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Robert W. Hogeboom, Esq.
HINSHAW & CULBERTSON LLP
(213) 614-7304
Samuel J. Sorich, Esq.
Hinshaw

CDI INVESTIGATORY HEARING TO CREATE A RECORD ON AFFINITY GROUP DISCOUNTS

On Tuesday, September 17, 2019, the California Department of Insurance (“CDI”) conducted an Investigatory Hearing on the use of affinity groups in connection with private passenger automobile insurance.  The hearing resulted from Commissioner Lara’s May 19, 2019 directive to the CDI to investigate whether affinity group discounts increase the cost of automobile insurance for lower wage, less educated consumers or for classes of insureds protected by the Unruh Civil Rights Act.  The Commissioner acted following a letter request from Consumer Watchdog alleging that affinity group discounts are discriminatory.  Consumer Watchdog also requested immediate rule making. [i]

The 2010 Workshop 

For several years, previous Insurance Commissioner Dave Jones listened to consumer groups on their position that minority and poor drivers were discriminated against because insurers were providing premium discounts on private passenger automobile insurance to “affinity groups.”  Specifically, the consumer groups focused on groups based on occupation, members of associations and insurer affiliates (e.g. motor clubs). As far back as 2010, then Commissioner Steve Poizner held a workshop at the request of the consumer groups to discuss potential promulgation of regulations regarding affinity groups under California Insurance Code (“CIC”) §1861.12. [ii] The 2010 Workshop focused on CIC §1861.12 (enacted in connection with the adoption of Proposition 103) which authorized insurers to “issue property and casualty insurance coverage on a group plan.” Insurers may issue such group insurance “without restriction as to the purpose of the group, occupation or type of group.”

Under CIC §1861.12, the rates for group insurance are not considered to be unfairly discriminatory if they are “averaged broadly among persons insured under the group plan.” However, the statute does not define the term 'group' and does not specify conditions as to when insurance may be issued on a group plan. Further, the statute provides no guidance with regard to the validity of groups that exist solely for the purpose of purchasing insurance or groups that are simply acknowledged by an insurer based on shared characteristics or status (such as everyone who has purchased a particular product from a particular vendor).  The 2010 CDI Workshop noted that the forum was intended to be open and invited a frank discussion on all key points of view.

The issue whether the CDI has authority to promulgate regulations to alter what is arguably the clear and broad meaning of “group” under CIC §1861.12 was also discussed The CDI understood that this would be a debated issue at the September 2019 Workshop.

The CDI's position was that a “group” must be an actual organizational group. With respect to the phrase “without restriction as to the purpose of the group, occupation or type of group” used in §1861.12, the CDI noted that it did not believe this language meant that any identifiable “group” could be the subject of a group plan.   Rather, the CDI believed that CIC §1861.12 implies the existence of an actual bona fide group and that the “without restriction” language is intended to prevent discrimination against any particular “group.”  By way of example, the CDI noted that graduates of U.C. Berkeley are not a “group,” but that the Berkeley alumni organization could be a qualifying group.

While the CDI appeared to have a strong idea (though not necessarily fully disclosed) of what is a “group,” the CDI also demonstrably appeared to have an open mind to discuss the issue. At the outset of the 2010 Workshop, the CDI noted that it was inclined to require a “group” to exist for some purpose other than the purpose of purchasing insurance. Throughout the workshop, however, the CDI noted that a “group” could possibly qualify if brought specifically together for the purpose of buying insurance.

At the 2010 Workshop under then Commissioner Steve Poizner, Consumer Watchdog (“CW”) argued that a “group” must be an authentic "group," not a "grouping" of individuals defined simply by a set of characteristics.  Consumer Watchdog opined that the interpretation of “group” should be viewed in light of the purpose of Proposition 103.  Consumer Watchdog argued that voters passed Proposition 103 to empower policyholders to shape the discussion concerning the meaning of CIC §1861.12.  CW believes the statute is intended to enable consumers to band together to wield “collective bargaining power” and thereby obtain better insurance rates from carriers.   CW cited the Chambers of Commerce, AARP, and alumni organizations as examples of authentic groups.

The CW opined that insurers should not be allowed to issue insurance on a group plan for groups based solely on shared characteristics or status.  Groups should exist for a particular purpose other than the purpose of purchasing insurance.  The CDI expressed no definitive position on whether insureds should be permitted to form groups solely for the purpose of purchasing insurance at a group rate. While CW strongly believed that groups could specifically be brought together to obtain a "group plan" and generally focused on consumer-created "groups," CW did not reject outright an "authentic" group that may be created by an insurer.

