Report on the condition of the U.S. banking industry: first quarter, 2005
Assets and earnings of reporting bank holding companies continued to show healthy growth in the first quarter of 2005. Total assets reached $10.7 trillion, an increase of $355.0 billion from year-end 2004, while net income rose 13.8 percent, to $32.9 billion over the same period.
Securities and money market assets accounted for more than two-thirds of the total growth in assets. Most of this increase occurred at the fifty large bank holding companies (up $185.4 billion, an increase of 6.4 percent) as these large companies added to their holdings of mortgage-backed securities. These acquisitions were made in large part to investment portfolios as companies adjusted their interest rate risk exposures–responding to long-term interest rates that remained unexpectedly low through the quarter despite significant increases in short-term rates–although some firms expanded the securities and other assets they held in trading portfolios. In addition to the fifty large bank holding companies, insurance-oriented financial holding companies added significantly to their securities holdings (up $76.6 billion, an increase of 18.4 percent).
Loans grew somewhat less robustly, rising $71.6 billion, or 1.4 percent, as did unused commitments to lend (up $83.4 billion, or 1.7 percent). Residential mortgage loans, including home equity lines of credit, contributed significantly to this increase. Commercial loans also increased modestly, although some of that rise was due to one-time technical factors and reclassifications. Weakness was evident in credit card balances, attributable to a seasonal slowdown in new credit card spending and significantly accelerated repayments as households shifted some credit card balances to the rapidly growing home-equity loan category. Commercial real estate lending, especially for construction, again was a significant source of growth for the industry.
Nondeposit borrowings increased sharply, rising 6.8 percent ($209.2 billion), as strong asset growth outstripped deposit increases (up $95.7 billion, or 1.8 percent). Although long-term rates remained low, the increase in borrowings was mostly in short-maturity instruments. Regulatory capital ratios remained strong but tightened slightly during the quarter, as Tier 1 and leverage ratios declined 8 basis points and 11 basis points respectively.
Problem assets continued to decline from already-low levels, reaching 0.76 percent of loans and related assets. Net charge-offs also declined to 0.57 percent of average loans, and provisions for loan losses followed suit.
Fueled by asset growth and improved asset quality, net income rose to $32.9 billion, representing a return of 14.84 percent on average equity and 1.24 percent on average assets. Net interest margins narrowed significantly to 3.18 percent compared with 3.28 percent in the fourth quarter of 2004, a constriction that was attributable to the flattening of the yield curve and, to a lesser extent, competitive pressures on loan and deposit spreads. Non-interest income surged, supported by strong trading revenues and mortgage servicing income.
Assets of the securities broker-dealer subsidiaries of reporting bank holding companies jumped 29.8 percent (or $214.2 billion), to $933.4 billion. Nearly all of that increase was from a single large bank holding company (Citigroup), resulting from a clarification of reporting instructions rather than a change in the underlying volumes.
Hostels becoming more like budget hotels
Budget Travel
Hostels becoming more like budget hotels
By ARTHUR FROMMER
Sunday, November 2, 2003
Most people think hostels are bare-bones lodgings — bunk beds and communal showers, suitable only for backpackers and students. And the truth is, they often are.
But the good news is that hostels are changing. Many of them are more like budget hotels, with the only real difference being the price. While dormitory-style rooms always tend to be cheaper, many hostels offer private accommodations at a slightly higher cost.
That said, anyone expecting a mint on his pillow should stop reading now. Hands-on and do-it-yourself, hostels are still far from luxurious. But they can offer something four-star hotels can’t — a great way to meet people and see places not readily seen in the bubble of Western-style hotels. Here are some tips before you go:
Become a member: With literally thousands of hostels worldwide, choosing one can be a daunting task, but membership has its privileges. Most hostels operate much like large hotel chains with international booking networks and membership benefits.
Hosteling International-USA (www.hiayh.org), for one, offers perks like free international travel insurance; discounts at restaurants, retail stores and attractions; as well as access to more than 4,000 hostels in more than 60 countries. Members of the International Youth Hostel Federation (www.iyhf.org) receive commission-free currency exchange, as well as discounts on international calling.
