal 103 required that California’s
insurance commissioner be elected instead of being appointed by the governor as
was the case previously. The advantage of electing a commissioner is that the
office holder becomes accountable to the public rather than to the governor or
any state authority. Since only the voters have the power to pass any verdict
regarding the commissioner’s performance, he or she has the impetus and
incentive necessary to act in the best interest of the public (Janiskee and
Masugi 63). In effect, the new initiative gave the commissioner more powers to
champion the review of insurance rates and other issues relating to the fairness of the practices and rates of insurers.

Even so, critics argued that the requirement for the insurance commissioner
politicized the office and that it could attract officials who view the
position as a stepping stone for ascending to higher offices.


A central tenet of democratic principles is that
all parties to a proceeding should have right to be heard or be represented. This
serves to enhance openness and transparency, acceptance of decisions and
constructive change. Proposal 103 introduced various avenues for consumers to be represented in insurance matters. First, the
proposal gave individual consumers the power to go to the Department of
Insurance to report any issue relating to non-compliance with the law by the
insurance companies (Consumer Watchdog).

Second, the proposal gave consumer advocacy groups the powers to seek legal
intervention in the regulatory process to protect interests of consumers of
insurance services. Last but not on the
minimum, the proposal established a requirement that any public group that
participates in any insurance issue under consideration by the Department of
Insurance or the courts be reimbursed for
any expenses such as attorney fees.    

Reaction to the Regulation of

Regulation of premium rates is one of the most
important changes introduced under Proposal 103. This change has been
interpreted as an attempt regarding price control because insurance companies
cannot set rates at their discretion without the approval of the Department of
Insurance. The requirement for prior approval has many potential adverse
effects, including the possibility of lengthy delays in adjusting premium rates
to match expenses and losses (Norma

The requirement also gives the Commissioner of Insurance greater powers to
impose costs for compliance and administration. These costs will ultimately be
paid by the consumers, thereby increasing the cost of insurance. Regulation of
insurance rates increases government intervention in trade, and therefore,
rolls back any gains made by the industry in promoting a free market economy in
California. In an ideal free market economy, the government should not
interfere in the trade as this makes industries less competitive. 

Proponents of rates’
regulations argue that they are necessary to correct market failures. In
California’s insurance industry, they are outstanding, in essence to the
existence of information imperfection. For example, customers might not be
aware of market trends or be in a position to observe the management of
insurance companies. In the absence of regulations, some companies may take the
advantages to charge exorbitantly high rates, causing consumers to lose
confidence in the industry. Before the
enactment of the regulatory requirement for rates, there were no effective
means for enforcing discipline among insurance companies (Janiskee
and Masugi 53). The regulations
made it possible for the government to monitor insurance companies and thus
eliminate market imperfections. Consequently, the regulations were necessary
and have helped to transform the
insurance industry.


Proposal 103 was put in place at a time
when many consumers were reeling from the impacts of lack of proper regulations
and supervision for the industry. Compared to the rest of the nation, the
proposal made California’s insurance industry more competitive and provided
win-win outcomes for both the insurers and the insured. By all standards, the
proposal was a good initiative because it addressed the concerns of many
industry players. Although sections of the proposal have been amended several times, the proposal has
served to provide a framework for insurance reforms in other states across the
US. On the negative side, Proposal 103 has strengthened bureaucracy in the
insurance industry due to the numerous regulations it introduced. But, with
necessary amendments, it is poised to satisfy all parties involved.


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