The CDI concluded that some process should be put in place to ensure that risks actually belong to a group and to ensure, for future renewals, that these risks are still part of a group. There was no substantive discussion on specific processes to review, but the CDI noted that this would depend upon the specific circumstances for each type of group for each insurer.  

Commissioner Poizner left office without adopting any regulations; Dave Jones was elected Commissioner of Insurance and assumed office in early 2011.  During Commissioner Jones’s term, the CDI expressed no definitive position on whether drivers should be permitted to form groups solely for the purpose of purchasing insurance at a group rate.  During Commissioner Jones’s eight years in office from 2011 to the beginning of 2019, consumer groups petitioned for rulemaking on affinity groups.  Jones rejected the petitions, explaining that the matter needed more investigation.  

The September 2019 Investigatory Hearing 

In May 2019, new Commissioner Ricardo Lara commenced his own investigation on the affinity group issue.   He issued a voluntary data call to admitted automobile insurers that included 168 insurers who comprise 95% of the private passenger automobile insurance market in California.  Thirty three (33) of the insurers comprising 62% of the market and representing 16 million insured vehicles submitted the requested survey data.   All of the insurers submitting data offer affinity group discounts.

The CDI aggregated the data in order to provide the public with more information about how affinity groups affect different classes.  The CDI analyzed the affinity group distribution broken down by the following categories:

58% of insureds are non-affinity group members: Non-affinity group members are all exposures not in an affinity group;

27% of insureds fall into occupational affinity groups: Occupation includes military, public safety workers, licensed or credentialed professionals (e.g., lawyers, teachers) and other professionals (e.g., scientists, engineers);

11% of insureds are in “sponsored marketing” affinity groups consisting of members of professional associations, alumni associations, credit unions, fraternities/sororities, employer-sponsored groups, Costco, trade or advocacy groups (non-professional, e.g., Sierra Club);

 4% are in “insurer affiliated” groups, including membership programs, insurer motor clubs and employees of an insurer.

Focusing on automobile bodily injury coverage, the CDI’s actuaries determined that customers in the affinity groups received a reduction or discount of premium ranging from 1.5% to 25% for occupational groups, 2% to 25.9% for sponsored marketing groups and 4.9% to 10.5% for insurer-affiliated affinity groups.   The CDI also looked at demographic data by Zip Code that included income and educational level.  Based on the foregoing, the CDI concluded as follows:

1)  Insureds that are not in affinity groups tend to reside in Zip Codes with lower incomes;

2)  Insureds who are in affinity groups tend to reside in Zip Codes with higher incomes;

3)  Educational Disparity – Non-affinity group insureds are more likely to reside in Zip Codes with lower average educational attainment while insureds in affinity groups are more likely to reside in Zip Codes with higher average educational attainment.

The CDI concluded that the income and education disparity was especially evident in occupational groups.  The CDI data also showed that income and education disparity was not very pronounced in affinity groups based on sponsored marketing or insurer-affiliated groups.

The CDI then compared the Zip Code data against similar data from the 2015 Commissioner’s Report on Underserved Communities.  The CDI compared the distribution of affinity groups by underserved Zip Codes versus the balance of the state and concluded that:

1)  75% of the underserved communities’ vehicle exposures are not in affinity groups;

2)  Affinity groups disproportionately and adversely impact drivers residing in Zip Codes:

  1. With lower per capita incomes;
  2. With lower levels of educational attainment;
  3. With a lower percentage of non-Hispanic white population.

The CDI also concluded that two-thirds of the affinity group vehicles belong to insureds in occupational groups.  After the CDI concluded its report, the consumer groups testified.  

a.  Consumer Group: Consumer Federation of America - Doug Heller

Consumer Federation testified and offered the following conclusions:

  1. The poor and those with less education pay higher auto premiums;
  2. Occupation is not a valid group;
  3. 90% of drivers are safe drivers within the meaning of the applicable statutes;
  4. Most affinity groups have a discriminatory effect;
  5. Group plans under CIC §1861.12 should apply only to drivers who have voluntarily banded together (e.g. Costco members);
  6. Most affinity groups result in unfairly discriminatory premiums to non-group members;
  7. Using occupation and education to define an affinity group is discriminatory because the poor pay more.

b.  Harvey Rosenfield – Author of Proposition 103

Harvey Rosenfield focused on how affinity groups based on occupation produce unfair rates.  He asserted that CIC §1861.12 applies to all lines, not just automobile.   Mr. Rosenfield argued that Proposition 103 requires that private passenger automobile rates must be determined by the rating factors specified in CIC § 1861.02. [iii] As the statutory rating factors do not include group affiliations, Mr. Rosenfield alleged that insurers are illegally relying on CIC § 1861.12 as justification for using group affiliation as a rating factor.

