Insurance companies ordered to give refunds to Californians due to coronavirus

[TexasTowelie]

Drivers and business owners in California should get at least partial refunds on no less than two months’ worth of insurance premiums because of the coronavirus-induced restrictions that have slashed commutes and shut companies’ doors, the state insurance commissioner’s office ordered Monday.

Commissioner Ricardo Lara ordered insurance companies to adjust insurance premiums covering March and April, since less activity means lower risk in several categories. Californians could also see refunds for their May premium payments if stay-at-home restrictions extend into next month.

“With Californians driving fewer miles and many businesses closed due to the COVID-19 emergency, consumers need relief from premiums that no longer reflect their present-day risk of accident or loss,” Lara said in a statement. “Today’s mandatory action will put money back in people’s pockets when they need it most.”

The order to retroactively adjust insurance premiums applies to at least the following coverage areas: private passenger and commercial auto insurance; workers’ compensation; commercial multi-peril, which covers a variety of losses; commercial liability; and medical malpractice.

Read more: https://www.latimes.com/business/story/2020-04-13/insurance-refund-premiums-california

[jimfields33]

2. They will for sure jack up the rates at renewal

Not sure if this is worth it long term.

[jimfields33]

6. Definitely.

[TexasTowelie]

4. I've dealt with the California Department of Insurance before in a professional capacity

when I worked with at a property & casualty insurance company as a stat analyst. I've submitted reports to CDI on most of the lines of business mentioned in the article and I can assure you that what you feel certain of is indeed not true. CDI is an extremely consumer-oriented insurance bureau and who ordered these rebates. In fact, one of the the former insurance commissioners, John Garamendi, is a current Democratic Congressman.

For example, claims loss data in workers compensation has to be reconciled among four different sources: individual policy level data, detailed claim investigative reports, aggregate financial reports and tax filings. It's already difficult enough to reconcile all of these different sources of data, so fudging the numbers would essentially require keeping a second set of books. It simply isn't in the interest of any insurance company to go to those lengths since no single insurance company has a large enough market share to effect the ratemaking process that significantly. Furthermore, if a company does inflate their claims experience, the CDI can make the insurance company put up bonds to cover those losses. The company that I worked for had to put up a $300 miliion bond with the state when the company voluntarily liquidated.

On a positive note, I will say that I had cordial professional relationships with the employees of the California Department of Insurance. Don't get me started about the New York Compensation Insurance Rating Board though.

[TexasTowelie]

7. I don't know much about the ratemaking process for some lines of insurance

and what deviations they can make from the suggested rates, but for workers comp the insurance rates are determined by the state for each class code and insurance companies cannot deviate from them.

In general though, insurance companies cannot wave a magic wand and jack up the rates to whatever they desire. In most lines of business, the state still determines the rates and insurers can deviate from those rates within a limited range based upon whether the clientele they are dealing with are considered as preferred, standard, or substandard. California is a large insurance market with plenty of competition so if a company acts unilaterally to increase their rates, then they will lose that business to competitors. If a company acts unilaterally to decrease their rates and write more business, then the state will intervene since it is not in the public interest to have an insolvent insurer so that guaranty funds have to cover the losses.

The premiums that are ordered to be refunded to the customers are not going to be recovered by the insurance companies at renewal. In fact, the insurance department is mandating refunds retroactively based upon the fact that the loss experience is coming in much less than anticipated when the rates were promulgated. This revised loss experience information will also be used in determining rates for the future. At some point in the future after the pandemic is over and claim losses return to "normal", then the rates will likely be too low and there will be a hike in premiums, but that does not necessarily mean it will occur either six months or one year later when the policy comes up for renewal. However, if there are drastic changes in consumer behavior that continue a year or two while we wait for a vaccine to arrive on the market, then the insurance companies will be mandated to charge the lower rates during that time.

I believe that the Insurance companies will either do this on their own or comply with the order and simply jack up the rates at renewal.

The insurance companies don't really have an option not to comply. If they fail to comply then they will find themselves in litigation with the insurance department that can become quite expensive and last for years. And if the courts agree with the insurance department, then the courts can order those premiums to be refunded. There can be additional sanctions levied against individual companies if they fail to comply including the loss of their licenses to conduct business.

[TexasTowelie]

9. Well yes,

the premium amount for the entire policy term is going to be greater than the refund since only a part of the premium is being refunded for a part of the policy period. So in effect you would be comparing apples to oranges. The insurance department is not requiring the insurance companies to refund the entire policy premium for the entire time the policy is in effect since other factors besides claim losses influence rates. Those other factors include administrative overhead costs, investment income returns which have obviously nosedived with the drop in the stock market, and any special assessments that could be levied by guaranty funds if insurance companies become insolvent.

A more valid comparison is to compare the entire premium for the policy from one year to the next year (or six months if that is the time between the effective and expiration dates of the policies). Of course, the premium for the renewal policy would also need to be adjusted if there is a credit adjustment that is incorporated into the renewal policy premium rather than an actual refund check being issued to the policyholder. Even this comparison from year to year could have some problems though--if the loss experience prior to the pandemic occurring was terrible, then a rate increase would have occurred anyway under the routine rate promulgation.