In cooperation with other worldwide associations, HI-USA and IYHF are part of the Hosteling International network — the brand name for more than 90 youth hostel associations worldwide. For the weary budget traveler, HI’s easy-to-spot blue triangle logo is often a sight for sore eyes.
Making reservations: While part of hosteling’s novelty is not knowing where you’ll be headed next, book ahead during peak seasons in popular destinations — Greece in August, for example, or Whistler, British Columbia, in January. It will save you time and money in the long run.
Location is crucial: More so than budget hotels, hostels take you where the action is. They’re often conveniently situated near the city’s cultural center or within walking distance of local night life. Don’t be fooled by a slightly better deal “just minutes away from the city center!” Spend the extra buck or two and stay right where you want.
When traveling to Helsinki, Finland, for example, try the ultra- modern EuroHostel. Centrally located and filled with amenities, it’s the perfect stop for a Scandinavian visit. At per-person rates, including linens and a morning sauna, single rooms are 36.5 euros (about $42), while doubles with a harbor view and triples both rent for 22 euros ($25.50) each. The rates drop slightly for HI members. For more information, check out www.euro hostel.fi.
Visa support: Traveling abroad is a thrill; getting a visa is not. For countries like Russia, a letter of invitation is required before a visa can be given. In cases like these, hostels often provide inexpensive and headache-free visa support. At St. Petersburg International Hostel — Russia’s first and only HI property — visa support is offered for $54, including tax and your first night’s stay with breakfast. For details, visit www.ryh.ru.
Get what you pay for: Before making reservations, ensure that the hostel has everything you need for a comfortable stay. Ask if linens, breakfast and baggage lockers are included in the price. Planning to stay awhile? Make sure the hostel has laundry facilities and/or a kitchen if you’re planning to cook.
Ask about rules: Although the majority of guests are between the ages of 18 and 35, more and more people ages 55 and older frequently stay in hostels. Age restrictions used to be commonplace but have become increasingly rare. Nonetheless, call ahead to confirm the hostel’s policy. This is particularly important for families traveling with small children.
Likewise, night owls should always ask if there’s a curfew. A midnight curfew could mean you’ll be sleeping outside if you get home too late; if you think a hostel bed is uncomfortable, just wait until you lie down on the sidewalk.
King Features Syndicate
Copyright 2003 Journal Sentinel Inc. Note: This notice does not apply to those news items already copyrighted and received through wire services or other media
Provided by ProQuest Information and Learning Company. All rights Reserved.
A board room with a view - entrepreneurs who used their love of the outdoors to create Glacier Wilderness Guides and Montana Raft Co. in Montana’s Glacier National Park
Growing businesses share their experiences in creating and marketing new products and services.
When Randy Gayner and his partners go to work each morning, they head for an office located in one of the business world’s most spectacular settings, with Montana’s Glacier National Park right in their back yard. This is, of course, precisely why Gayner and a pair of friends started their two related companies: Glacier Wilderness Guides and Montana Raft Co.
“We were all tired of doing what we were doing,” says the 41-year-old Gayner. “We wanted to stay here and have fun.”
A native of Cleveland, Gayner moved to Big Sky country in 1976 with a bachelor of science degree in zoology. After several seasons as a backcountry ranger for the National Park Service, he wanted a new way to make a living in an area he had grown to love.
His friends Mark O’Keefe, a state government worker, and Dave Ames, an employee of the U.S. Forest Service, felt the same way. In 1983, when the three realized Glacier had no official backpacking guide service, they proposed the idea to park authorities, who gave them the go-ahead. Other popular parks had already allowed concessionaires to lead day hikers and overnight campers on commercial trips.
“This was around the tune James Watt was secretary of the interior, and that helped,” Gayner recalls. “He was pushing for the privatization of services in the national parks so the government wouldn’t have to provide them.”
Success would not come so easily. The three, who initially handled all of the company’s business matters while leading every one of its clients along Glacier’s trails, quickly developed a favorable reputation as the park’s exclusive guide service. But their first three seasons were money-losers, and O’Keefe and Ames decided to move on. With their departure, Gayner took steps that ultimately turned the business around.
