SACRAMENTO—For almost 29 years, California insurers have uttered the phrase “Proposition 103” like a curse.
The 1988 voter-approved initiative forced insurance companies to roll back home and auto rates by 20 percent and to obtain the approval of an elected commissioner before increasing them. It also required insurers to set car policy rates based primarily on three factors: a driver’s safety record, his or her years of experience behind the wheel and the number of miles driven annually.
While consumer groups have cheered the initiative’s impact, which they credit with bringing Californians’ spending on car insurance below the national average, insurers say the rating scheme is illogical and restrictive and unfairly benefits urban drivers at the expense of rural residents.
“There are all sorts of wonderful things we can do in other states that we can’t do in California because we’re locked in,” Steve Sheffey, corporate counsel at Allstate Insurance Co., told an Institute for Legal Reform conference in Menlo Park in March.
Over three decades, insurance companies have spent millions of dollars trying to chip away at Prop 103’s regulations both through litigation and at the ballot box—with little success. Now, however, the industry has found a new source of optimism in a different phrase: driverless cars.
Autonomous vehicles’ promise of no brake pedals, no steering wheel and virtually no human error has industry leaders questioning whether Prop 103’s days are numbered. If the car becomes the driver of the future and a passenger’s driving skills and experience are no longer relevant to its performance, why should insurers be bound by outdated regulations, they ask.
“What happens when those vehicles are so smart” that their advanced safety characteristics become the most significant factor in assessing risk, said Rex Frazier, president of the Personal Insurance Federation of California, which represents six of the largest insurers in the state.
The issue grabbed the attention of state lawmakers during a hearing earlier this year.
“I don’t think these [Society of Automotive Engineers] Level 4 and Level 5 vehicles … fall under a strict adherence to Prop 103,” said Senate Insurance Committee chairman Tony Mendoza, D-Artesia. “I don’t see how they fit.”
Southern California lawyer Harvey Rosenfield, the author of Prop 103, brushed aside such comments as the premature musings of an industry and its allies that despise the rate-setting measure.
“What these guys want to do is just get rid of” Prop 103, Rosenfield said. “They hate the whole idea of the public looking into their books and having to ask for permission to raise their rates.”
In a white paper published in March, Rosenfield argued that Prop 103 will remain relevant when autonomous vehicles join roadways still dominated by people-driven cars.
“There is … a real danger that insurance companies will pursue a new form of red-lining to favor motorists who can afford more expensive cars with sophisticated computer systems and surcharge those who cannot,” he wrote. Prop 103’s restrictions “will be more important than ever in the new automotive era.”
Altering Prop 103 would not be a simple task. Wholesale changes, or repeal, would have to be approved by voters. Alternatively, the Legislature could make changes that “further” the interests pursued by the initiative. But any insurance industry-backed legislative effort would be fought by consumer groups, including Rosenfield’s Consumer Watchdog, and invite litigation.
Other government agencies are starting to confront questions about insurance.
Michigan last year adopted self-driving regulations that require companies to comply with the state’s no-fault insurance laws. In the United Kingdom, regulators are considering a dual insurance system where owners of self-driving cars would have to carry policies covering them when they are driving and when their cars are in autonomous mode.
California has a $5 million insurance requirement for manufacturers that are testing driverless cars. What happens when autonomous vehicles move into operational mode is not clear.
“There’s an old saying that insurance is the oxygen of the free enterprise system,” Sheffey, the Allstate lawyer, said at the Institute for Legal Reform conference. “No one is going to take risks if they don’t have insurance. We’re not going to be able to adapt as quickly as we need to unless these [California] insurance regulations are changed and repealed in some cases to allow insurance companies to innovate.”
Chris Shultz, deputy commissioner of the California Department of Insurance, told lawmakers earlier this year that the state does not need an immediate change to Proposition 103 to ensure autonomous vehicles have coverage. He noted that companies moved quickly to offer specialized policies for ride-hailing drivers when Uber and Lyft surged in popularity.
“We’ve been asking all the stakeholders whether there’s an immediate need to change either the laws or the regulations in order to insure autonomous vehicles,” Shultz told the Senate Insurance Committee. “And the initial answer is, we do not think there’s a need. If a manufacturer offers a [self-driving] vehicle for sale tomorrow, insurance will be available.”
Frazier said there is no political effort afoot to change Prop 103, either at the ballot box or in the Legislature. Of more immediate interest to insurers is trying to ensure they can access data generated by self-driving cars to assess liability. That priority could change, however, if an autonomous vehicle developer hits the market with a popular product.
“When it becomes obvious that something has captured the public’s imagination, the Legislature can move quickly,” Frazier said.