THIS WEEK IN
Prepared by Norwood & Associates
License Fees
Expected to be Raised by 10 Percent
The Department of Insurance said it
would announce, possibly as early as today, its intention to increase all fees
on licensees by 10 percent. The proposed
10 percent fee increase is expected to be effective
According to the Department, the fee increase is necessary to erase a $4 million structural deficit. The reserve fund for license and fee revenue will be fully exhausted during the 2004-05 fiscal year. Some of the reasons for this structural deficit are:
a. Increases in employee salaries and benefits negotiated by the state with civil service unions.
b. Loss of $1 million in annual revenue from providing license certifications to other states because those states are now relying on the NAIC database.
c. Assessments imposed on auto insurance policies and registration fees, which are distributed to various law enforcement agencies including the Department, are now assessed on a pro-rata basis.
In previous years, the Legislature balanced the state budget in part by taking an Insurance Fund "loan" of $3.5 million and then $10 million. Even if several insurance trade association sue for return of the "loan" to the Insurance Fund, as is expected, these funds will not solve the structural deficit, but will simply improve the short-term cash flow situation.
The Department argues it is doing all it can to control costs, spending well below the amount authorized by the Legislature in the Budget Act. They have taken the following action:
a. Eliminated 30 positions and reduced costs by $1,732,000 in FY 2001-02.
b. Eliminated 31 positions and reduced costs by $1,664,000 in FY 2002-03.
c. Reduced budgeted expenditures by an estimated $9.2 million in FY 2002-03.
d. Implemented an internal hiring freeze.
The Department also argues that fees have not kept pace with inflation. In 1992, the annual fee for a Fire and Casualty Broker-Agent License was $56. The inflation-adjusted fee next year will be $78. If the proposed fee increase is implemented, the fee will be $72. Similarly, the stock insurer license fee in 1992 was $2,833. The inflation-adjusted fee next year will be $3,971. If the proposed fee increase is implemented, the fee will be $3,599.
Finally, the Department says the proposed fee increase, which will generate $4 million annually, will only bring revenues into balance with expenditures after cost cutting. Thus, the fee increase will not allow the Department to restore the unfunded positions, expand existing programs, or start new programs - it will simply keep the status quo in place.
Department May be
Challenged on Proposed Fee Increase
The Department of Insurance has four principle sources of revenue. Of these sources, all but one are limited by statute to the cost of regulation or dedicated to specified activities. The only unrestricted pool of money comes from the 170 fees and licenses set forth in the Insurance Code.
Producer groups have complained for
many years that they pay a disproportionate share of these fees and
licenses. Agents and brokers pay 62
percent of all the revenue derived from these fees and licenses, while insurers
pay 38 percent. Conversely, expenditures
from this category are spent 37 percent on agents and brokers, 56 percent on
insurers and 7 percent to fund the Health Insurance Counseling and Advocacy
Program (HICAP) within the Department of Aging.
Thus, producer groups argue, they have been subsidizing insurers.
Prior to 1999, the law required the Department to raise or lower all fees by a uniform amount instead of selectively, thus locking in the existing fee structure. As a result, producer groups sponsored SB 940 (Speier), chapter 884, Statutes of 1999 to eliminate this requirement and give the Department the authority to selectively raise or lower fees.
Last year, the Department ignored
the discretion provided by SB 940 (Speier) and increased all fees by a uniform
5 percent, effective
"A uniform increase, when the Legislature clearly intended that discretion be exercised, was not a great choice. This is precisely the type of act that sparks legislation further refining and constricting the department's authority."
The Senator said she would examine the Department's fee levying authority the next year, and implied she would carry legislation requiring insurance companies, as opposed to producers, to bear a larger portion of future fee increases.
In an embarrassing bureaucratic "oops," the new administration of Commissioner John Garamendi was apparently unaware of SB 940 (Speier), believing they were still required to raise fees uniformly. Producer groups were quick to educate the Department about the four-year-old law.
Even more embarrassing for the Department, they may have failed to comply with the statutory requirements for raising fees without legislative approval. Insurance Code §12978 authorizes the Department to increase fees up to 10 percent on a fiscal year basis without legislative approval. However, the Department is also required to project forward its workload for the subsequent three years in order to project appropriate fee levels, and to make adjustments to those fees based on actual workload experience. Fee increases must be necessary to meet the projected workload within the amount appropriated by the Legislature. The Department apparently has failed to undertake this workload study.
Producer and insurer groups are now weighing their options. The Department has asked the industry to "go along" with the fee increase for now. The Department said it would later go back later and conduct the statutorily required study and make future adjustments as necessary.
Some producer groups are not inclined to go along with the "go along" request, especially since this is the second time in two years the Department has raised fees on a uniform basis. Producers may ask the Legislature to invoke its authority to rescind the fee increase within 60 days after it is announced by Bulletin. A lawsuit based on the fact the Department did not conduct the required workload study is also a possibility.
Insurers are also not happy about the fee increase. While some insurers seem willing to accept the fee increase, they do want to exact a price. They are considering suing the state to force it to return the $13.5 million it borrowed from the Insurance Fund and seeking legislation to prevent future raids on the Insurance Fund. They are also asking for an independent management audit of the Department. The Department is supporting the management audit idea - as long as it focuses on the prior administration.
Persistency Bill Goes to Governor
SB 841 (Perata), which lets drivers keep their discount for being previously insured even if they change companies, passed the Assembly by a 56-13 vote. The bill now goes to the Governor's desk. With budget negotiations stalled, the Assembly spent an inordinate amount of time debating the bill. Existing law has always allowed a consumer's persistency, or loyalty discount, to be transferred to a new insurer. However, recent Department of Insurance regulations now provide that a persistency discount can only be provided to an existing customer.
The 13 legislators who voted against the bill, all "progressive" Democrats, opposed it because they believe it harms low-income drivers who were previously uninsured. They argued insurance is a "zero-sum" game in which any discount given to one group means the rates of other groups must go up, since insurers will "squeeze out every ounce of profit they can."
The 56 bi-partisan legislators who voted for the bill challenged the view insurance is a "zero-sum" game. They argued it is cheaper to provide insurance to customers who continuously maintain their insurance as opposed to those who let coverage lapse frequently. They also pointed out it benefits the poor by allowing them to take their persistency discounts with them if a competitor offers a cheaper product instead of locking them into the same insurer.
The Department of Insurance and the Foundation for Taxpayer and Consumer Rights opposes the bill, arguing it violates the provisions of Proposition 103 prohibiting penalties for lack of prior insurance. The Governor vetoed a similar bill last year just before the election after it was caught up in the controversy surrounding his fundraising practices. The bill now provides an exception for gaps in coverage not exceeding 90 days and a two-year exception for military personnel. Accordingly, the Governor is expected to sign the bill.
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© Copyright 2003 by Norwood & Associates