First, Gayner and his wife, Cris Coughlin Gayner, now 35, bought out one of the original partners, while longtime area resident John Gray, 48, bought out the other. Then, when one of the few commercial river rafting permits available in the area came up for sale, the company acquired it and began offering guided trips down the Middle Fork and North Fork of the Flathead River. Eventually, it started advertising in national magazines like Outside and Backpacker.
And at last, Gayner says, the business became profitable.
“But I think it was the time factor more than anything else,” he adds. “About 2 million people come through Glacier every year, and more and more of them were starting to hear about us. Plus, it didn’t hurt that the whole market for adventure vacations was really on the upswing.”
Today, the two enterprises cater to everyone from celebrities such as actress Jill Clayburgh and “Entertainment Tonight” co-host Mary Hart to families from Nebraska and business leaders from New York. Last year the companies’ umbrella S corporation employed 30 guides during the season running from May to October. It also tallied 4,200 rafting user days and 2,500 hiking user days (one user day equals one person spending one day on the water or trails) en route to grossing $300,000.
Both of these totals are a far cry from the original company’s initial season, when it logged 100 user days on park trails and grossed just $7,000.
Expansion has come at a price, of course; the owners–including longtime employee Doug Niemann, 44, who was recently awarded a 4 percent share in the company–now spend only about 10 percent of their time in the backcountry compared with the 75 to 100 percent originally. Instead, their days are consumed by financial duties, marketing and advertising chores, and insurance matters.
These changes in obligations do not seem to bother them, though, and plans are in the offing for still more enlargement. If they can get the necessary permits, Gayner says, “we’re looking to increase our hiking service by offering guides in Yellowstone National Park and to expand our rafting business by buying a permit for the Salmon River.”
In the meantime, the partners and their employees–often vacationing schoolteachers, local college students, and winter employees of the local ski resort–will continue showing visitors a good time on the area’s trails and white water. And, of course, occasionally taking a peek at the stunning natural wonders in their back yard.
Howard Rothman, a writer in Littleton, Cola, is co-author of Companies With A Conscience: Intimate Portraits of Twelve Firms That Make A Difference, recently re-released in paperback by Citadel Press.
Indonesia gets even trickier
Since the Bali bombing 15 months ago, Indonesia has been on the Foreign Office blacklist of countries it warns you not to visit: “There is a continuing risk of harassment of Westerners by fundamentalists,” says the FO’s Travel Advice Unit.
Many British travellers, particularly backpackers, have chosen to disregard this warning - even though most travel insurance policies are invalidated by visits to countries on the blacklist. Now the Indonesian government has brought in an extra disincentive: a requirement for a tourist visa to be bought on arrival. The three- day version, intended mainly for those on brief stopovers in Bali en route to Australia, costs US$10 (pounds 6). The 30-day visa is US$25 (pounds 15). It is not yet clear what currencies are acceptable for payment; carrying US dollars is probably the best way to avoid problems and/or unfavourable rates of exchange.
Note that the visas are available upon arrival only at what are described as “main points of entry”; if you plan any unusual approaches, such as by sea from Singapore, you may need to arrange a visa prior to travel; check your proposed port of entry with the Indonesian Embassy in London (020-7499 7661, www.indonesianembassy.org.uk).
One final hurdle: departure tax when leaving Indonesia is now 100,000 rupiah (pounds 6.50).
Copyright 2004 Independent Newspapers UK Limited
Provided by ProQuest Information and Learning Company. All rights Reserved.
On defense: driving classes could lower your insurance rates
It’s Friday afternoon. You have the whole weekend ahead of you, so you’re anxious to get home. In the rearview mirror, you spot a police car’s flashing lights. The siren is wailing, signaling you to pull over. The officer leaves you with a $95 ticket and two points added your license. Your first thought: “The insurance is going to go through the roof.” Your second thought: “Two more points after this and my license will be suspended.” Don’t panic. Take a defensive driving course.
