Calif. Regulatory Advisory Threatens Use of Loss History Databases, Says ACIC

A California Department of Insurance Advisory Notice significantly restricts homeowners insurance underwriting and, if fully implemented, reportedly could result in fewer choices and higher prices for consumers in the state.

The Association of California Insurance Companies (ACIC), and affiliate of the National Association of Independent Insurers (NAII), opposes the notice because it was reportedly implemented without proper notice and hearing, incorrectly interprets statutory provisions, and does not define key terms.

The advisory cautions that “loss history data obtained from insurance-support organizations may not be the basis for an adverse underwriting decision; however, an insurance institution or agent may base an adverse underwriting decision on further personal information obtained as the result of information received from such insurance-support organizations.” The advisory further warns insurers that application of eligibility guidelines that do not have “a substantial relationship to an insured’s loss exposure” is in violation of the California Insurance Code.

“In essence, the advisory could preclude insurers from using loss history information obtained from electronic databases such as C.L.U.E. and A-PLUS,” said Sam Sorich, president of the Association of California Insurance Companies (ACIC). “In order to use such information, an insurer would have to independently investigate every loss reported to the database. The Insurance Code does not impose that mandate.”

“Insurance companies do not have the resources to inspect every application or renewal policy that has had claims activity,” said Sorich. “Personal inspections would drive up the cost of homeowners insurance and delay the sale of properties. Moreover, because some insurers could not possibly comply with the inspection requirements, they may limit the number of policies they write in the state, reducing competition and consumer choice.”

ACIC submitted detailed comments about the proposed advisory to the Department of Insurance on March 28, 2003. In its letter to Commissioner John Garamendi, ACIC stated that it “recognizes that the department is trying to resolve an issue that appears to be problematic, however, this advisory notice does not remedy the perceived problem. ACIC would like to continue working with the department on this issue to come to an amicable resolution that benefits insurers and consumers alike.” Unfortunately, the final regulatory advisory does not address the issues raised by ACIC.

“The advisory ignores the fact that loss history databases help insurers and agents deliver faster, more accurate, and less expensive underwriting decisions,” said Sorich. “The department apparently believes that while prior losses are ‘predictive’ of future losses, they do not have a ‘substantial relationship’ to them. ACIC disagrees strongly with the department’s position on this issue, and believes that such a regulatory advisory should not be implemented without a full and fair hearing, a review of the legal basis for the notice, and an analysis of the market costs and problems that could result from the notice.”