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Testimony
of Norma P. Garcia
Senior Attorney
Consumers Union
West Coast Regional Office
State
of California
Department of Insurance
Investigatory Hearing Regarding Low Cost Automobile Insurance
IH-01-15022
June
26, 2001
San Francisco, CA
Consumers Union, the nonprofit publisher of Consumer Reports, appreciates this opportunity to address the Department of Insurance on issues regarding California's Low Cost Automobile (LCA) Insurance Pilot Program.
INTRODUCTION
Consumers Union has long advocated for affordable automobile insurance for California's low income drivers and supported the 1999 legislation which established the LCA Program. Consumers Union has known for many years that automobile insurance affordability is a serious problem for many low income Californians. In 1991, Consumers Union and Latino Issues Forum documented the dire public need in Los Angeles for affordable automobile insurance. The Los Angeles metropolitan area was selected for the study because, on the average, it has the highest auto insurance rates in the state and also a high proportion of low income families from diverse racial and ethnic backgrounds. These are also the families who can least afford to pay for mandatory auto insurance coverage no required by the State of California.
The report, The Affordability of Auto Insurance Among Low Income Families in Los Angeles, found that more than half (53%) of respondents said they could not afford even $300 per year for automobile insurance. Adjusted for 2001 dollars, this amounts to not even $391.14 per year.
What is particularly poignant about this study is the profile of the respondents who have been so adversely affected by sky-high auto insurance rates in Los Angeles. Generally, they are the working poor who are struggling to make ends meet to support their families.
In 1999, after overcoming major insurance industry opposition, the state legislature passed and the Governor signed a compromise bill that created the state-sponsored, low-cost auto insurance available only to eligible, low-income drivers in two pilot cities, San Francisco and Los Angeles. The final product was more expensive and more limited in geographic scope than what the bills' proponents had proposed. These concessions were the result of insurance industry opposition.
Consumers Union is here today, nearly one year after the LCA policies became available to the public, because we are concerned about the program's success. We are here to tell you about our efforts to promote the program. We will offer information about impediments to the program's success and offer recommendations on how to overcome these obstacles.
CONSUMERS UNION'S EFFORTS
We have reviewed certain aspects of the program that cover both target areas. In general, we have gathered facts and identified problems low-income consumers may experience in getting the new policy, and have advocated for the elimination of barriers to getting the low-cost policy. Specifically, our efforts have included:
Publicity
With the assistance of the WCRO media director, we designed a media campaign to publicize the availability of the low-cost auto insurance policy in San Francisco. We issued a news release on June 28, 2000. The news release generated a television news story and interview of WCRO Senior Advocate, Harry Snyder, by KRON, Channel 4 on June 29, 2000; a story in the San Francisco Bay View newspaper on July 12, 2000; and contributed to an Associated Press wire news story that appeared in the San Francisco Examiner on June 30, 2000. We provided information to Univision Spanish-language network for its online news website. Furthermore, the November 2000 issue of Consumer Reports magazine included a story about the low-cost auto insurance pilot project which generated over 60 calls to our office from interested California consumers.
Targeted Community Outreach
Since July, 2000, we have engaged in outreach efforts in San Francisco. (The Proposition 103 Enforcement Project is engaging in locally targeted efforts in Los Angeles County.) These include creating and distributing general information flyers in various San Francisco neighborhoods. Last winter we engaged in outreach to direct service providers and those likely to be in the position of counseling the target population, including public defenders, women's groups, domestic violence prevention groups, district attorneys, judges, and a round of community and faith organizations in the Bayview/Hunters Point, the Mission and in other low-income areas of San Francisco. We collaborated with the Bar Association of San Francisco to send an informational mailing out to approximately 250 San Francisco attorneys who receive appointments from the various courts to represent low-income San Franciscans. Additionally, we are coordinating meetings with the newly elected members of San Francisco's Board of Supervisors to inform them about the low-cost auto insurance pilot project.
In addition to our ongoing efforts mentioned above, Consumers Union will pursue ways to encourage agents to be part of this project's success.
In spite of our efforts, the number of San Franciscans actually obtaining low-cost policies to date is quite low and has not met our expectations. This has motivated us to determine if there are major impediments to the success of the low-cost automobile insurance pilot project in San Francisco. We have identified several and will discuss them in detail below.
BARRIERS TO SUCCESS
1. Department of Insurance Publicity Campaign Failure-Poor Department of Insurance Oversight until Commissioner Low's Tenure Began
On October 18, 1999, we testified before the California Assembly Insurance Committee at a special hearing on LCA convened in Los Angeles. At that hearing we made several recommendations for ensuring the successful implementation of the LCA. We recommended, first and foremost, that professionally led focus groups made up of the target population be convened to provide ideas about the most effective ways to reach out to educate low-income uninsured good drivers about the new policies. We stressed that the results of such focus groups could provide an important road map for determining the right message and method of delivery of the information to the target communities.