According to the National Safety Council (www.nsc.org, 630-285-1121), 28 states allow up to three points to be subtracted from the total on your driving record if you have received violations within 18 months before course completion. Also, 34 states offer insurance discounts of up to 10%. “In other states where all companies are required by law to offer a discount, individual companies operating in those states offer premium reduction,” says Thomas Chartoff, a New Jersey police officer and defensive driving instructor. Insurance points, which are assigned by your individual insurance carrier, are used to determine the cost of your auto insurance and, therefore, are not reduced upon course completion.
Since the courses are for experienced drivers, don’t expect driving instruction basics. Also, don’t expect to take a vehicle out on the open road. You actually sit in a classroom for an all-day seminar that has a quiz at the end. The quiz is designed to see if you were listening and has no impact on getting the course certificate at completion, “The courses don’t teach you how to drive; they teach correct driving techniques,” says Chartoff. Topics include judging distance and being proactive instead of reactive. Chartoff mentions that the content of each course will be slightly different depending on the instruction. Course duration is usually six to eight hours and is typically intended for traffic violators; repeat offenders/problem drivers; traffic violators ages 16 to 24; and professional truck, van, and fleet drivers.
Those interested in a defensive driving course are warned to use caution when considering online driving schools. “The material is there, but they do not always have an instructor, which is a key part of the course,” says Chartoff. It is imperative to know whether or not the course is accredited by your particular state, for both traditional and online courses. A course can be accredited in one state and not another.
Course prices vary from $40 to more than $100 depending on the instruction and location. Each state has a different limit on how often you can take a course, in New Jersey, for example, a course can be taken once every five years for license point reduction and once every three years for an insurance discount. For more information on defensive driving courses, license point reductions, and insurance discounts, contact your insurance company, NSC, or AAA at 800-763-9900 or visit www.aaa.com.
Whatever happened to no-fault? - no-fault automobile insuranc
Newspapers lately have been full of stories about the “liability crisis.’ Insurance company profits are falling, premiums are rising, and the industry and consumers alike are starting to panic. In New York City, the tram line from Manhattan to Roosevelt Island shut down because the company that insured it would not renew the policy. In Janesville, Minnesota, last year’s Nativity pageant was canceled because insurance costs were prohibitive. In St. Anthony, Idaho, unaffordable insurance premiums closed down the city office building, the public library, the senior citizen center, and the snowplow service.
The liability crisis has inspired much debate about whether the enormous volume of litigation that accounts for much of the high cost of insurance ought to be restricted. Unfortunately, the question of whether to limit the right to sue can be frustratingly muddy. Do we really want to ease the pain felt by manufacturers of drugs that cause birth defects? Should architects and engineers who design buildings that collapse avoid responsibility?
But if the liability crisis as a whole seems to defy simple solutions, there is one substantial chunk of it that does not: automobile accident cases. In state courts around the country, automobile-related lawsuits often account for more than half the case load, driving up auto insurance premiums, delaying benefits for accident victims, and devouring dollars that might be spent compensating serious injury. Rather than spend time and money arguing in court about who is at fault when two cars happen to collide, as cars inevitably do, why shouldn’t insurance companies automatically pay out benefits to any policyholder who suffers in a traffic accident, no matter what the circumstances?
This idea, of course, got a lot of attention during the 1970s under the name of no-fault auto insurance. Massachusetts passed the first no-fault law in 1970. Twenty-three other states followed suit. There even was an effort in Congress to establish no-fault nationwide. But you don’t hear much about no-fault these days. When you do, the news is usually that some state government has lost faith in it. No new states have been added to the no-fault roster since 1975, and Nevada, Pennsylvania, and the District of Columbia, have repealed it. Conventional wisdom seems to be turning against no-fault as yet another starry-eyed liberal reform that failed.
But if no-fault is to be judged a failure–and we think it shouldn’t be–the problem lies not in the idea but in its half-hearted execution. Even where no-fault has been tried, the fault-based tort system that no-fault was meant to replace usually has remained relatively unthreatened. No-fault statutes have not gotten enough victims of automobile accidents out of our courts because the lawyers won’t allow it.