  • Mr. Rosenfield left the door open that some groups under the right circumstances may be permissible groups.  Those circumstances would include an agreement between the insurer and a preexisting membership group to be approved by the CDI.  Mr. Rosenfield also focused on the need for specific rules on what constitutes a valid group, including approval by the CDI of an insurer’s membership group.
  • Mr. Rosenfield asked the CDI to impose an immediate moratorium on the approval of future insurance groups.
  • Mr. Rosenfield stressed the need for detailed regulations on this whole area.
  • He opined that some teachers associations and the California State Bar might qualify as permissible associations/groups.
  • Finally, Mr. Rosenfield is opposed to affinity groups based on occupations and education (e.g. affinity groups for all individuals in a certain profession or those insureds who possess a Bachelors degree).

c.   Testimony in Support of Annuity Groups

The following organizations and individuals testified as follows: 

  • The California Teachers Association called on the CDI to take no action that would restrict affinity group programs that benefit teachers.
  • A recent USC graduate argued in favor of affinity groups.  As a struggling recent graduate, she pointed out that it is wrong to presume that college graduates are not low-income consumers.  She asserted that the discount she gets from her affinity group is an important economic benefit.
  • Pastors for parishioners in the African American community in Los Angeles testified that they were grateful for affinity group discounts.  
  • The Los Angeles Civil Rights Association criticized the assumption that African Americans are deprived of affinity discounts as many in the Association receive discounts and their members are not excluded.  The only problem is that some drivers are not aware of the availability of group discounts.
  • Black Chamber of Commerce – Businesses that belong to the Chamber and their employees receive a discount under a major insurer’s affinity group plan.  They asked the CDI panel to not take away the discount.
  • Hispanic Chamber of Commerce also informed the CDI panel that its members are also part of an affinity group.

d.   Insurer Trade Associations

After the hearing, position papers were submitted by the American Property Casualty Insurance Association (APCIA) and the Personal Insurance Federation of California (PIFC) that defended the continued use of affinity groups and challenged the arguments that affinity groups are discriminatory put forward by consumer groups.

APCIA pointed out that the CDI called the investigatory hearing to get concrete facts about affinity groups.  APCIA asserted that “[t]he essential facts are that California group insurance plans are authorized by a voter-approved law in Proposition 103 under which the groups comply with the Insurance Code’s rate filing and rate approval requirements, and group insurance plans add choices and foster competition in the California automobile insurance market.”

APCIA argued that affinity groups are authorized by the plain language of Proposition 103 and “[t]here is no justification in the Proposition to restrict the groups that are entitled to insurance coverage on a group plan.   Certainly, formal associations or organizations are groups.  But the plain meaning of ‘group’ is not restricted to such associations or organizations.  People with common characteristics or community of interests or who are in the same occupation are plainly groups.”     

PIFC explained that “Nothing in the CDI survey indicates that affinity group discounts are leading to higher insurance premiums for individuals protected by the Unruh Civil Rights Act.”  PIFC stressed that the testimony of consumer groups “provided no evidence that drivers protected by the Unruh Civil Rights Act are being denied entry into an affinity group discount program.” Not only did the consumer groups fail to demonstrate how affinity groups harm drivers, they failed to “demonstrate how their views are consistent with Proposition 103.  They failed to provide a reasonable interpretation of each of the provisions of CIC § 1861.12. “Despite decades of consumers enjoying affinity discounts, the consumer groups now offers a novel, but unfounded, interpretation of a group plan that would eliminate benefits for millions of drivers.

PIFC concluded that the current implementation of §1861.12 is “working well.”  Further, based on testimony at the hearing by consumers who were members of an affinity group, the “discounts help a myriad number of drivers afford auto insurance.”

PIFC urged the CDI to retain the existing implementation of the authorization for group insurance in §1861.12 and to keep in place the auto insurance group discounts that are now available to California drivers.

LA Times Editorial – October 14, 2019

In a Los Angeles Times editorial published on October 14, 2019, the writer supports the CDI Survey Report’s conclusions that Latino and African American Californians with a low wage job and no college degree have “the economic deck stacked against [them]” as the Survey confirms that these drivers are not receiving an auto insurance discount compared to more affluent Californians.  The results also suggest that the discounts flow to “far more drivers” in well-to-do parts of the state than in poorer communities.

