On February 18, 2021, California Insurance Commissioner Ricardo Lara announced a revision to proposed regulations regarding the use of affinity groups in insurance rating. The commissioner will hold a virtual workshop on the revised draft on March 23, 2021, at 1:00 pm PDT to give stakeholders another opportunity to comment on the proposal. The commissioner explained that the purpose of the regulations is to require insurers to give greater access to auto insurance discounts for low-income drivers and people of color.
The proposed regulations apply primarily to private passenger automobile insurance. They would permit insurers to use group membership as an optional rating factor subject to limitations, including requirements for relativities and creditability of data. They also require insurers to apply the non-group rate to a driver if that rate is lower than the group rate.
The proposed regulations acknowledge the broad authority for insurance on a group plan without restriction as to the purpose of the group, occupation or type of group provision for group insurance under Insurance Code section 1861.12, but state that using any rating criteria, including group membership, without the commissioner’s approval constitutes unfair discrimination.
The proposal applies specific requirements to insurance offered on a “Group Plan,” defined as a method of selling private passenger automobile insurance to members of a group that has either a written agreement with an insurer or a written attestation of the existence of an unwritten agreement (except for groups based on military status). Under the proposal, a “group” must be either:
- A set of individuals who choose to act or associate for a lawful purpose and who renew membership or pay dues at regular intervals (unless all group members receive lifetime membership), provided that the group must satisfy these requirements before an insurer or insurance producer interacts with the group; or
- Employees of a particular employer.
Beginning in 2026, insurers would be required to verify that each driver is a member of the group by obtaining documentation of the insured’s valid group membership.
Insurers would be required to maintain written guidelines for acceptance or rejection of a group, and the guidelines would need to afford all groups full and equal advantages, privileges and services, regardless of, among other things, education, occupation or income level. Insurers would also be required to maintain a written statement of the reason why a group was accepted or rejected, with specific reference to the guidelines. Group plans would be permitted only for groups that afford all persons full and equal advantages, privileges and services in conformance with civil rights laws.
The proposal provides for the commissioner to publish a Designated ZIP Code List of ZIP Codes where the per capita income is below the 50th percentile for California and less than one-third of the population self-designate on the US Census as White, not of Hispanic origin. Depending on the percentage of insured vehicles rated in ZIP Codes on the Commissioner’s Designated ZIP Code List, the proposal would authorize the use of a balanced relativity of less than 1.0 and an increase in the efficiency standard in rate calculation. Ultimately, at least 13% of each insurer’s insured vehicles under group plans would need to be rated in ZIP Codes included on the Designated ZIP Code List.
The proposed regulation provides for phasing out of current group plans that do not meet the new definition and phasing in of group plans that do meet the new definition. If an insurer currently has a group plan that does not meet the new definition, it would be required to make class plan filings annually until the group reaches the same relativity factor for the group membership rating factor as for the insurer’s non-group insured vehicles. If an insurer’s group plan does meet the new definition, it would need to make annual class plan filings until the group either reaches the indicted relativity or three years have passed, whichever is first. In both cases, individual premium increases resulting from the new requirements would be phased in over a three-year period, and no individual premium increase caused solely by the new regulations would exceed 5% per year.
Although the stated goals of the proposed regulations are laudable, it is unclear that they would have the desired effect. We also note that the regulations appear to face significant legal hurdles since Insurance Code section 1861.12 (which is part of Proposition 103) states that “Any insurer may issue any insurance coverage on a group plan, without restriction as to the purpose of the group, occupation or type of group. Group insurance rates shall not be considered to be unfairly discriminatory if they are averaged broadly among persons insured under the group plan.” The regulations as proposed appear to directly contravene this broad freedom for group insurance programs established by Proposition 103, and would therefore require a legislative change.