No fault, no fee
The case for no-fault was and remains simple and compelling: the traditional, tort law process of fault-finding gobbles up time and money that could be spent compensating people who need help. Under a pure tort system, if a driver suffers injuries from a car accident, he is not automatically entitled to compensation from his insurance company. Before he can collect, he must demonstrate to a jury that another driver was responsible for the accident. If the victim wins, the wrongdoer (actually, the wrongdoer’s insurance company) must pay him not only for his out-of-pocket expenses–medical costs and the loss of wages–but also for the “pain and suffering’ that results from the injury. If he loses, he gets nothing.
In contrast, under no-fault, an accident victim does not need to prove that anyone was at fault before he gets his money. A no-fault policy insures against any circumstance that might injure a driver. The harm might come from another driver; it might also come from the victim’s own carelessness, a situation the tort system cannot address. Consider a collision with a stationary object. If you crash into a tree, you’ll have a hard time convincing a jury that it ran out into the middle of a road. (Anyway, trees tend to be insolvent.) Or consider a collision with another driver that injures the driver who caused the accident. Under the tort system, if you’re at fault you can’t collect.
And what about the broad gray area in which most traffic accidents occur–cases where both drivers are at fault? Maybe one fellow was speeding because he was a little anxious about being late for an important business meeting. Maybe the other was looking out the window at an attractive woman who was crossing the street. The tort system’s usual solution is to have the two men slug it out in court over who was more guilty. Both men will be tempted to distort the truth in order to collect; moreover, if the jury concludes that both were negligent, both men may be losers –neither may be compensated for injuries. Under no-fault, the question is irrelevant.
The difference no-fault can make in the lives of auto accident victims was illustrated dramatically by two cases cited in a 1984 issue of Consumer Reports. In Illinois, which operates under the tort system, 25-year-old Robert Demichelis was returning home from a basketball game at Northern Illinois University when he dozed off at the wheel. His Datsun 200SX bounced off a guard rail and smashed into a concrete divider in the middle of the interstate. Demichelis’s head struck the windshield, and he suffered brain damage. His ability to reason and make judgments was sufficiently impaired that he was unable to hold a job. Health insurance covered his medical bills, but his family ended up paying for his rehabilitation treatments. At the time the article appeared, Demichelis’s family had paid out $15,000. Because they had no one to sue, there was no auto insurance money to cover the cost.
Everybody into the pool: supporters of pooling mechanisms to buy insurance say they’ve been one of the insurance industry’s big success stories
Pools come in different shapes, sizes and concepts, but all offer a method for spreading the members’ risk.
* In New York, a risk-sharing pool made up of public colleges and universities is closely following new workers’ comp laws favored by the new governor, Eliot Spitzer.
* Supporters of public-entity pools believe they do a better job at correlating premium contributions with exposures.
***********
Once upon a time, from the mid-1970s through the early 1980s, there was a hard insurance market, with high prices and limited availability of liability coverage. It was a difficult era for colleges and universities looking to insure their risks. They were at the mercy of prices over which they had no control.
“We had to take control of our own destiny,” explains Roger Fell, client executive of Marsh Inc.’s Philadelphia office. The market presented short-term challenges but long-term opportunities. Then the federal and state governments entered the picture to help with the critical hard-market situation, passing specialized legislation that enabled public entities and colleges and universities to form insurance pools to spread the risk and reduce their insurance costs. And, thus, a new strategy was born.
As with all cycles, that particularly hard market cultivated a concept for dealing with the difficulties of obtaining insurance. Pools, as lobbying groups and in different forms and structures, have been around since the late 1800s, but didn’t really take off until legislation allowed two or more entities to form a partnership for buying insurance products.
As such, pools offer members the opportunity to reduce their insurance costs while advancing better loss-control measures and policies. Public entities, such as municipalities, school districts and related departments, were among the earliest industries to embrace the pool strategy, followed by the typically independent colleges and universities, which saw the benefits too.
Today, there are more than 480 public-entity pools and dozens of university pools. They tend to be homogeneous–operated by all colleges or all specific types of public entities so their liabilities and exposures are similar.
“Pools are one of the biggest success stories in insurance in the past 50 years,” says Rich Terlecki, area senior vice president and co-managing director of Arthur J. Gallagher & Co.’s public-entity pooling niche.