At that hearing, we also stressed the importance for the Department or the body responsible for implementing the program to meet with representatives of low-income community based organizations, churches, labor, and advocacy groups prior to implementing a publicity campaign plan.
It was our hope that the Department of Insurance or its representative would take these measures before implementing any publicity campaign for the LCA program. We were shocked when we learned otherwise from a representative of Deen & Black, the public relations firm under contract with the Department of Insurance to publicize the LCA insurance program. Deen & Black did not convene focus groups to test the effectiveness of their proposed campaign and did not consult with consumer or community groups representing the target population before rolling out their campaign.
Deen & Black was hired during former Insurance Commissioner Chuck Quackenbush's tenure and for several months was not responsive to our invitations to meet or discuss the publicity campaign and how we might share resources and ideas. It was not until late October 2000, after their publicity campaign was well under way that Deen & Black met with us in our offices to discuss the obstacles they faced, their strategies and progress. We were told, in essence, that the Department of Insurance had given them very little lead time to develop a campaign. However, even with this short time frame they were able to develop a publicity campaign that consisted of placement of ads on large billboards in Los Angeles, on bus shelters in San Francisco, full-page paid ads in the Pennysaver, and paid radio advertisements. According to the Deen & Black representative, the bulk of the advertising budget was spent on 10-second radio and billboard ads. After reviewing the Deen & Black advertising materials we believed that they needed to be more focused to reach the target population of low-income, good drivers; they needed to identify the program as "State-sponsored" to differentiate this low-cost auto insurance program from any other "low-cost" (usually low-value) auto insurance advertisements; and that Spanish translation issues needed resolution.
It appears that the Department of Insurance did not monitor Deen & Black's campaign or its effectiveness at reaching the target audience until Harry Low assumed the position as the new Commissioner of Insurance, three months after Chuck Quackenbush's resignation in June, 2000.
While we believe that there should have been close monitoring of this project from the beginning, we are pleased that the Department of Insurance under Commissioner Harry Low has been responsive to the concerns we addressed above and several others we have identified. We are also pleased that later today, professionally led focus groups will be convened in San Francisco and in two days, focus groups will be conducted in Los Angeles to gather what we consider to be critical information in reaching the targeted audience. We are pleased the Department of Insurance sought our advice on the composition of the focus groups before they were to be conducted. It is our hope that information obtained from these sessions will inform the publicity campaign to create an effective message and method of delivery. Unless and until this is accomplished, it is too soon to judge the effectiveness of the Low Cost Automobile Insurance Program in the pilot counties.
2. Consumer-Identified Obstacles
A. Price
Generally, the calls we have received from consumers indicate an interest in purchasing low-cost automobile insurance. However, many report obstacles to obtaining the low-cost policy. Some state that the $410 premium for San Francisco is still too high, and while we may refer to it as "low-cost," the policy is still unaffordable, especially given San Francisco's high housing costs. This claim is supported by price data from our 1991 report updated to reflect the current consumer price index. In 1991, we found that over half (53%) of respondents said they could not afford more than $300 per year for auto insurance, adjusted for 2001, this is no more than $391.41. The beginning premium for a low cost policy in Los Angeles is $450 which is more than $58 over our affordability index.
Data from the actuarial analysis provided by Donald Bashline a consulting actuary retained by the Office of Senate Research in 1999 suggests that a lower premium rate is actuarially sound. On September 29, 1999, Mr. Bashline concluded that an actuarial sound rate for a low cost auto insurance policy in San Francisco would be $366 dollars, and $402 dollars in Los Angeles. This rate includes the population or conditions which now trigger the 25% surcharge.
B. Purchase Process
Problems inherent in the purchase process may be hampering the program's success. Specifically, the consumer cannot purchase the policy directly from the state, but must first go through an agent, thereby creating opportunities for agents to persuade consumers to purchase other policies that yield higher commissions for the agents.
More troubling, some have reported being dissuaded by insurance agents who claim they can offer a better auto insurance policy at a "slightly" higher price. While such "buy-up" is good in that these consumers are being insured, if they cannot keep up with the higher premium payments, there is a danger of their reverting back to being uninsured down the road.
C. Out of Pilot Project Areas
We have received a high number of calls from interested consumers who do not live in either one of the two test pilot areas, with the majority of those calls coming from Alameda county.
3. Obstacles Identified by the California Assigned Automobile Risk Plan (CAARP)
There is such a huge discrepancy in the number of inquiries CAARP has received and the number of policies written to date. Between July, 2000, and the end of May, 2001, CAARP received 20,412 telephone calls inquiring about the low-cost policy. During the same time period, 1,312 applications were submitted. Of those, 822 policies (96.9 percent of the total) were sold in Los Angeles County, and 26 (3.1 percent of the total) were sold in San Francisco County.
