Prop 33: Mercury Insurance's Lemon is a Tough Sell

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By Richard Holober
Consumer Federation of California

Mercury Insurance has just about the worst customer satisfaction ratings in the auto insurance industry. And its billionaire chairman, George Joseph, is spending a fortune on Proposition 33 to make it easier to manipulate the marketplace and cherry pick the customers it wants, while raising rates for millions of Californians, including motorists with perfect driving records.

This isn't the company's first attempt to rig the insurance market in its favor. In 2010, Mercury spent $16 million on Proposition 17, but voters said no. Prop 33 on the November ballot is a re-run of Prop 17, with a modest facelift.

Most everyone who is not on Mercury's payroll who has examined the measure has concluded that Prop 33 is a lemon. Every major newspaper editorial on Prop 33 opposes the measure:

• The Sacramento Bee: "Prop 33 is an old jalopy with a new coat of paint"
• The San Diego Union Tribune called Proposition 33 "fundamentally unfair and impossible to support."
• The San Jose Mercury News opined "California voters should vote no on Proposition 33 on Nov. 6 in such large numbers that Joseph never tries to dupe Golden State residents again."
• San Francisco Chronicle: "California's compelling public-policy interest is to make sure that drivers are insured. Keeping rates affordable advances that goal. Vote no on 33."
• The Bakersfield Californian gives examples of Prop 33’s victims: "Who could see their rates jacked up? Anyone who halts their insurance coverage for any reason. If Aunt Erma stops her insurance because she's having surgery and can't drive for six months, she'll be charged more when she starts driving again. If Uncle Al has used public transportation for years but then moves to a city like Bakersfield where he will probably need to drive, he will be charged more… Voters should say no to this flawed and deceptive measure."
• San Gabriel Valley Tribune: "Mercury’s billionaire boss George Joseph is back - spending more than $8 million so far in support of this self-serving measure. It's a retread of the 2010 ballot proposition, and it deserves rejection too."
• The Los Angeles Times: "raising the cost of coverage for those without insurance doesn't help anyone on California's roads. Voters should reject Proposition 33."
• The Ventura Star: "It's a bad deal, even for good drivers. The Star recommends voting 'no' on Proposition 33."
• Santa Rosa Press Democrat: "No on 33: This retread is no bargain."
• North County Times (San Diego County): "the arguments in favor of Prop. 33 are specious, and should be rejected by voters."

Under voter-enacted Prop 103, insurers must provide proof to the Insurance Commissioner that a particular characteristic of a motorist is related to the driver’s risk of having an accident before it can use that characteristic as a rating factor for pricing automobile insurance. Insurance companies must give the greatest weight to a driver's safety record. They are free to use other approved rating factors if they provide data that proves the rating factor is related to risk of an accident.

Proposition 103 prohibited surcharging motorists merely for an absence of previous insurance. This prohibition was consistent with the public policy goal of getting the maximum number of cars on the road insured. Prop 33 would reverse that policy and allow insurers to surcharge most drivers who had a break in continuous coverage for 90 days within the past five years.

One would think that if Mercury Insurance could document that a driver with a break in coverage is a worse accident risk, it would have written Prop 33 to allow it to make that case to the Insurance Commissioner. But it did just the opposite.

Hidden in the fine print, Proposition 33 explicitly exempts from regulatory oversight the use of continuous coverage as an auto insurance rating factor. Simply put, Mercury doesn't have the data to make its case, so it wrote itself a giant loophole in the insurance rate regulations.

Under Prop 33, the Insurance Commissioner would be powerless to stop Mercury from penalizing good drivers by charging higher rates.

The flip side of Proposition 33, and the only side you will hear from the Yes on 33 ads, is the fatuous argument that drivers should be able to "shop their continuous coverage discount around" to get a better deal. This falsely assumes that there is a "continuous coverage" discount under California law. There is no such discount. What is permitted is a loyalty discount, also called a "persistency" discount. Here's why that makes some sense:

Ever notice the non-stop barrage of auto insurance ads on television? One company, which uses an animated amphibian as its spokesperson, spends $800 million a year on advertising. Other insurers also spend a fortune on advertising to make sure they are not completely drowned out. All that marketing costs money, which ultimately the customer pays. It’s called "acquisition" cost.

I have kept the same insurance company for two decades. It spends zero dollars each year on marketing to me, or on rewards to agents and brokers to acquire my business. It also knows that I pay my premiums and it knows my accident history, so it saves money in underwriting costs for me. It can share some of its savings with me, in the form of a modest loyalty discount. But it has to prove to the Insurance Commissioner that customers like me are cheaper to insure.

Mercury would have you believe that this should be a "portable" discount that you should "own". Its real goal is a new marketing tool to poach customers from its competitors without connecting the discount to any risk factor. But in California's regulated system, insurance is a zero-sum game. Since an insurance company's overall pricing structure must be OKed by the Department of Insurance, one customer's new non-risk related discount must be offset by another customer's new non-risk related surcharge. Hence the prohibition in Prop 33 on Department of Insurance review of these new surcharges.

Victims of Prop 33 would include anyone who has a valid reason for stopping coverage during a period that they are not driving. These are hard times, and few of us have the luxury that billionaires such as George Joseph have to pay for coverage we don't need.

In states that allow insurers to discriminate against motorists with a break in coverage, Mercury Insurance jacks up prices on many good drivers by 50% or more. We must not allow Mercury to get away with it in California.

Let's send a message to Billionaire George Joseph that "no" means "no" by voting down Proposition 33.

Richard Holober is the Executive Director of the non-profit Consumer Federation of California, a leading consumer advocacy organization.