Pools come in different shapes, sizes and concepts, but all offer a method for spreading the members’ risk and act as insurance companies, except they’re owned by the members. Captives are a version of pools, capitalizing the entity, sometimes forming a trust, and retaining enough premium income to pay out claims or secure coverages through the reinsurance market. They usually have members throughout the country. Risk retention groups are self-insurance vehicles, set up by federal legislation in 1981 to address the prohibition by most states of groups banding together to buy liability coverage. Risk retention groups may not be subject to state laws as are most pools. Some pools are just set up as purchasing groups, usually offering several lines of coverages, such as auto and general liability. Some are created to address just one risk, such as workers’ comp.
Genesis Ltd., which is celebrating its 27th anniversary this year, is one of the older higher-education pools. A group of blue-ribbon colleges and universities, it’s domiciled in Bermuda as a Class-3 reinsurance company and offers its 16 members, all shareholders of the corporation, general liability products and automobile liability. (See chart below). At one point it also offered property and workers’ comp but deleted those services early on. Due to the power of group purchasing, which puts the pool into a better negotiating position, “we get extremely competitive pricing,” says Marsh’s Fell, who’s also the administrator for Genesis. As with most pools, premium income is invested, and any surplus funds that aren’t earmarked for claims are returned to the members in the form of dividends.
Fell points out that, because of the nature of the pool, which includes professional schools and other specific departments and risks, policies purchased are crafted for the universities and aren’t “off the shelf.” Thus, Genesis enjoys a 15 percent to 50 percent savings on its coverages and 50 percent off the list price of its environmental insurance.
“It’s like retail pricing,” says Fell, something akin to paying T.J. Maxx prices instead of Saks Fifth Avenue prices for the same designer clothing. “Carriers like to write a lot of risk at once because it’s more cost-efficient and the acquisition costs are less,” he says. He points out that Genesis is a desirable account too. “It all adds up to a healthy long-term business relationship and cost-effective risk transfer.”
But not all risks are created equal, nor are they all easily identified. As enterprise risk management, or ERM, has swept the corporate landscape, how to deal with ERM is probably the newest development colleges and universities are confronting these days.
Smart Shopping? - auto insurance rates in New Mexico - Brief Article
The difference, or variance, between the highest and lowest quoted rates for a six-month auto insurance policy in New Mexico is a staggering $545, according to a study made by Progressive Auto Insurance. Says Progressive’s Mike Randall:
“New Mexico consumers could be saving hundreds of dollars every six months if they only shopped around.” Which, apparently, they don’t. Randall points out that no one company, including Progressive, “will always have the lowest or highest insurance for all consumers. That’s why the need to shop and compare rates. Smart shopping doesn’t necessarily mean you could save $545 a month, however. “There are just too many variables,” Randall says. But at least a decent portion of that probably could be saved.
Myths and realities of car insurance
The color of an automobile influences how much it costs to insure it. Comprehensive coverage protects drivers in all situations because, after all, it is “comprehensive.” Car insurance companies can charge whatever they want. Have you ever thought one or more of these statements to be true? You are not alone. A survey conducted by DriveSM Insurance, Mayfield Village, Ohio, from The Progressive Group of Auto Insurance Companies, finds many drivers accept common car insurance myths as true. Here is a sampling:
Myth: Car insurance companies consider vehicle color when determining rates. Fact: Color is not a factor. Information that is used includes the vehicle’s year, make, model, body type, and engine size, as well as data about the driver.
Myth: Car insurance rates are not regulated and insurance companies can charge whatever they want. Fact: Each state has regulators who review the information companies collect as well as the rates they charge; insurers cannot deviate from those rates.
Myth: Comprehensive coverage protects drivers in all situations. Fact: Comprehensive coverage is one type of protection available. It only pays for damage caused by an event other than a collision, such as fire, theft, or vandalism; it also covers weather-related (e.g., hail, flood) damage; and damage caused if a vehicle collides with an animal. Moreover, it provides a rental car if a vehicle is stolen.
Myth: Rental reimbursement coverage protects drivers who crash their rental car while on vacation. Fact: This coverage pays for the cost of a rental car if a driver’s personal car is in the shop as a result of an accident and he or she needs a replacement vehicle.
