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CA DEPARTMENT OF INSURANCE PERMITS SEPARATE AUTO RATE APPLICATIONS AND AUTO CLASS PLAN CHANGES
 
            The California Department of Insurance (CDI) has changed the policy it adopted in 2007 of requiring any insurer that wanted to modify its auto class plan to also submit its base rate for approval.  This change was adopted with little fanfare, but it gives insurers significant new flexibility in managing their auto insurance business. 
 
            Under California's insurance price control system, established pursuant to Prop 103, which was enacted by the voters in 1988, private passenger automobile insurance pricing is broken into two components, the "base rate" and the "class plan".  Any change in either the base rate or the class plan requires the prior approval of CDI. 
 
           The base rate is, in effect, the average premium that the insurer needs to collect per vehicle insured.  It determines to total revenue that the insurer will obtain from that line of insurance (Base Rate X Number of Vehicles = Total Revenue).  However, since different drivers pay different amounts for insurance, the base rate alone is not enough to determine what any individual driver should pay for a policy.  This is done through the class plan, which comprises a matrix of discounts and surcharges applied to the base rate to determine the premium that will be paid by any individual driver, based upon that driver's individual characteristics.  For example, all other things being equal, a driver with a better than average driving record will be given a discount and will pay a premium lower than the base rate; a driver with a worse than average record will be given a surcharge and will pay a premium higher than the base rate. 
 
            It is entirely possible for an insurer to modify its class plan without changing its base rate.  This is called a "revenue neutral" class plan change since it does not modify the total revenue that the insurer may expect from its personal passenger auto insurance business.  In 2007 the CDI adopted a rule requiring that every class plan change, even those that were revenue neutral, could be approved only in conjunction with a review of the base rate.  This rule restricted insurers' ability to change their class plans.   An effort to change the class plan could easily result in CDI forcing an insurer to reduce its base rate below what it felt was necessary to operate.  This was particularly true after CDI changed its base rate regulations in 2006.  The 2006 changes to the regulations are widely believed by insurers to produce base rates that are too low. 
 
            Early last month CDI quietly modified its class plan application instructions to allow revenue neutral class plan changes to be submitted without an accompanying application for a new base rate.  The initial impetus for this change was CDI's adoption of "Pay as You Drive" regulations, which permit insurers to adopt class plans that require verification of actual mileage that a vehicle is driven.  CDI recognized that insurers were far less likely to develop Pay as You Drive plans if doing so required them to submit their current base rates for CDI scrutiny and approval. 
 
            In announcing the adoption of the Pay as You Drive regulation, CDI issued an advisory notice allowing revenue neutral Pay as You Drive class plans to be submitted without an accompanying rate change application.  Then in early November it modified its general instructions for class plan changes to permit any revenue neutral class plan change, whether or not it employed the Pay as You Drive rules, to be submitted without an accompanying application for base rate approval.  Under these new instructions insurers are free to submit any application to make a revenue neutral change to their class plans without submitting their base rates to CDI scrutiny. 
 
             Under the new instructions, proposed revenue neutral class plan changes will be evaluated by CDI to determine that they are, in fact, revenue neutral.  If CDI determines that the revised class plan will actually result in a base rate change, they will require a review of the base rates.  If this occurs an insurer will have to decide whether to submit an application to change its base rate or, alternatively, to withdraw its application to change its class plan. 
 
            The revised class plan filing instructions are available on the CDI web site at http://www.insurance.ca.gov/0250-insurers/0800-rate-filings/upload/Class-Plan-Instructions-11_10_09.pdf.  
  
For more information about the revised class plan instructions, please contact William Gausewitz at 916.447.4044 or by emailing him at WGausewitz@mrllp.com.