We have learned from CAARP that in contrast to Los Angeles County, CAARP-certified agents in San Francisco County generally show much less interest in CAARP-sponsored trainings of any sort, including trainings offered on the details of the low-cost auto insurance policy. In fact, CAARP has not scheduled any more trainings in San Francisco because it has not received any interest in attending from San Francisco agents. Second, CAARP agents in general may not be motivated to sell the low-cost policy because commissions are relatively low and agents receive no commission for an application that is rejected by CAARP because the consumer does not meet one or more of the eligibility requirements. Third, CAARP cannot mandate agent participation in these seminars, and agents are not required to sell these policies over others that the agent may have available for sale.
To circumvent these problem areas, Consumers Union recommends that consumers should be given a way to apply directly to the state for this insurance in manner similar to the Healthy Kids/Healthy Families program. If this is not feasible, then all CAARP certified agents must attend a training on the details of the low-cost auto insurance policy and should be required to sell the LCA insurance policy unless that agent can offer the consumer a non LCA policy with the same coverage at the same cost, or a more comprehensive policy at the same cost or lower than the LCA insurance policy.
DEVELOPING STRATEGIES AND ADVOCACY TO REMOVE IMPEDIMENTS
Armed with information about barriers to the Program's success, we are now actively strategizing and advocating for changes that can lead to increased policy subscriptions.
The Department of Insurance involvement in the implementation of the low-cost auto insurance pilot project began during Quackenbush's tenure, when projects of consumer interest received little priority from the Department. In July, 2000, anticipating the appointment of a new insurance commissioner after Quackenbush resigned, we wrote to the Interim Commissioner, J. Clark Kelso, identifying the low-cost auto insurance pilot project as a matter for his priority attention. Shortly after Harry W. Low was installed as the new Insurance commissioner in mid-September, we sent him a similar letter, once again asking the Department to make low-cost automobile insurance a priority.
Since his appointment, Commissioner Low and his Community Relations Deputy Commissioner, Ed Fong, have been responsive to our concerns about Deen & Black and the need for the Department to get more involved in making this program a success.
During a meeting this January, Consumers Union urged the Department of Insurance to take certain measures to increase the program's success. We believe that the Department is actively engaged in several of these endeavors. We suggested that the Department:
1. Closely monitor all aspects of the public relations campaign and convene focus groups to determine the best message and method of delivery to reach the target audience;
2. Follow through with the Department of Motor Vehicles to include informational inserts in vehicle registration renewal notices in San Francisco and Los Angeles counties where the vehicle value is within the $12,000 limitation imposed by the statute creating the low-cost auto insurance program. Investigate placing similar notices in drivers license renewal mailings to drivers living within zip codes that contain high concentrations of low-income drivers. Investigate the feasibility of these notices going out in a separate mailing rather than waiting until individual registrations or licenses are up for renewal. The Department of Insurance should pay the cost of such mailings;
3. Be more proactive in urging agents to promote the low-cost policy. Commissioner Low will take advantage of opportunities to address agents to remind them about the importance of this program;
4. Request that CAARP or agents keep data that show how many consumers "buy-up" out of a low-cost policy at an agent's urging to determine if those numbers are significant;
5. Design non-monetary incentives for agents who sign-up consumers for low-cost auto policies, such as, service awards or mentions in the Department of Insurance's Communique newsletter;
6. Gather demographic information and look at data regarding inquiries from non-pilot program counties. Determine if it is appropriate to establish a pilot project in another Bay Area county, for Example, Alameda, especially given San Francisco's unusually high housing costs;
7. Collaborate with Consumers Union to convene an event with San Francisco Mayor Willie Brown, Senator Jackie Speier, and Commissioner Harry Low in San Francisco to announce a second push for low-cost auto insurance awareness in San Francisco;
8. Encourage elected officials representing San Franciscans to send out mailers to their constituents in low-income areas.
CONCLUSION
We believe that a successful implementation and success of the low cost programs in Los Angeles and San Francisco Counties will lead to the inevitable conclusion that it is in the best interest of California to make low cost automobile insurance available to good drivers statewide. We recommend that the additional following steps be taken in order to make the LCA Program successful.
We believe that these efforts will increase the number of low-cost automobile insurance policy holders in both San Francisco and Los Angeles.
1. Examine the cost factor-does
the policy offer too little for too much?
2. Examine the application process for impediments it creates. Look at Healthy
Families/Healthy Kids as a model.
3. Use high profile individuals who resonate with the target population to deliver
the message.
4. Agents must make good on their commitment to market the LCA insurance policy.
5. Determine if low cost customers are actually buying other low cost insurance
with better features for less money. Determine the impact of the LCA program
in getting the insurance industry to provide other competitive low cost policies
that didn't exist before. This could be another measure of the program's success.
6. Consider finding a private insurance company to administer the low cost program
for the state.