Myth: Bundling insurance coverage always results in a cheaper rate. Fact: Just because a driver buys more than one product from the same insurance company does not always mean he or she is getting the best rate available. In many cases, there are savings to be had by talking with an independent agent or broker who can create a custom insurance package with policies from competing insurance carriers.
Myth: Car insurance rates go down dramatically when drivers turn 25. Fact: Young and older drivers typically have the most car crashes and different car insurance companies’ customers have different claims experiences. When developing an auto insurance rate, insurers generally consider a variety of items about drivers in addition to age, including information about the vehicle, past claims history, and the claims experience for other customers like them. One or more of these pieces of information could lead to an individual getting a higher, lower, or the same rate when he or she turns 25.
New regulations on car insurance should be rejected
THERE soon may be new rules to determine auto insurance rates in California. The California Department of Insurance has developed rules, set to become effective in August, that would force insurance companies to manipulate data to generate artificially nigh premiums for some drivers that would subsidize artificially low premiums for other drivers. Called “fairer” by the CDI, this “zero sum” change is bad public policy, does nothing to address the Underlying cost escalators in the insurance system and should be rejected.
Under the current system, the CDI allows auto insurers to use 19 different rating factors to determine a driver’s premium. Insurers must first consider, and give the full data-supported weight for, a driver’s safety record, annual mileage and years of driving experience.
After giving full weight to these three “mandatory” rating factors, insurers can use any, none or all of the remaining sixteen “optional” rating factors. The CDI can add optional retting factors to the list if, and only if, they are “substantially related to the risk of loss.” The CDI has permitted optional rating factors such as gender (women are relatively less risky than men), student grades (better students are less risky), frequency of car accidents in an area (drivers in congested areas are more risky than in less congested areas) and severity of an accident in an area (the expense of auto body shops, medical treatment, fraud and lawsuits are higher in major urban cities). These last two rating factors are the so-called “territorial” factors and must be considered, and weighted, last if used by an auto insurer.
There is a long-standing public debate over which rating factors should be given the most weight: the mandatory or optional factors. The current insurance commissioner, along with a Santa Monica attorney, believes that the mandatory factors should be given more weight than territorial factors because they are “fairer” factors than where a driver lives. On the other side is a coalition of rural and suburban elected officials, along with farm and taxpayer-related groups, who support the current system which accounts for the obvious cost differences of providing insurance in rural, suburban and urban areas.
Unfortunately, the law governing this debate is a poorly worded ballot initiative, Proposition 103, passed by 51.4 percent of the voters in 1988. The initiative does not specify the “weight” that rating factors should receive. Rather, the initiative says that the mandatory factors must be applied “in decreasing order of importance” but, at the same time, the rating factors must have a “substantial relationship to the risk Of loss.”
In 2000, the First District Court of Appeal examined the language of Proposition 103 to determine whether the current system appropriately implemented its demands. In Spanish Speaking Citizens’ Foundation Inc. v. Low, the court stated: “The current regulations manage to implement most of the law’s conflicting demands … thereby preserving a substantial relationship between rating factors and risks of loss … Unrefuted evidence establishes that territory is a more important determinant of the risk of loss than any other single factor.”
Significant change
Despite the current system being upheld as consistent with Proposition 103, the Insurance Commissioner still wants to change the system. A diverse coalition of local elected officials, business groups, community groups, statewide groups such as the California Farm Bureau Federation and the Regional Council of Rural Counties, as well as insurance companies, have expressed their opposition to the proposal. But the commissioner is intent on re-opening this settled issue and forcing a change.
The new proposal would significantly alter the current system, resulting in a system in which the price a driver pays for insurance is not based upon their actual risk of loss. The system would result in arbitrary, non-cost-based insurance rates that we believe violate Proposition 103.
The Current system, based upon actual predictors of loss, produces the lowest premiums for the most good drivers and should stay in place. The proposed system, based upon zero-sum redistribution of insurance premiums, would result in arbitrary insurance rates with the state picking winners and losers. The new proposal would do nothing to reduce the underlying costs of insurance rates and simply creates subsidies that pit one set of drivers against another. The new regulations should be rejected.