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10:15 AM
Bill Gausewitz
Bill Gausewitz

California Auto Insurance: The Cutting Edge of 1988 Technology

Auto insurers in California are required, by law, to set prices solely using technology that was available in 1988.

Think back to the information technology available in 1988: No smartphones. No tablets. No texting. No social media. No WiFi. No wireless Internet access. 

The Internet, for those who knew about and had access to it, was a text-based collection of random and largely unsearchable information. The few who used email probably had an AOL or CompuServe address. The best PC-based database program was dBase III; the best spreadsheet was Lotus 1-2-3. PC users were facing the question of whether or not Windows was here to stay.

Now imagine that you are required, by law, to operate your business relying only upon the technology that was available in 1988. If you are a company writing auto insurance in California, that is precisely the situation that you face. Auto insurers in California are required, by law, to base the prices of their insurance policies using 1988 technology. 

Everybody understands that different drivers reflect different risks of loss. Insurers use statistics to evaluate the likelihood that a driver will have an accident. Overall we accept this system of pricing, not because it is perfect, but because it is the fairest way available to set prices. 

Insurers do whatever they can to obtain information that contributes to this analysis. In California, however, the law requires insurers to use 1988 technology to do this analysis. 

In 1988 California voters approved Proposition 103, a law dictating what information an auto insurance company must use to set its rates. It required that rates be set based upon a driver’s driving safety record (i.e., his or her record at the DMV), the number of miles driven annually, the number of years of driving experience, and other factors that the Insurance Commissioner decides to let the insurers use. 

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The key to this system is that these factors must be used "in decreasing order of importance." This means that no matter what factors may be allowed by the Insurance Commissioner, none of those factors may influence rates more than the first three -- DMV record, miles driven, and years of experience. In 1988 this may have made sense. But 26 years later there are a host of technological tools available that would allow insurers to set rates far more accurately and far more fairly. 

For example, with current technology it would be simple for a driver to install an application on his or her smartphone, or in the computer system of the car, that would give precise data about that driver’s actual driving practices. A few weeks of data showing how fast a person drove, whether he or she was prone to rapid acceleration or frantic braking, and whether the driver primarily drove through busy city streets or empty country roads would tell far more about a driver than does a DMV record. Technology-based recording of actual miles driven would be far more accurate than the estimates currently employed by most insurers. In California, however, these systems would be illegal and are not available. 

Privacy considerations may require a law saying that drivers should not be compelled to use such data-gathering technology, but in California the technology is not permitted even if a driver wants to use it. If this technology were permitted, the drivers who were confident enough in their driving skills could sign up for such monitoring voluntarily, and they would surely be rewarded for doing so through lower insurance rates. California doesn’t allow this. The California law says that rates must be set based upon the technology available in 1988, no matter what the driver wants. 

This problem will only get worse as technology advances.  There are already cars on the road equipped with technology that will apply the brakes and stop the car, thus preventing an accident even if the driver does nothing. Surely a driver who purchases a car with this technology should get less expensive insurance, but this cannot happen in California. Since the technology was not available in 1988, insurers in California are prohibited from giving discounts to drivers whose cars have this safety feature. 

And self-driving cars -- autonomous vehicles -- are right around the corner. What sense does it make to require by law that the most important factor in setting insurance prices is the driver safety record if the "driver" is really just a passenger in an autonomous vehicle?    

The effect of Prop 103 is that insurers in California are required to set insurance prices using only the technology that was available in 1988. To make matters worse, Prop 103 severely limited the power of the Legislature to make changes to the law. The only way that the current law could be significantly changed is with another ballot measure. 

For the foreseeable future, therefore, auto insurance companies must set prices using only 1988 technology. 

Bill Gausewitz is a partner in the firm of Michelman and Robinson, LLP. He is a member of the firm's Regulatory and Administrative group. View Full Bio

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