The editorial adopts the consumer groups’ position that Proposition 103 was intended to “sever the links between car insurance premiums and race, income level and neighborhood demographics.  Rather, rates are measured by factors including driving experience.”   

The editorial does note that in addition to the statutory rate factors applicable all drivers, CIC §1861.12 permits insurers to issue automobile coverage on a group plan, “without restriction as to the purpose of the group, occupation or type of group.”  As a result, these “Affinity Discounts” are understandably popular among the groups that receive them including the California Teachers Association, Fireman Associations and other mid-level organizations. The editorial states that assuming that insurers aren’t intentionally trying to use these affinity groups to charge higher premiums to lower-income black or Latino drivers, the Survey shows that the affinity programs have that effect.”

Defenders of the system insist that affinity group discounts are based on the lower risks associated with the group’s members. However, that does not explain why so many of the groups are organized around higher-paying jobs, and why so many of the recipients are in wealthier neighborhoods.

The department compared the survey data with average household income statistics and found a direct relationship between a neighborhood’s income and the percentage of drivers receiving a discount. At the bottom level — ZIP Codes with per capita income of less than $22,500 — only 26% of the drivers received an affinity group discount, which ranged from 5% to 8% on average. At the top level, with per capita incomes above $50,000, 55% received the discounts.

Even “assuming that insurers aren’t intentionally trying to use these affinity groups to charge higher premiums to lower-income black or Latino drivers, the survey — just like data gathered separately by consumer groups — shows that the affinity programs as practiced in California have that effect. Insurers insist that offering the discounts does not result in surcharges on drivers who are not in an affinity group, but critics of the system say that is the inevitable result. Regardless, it is inarguable that the discounts enable applicants in a group to pay less than drivers with identical safety records and commuting patterns outside the groups. And the chances of you being stuck on the outside increase as your income drops. That’s just wrong. [CDI’s] Survey shows that the affinity programs have that effect.”

Conclusion 

The Department of Insurance is evaluating the information it gathered and it seems likely it will take some action to address the premium disparities caused by the use of affinity groups.  The CDI will no doubt want to ensure that discounts do not violate either the spirit or the anti-discriminatory letter of Proposition 103 by giving some Californians a break on premiums that those with less education or lower wage jobs cannot receive.

After reviewing the 2010 Workshop and the 2019 CDI Investigatory Hearing, it appears that the new Commissioner may address the affinity group discount issue.   Based on the charts and other data provided during the hearing by the CDI, its focus centers on the alleged discriminatory effect of “occupational” groups that are not tied to any association or organization.  Based on our discussion with a CDI official after the 2019 hearing, we understand that  the CDI will review all of the positions and consider whether to prepare regulations consistent with the CDI’s and consumer groups’ testimony and then determine which of the current types of groups are discriminatory and subject to regulatory oversight in the future.

 

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Robert Hogeboom is a capital partner at Hinshaw & Culbertson, LLP and is the Senior Regulatory attorney.  He was formerly the Senior Regulatory attorney with Barger & Wolen, LLP, which merged with Hinshaw on 2014.   Mr. Hogeboom was President of the Federation of Regulatory Counsel in 2000.  

Sam Sorich runs the Sacramento office for Hinshaw & Culbertson, LLP.  Mr. Sorich focuses his practice on expanding the firm’s presence and relationships in Sacramento, particularly with the Department of Insurance and other state agencies.

[i] Commissioner Lara was elected in November, 2018 and took office in January, 2019.

[ii] CIC § 1861.12 “Any insurer may issue any insurance coverage on a group plan, without restriction as to the purpose of the group, occupation or type of group.  Group insurance rates shall not be considered to be unfairly discriminatory, if they are averaged broadly among persons insured under the group plan. (Added by Initiative Measure Prop. 103, § 3, approved by the electors, Nov. 8, 1988.)”

[iii] CIC Section 1861.02 provides in pertinent part as follows: “(a) Rates and premiums for an automobile insurance policy, as described in subdivision (a) of Section 660, shall be determined by application of the following factors in decreasing order of importance:

      (1) The insured's driving safety record.

      (2) The number of miles he or she drives annually.

      (3) The number of years of driving experience the insured has had.

      (4) Those other factors that the commissioner may adopt by regulation and that have a substantial relationship to the risk of loss.  The regulations shall set forth the respective weight to be given each factor in determining automobile rates and premiums.  Notwithstanding any other provision of law, the use of any criterion without approval shall constitute unfair discrimination.”

References