Some downward pressure on California auto insurance premium pricing can be expected as a result of State Farm's rate reduction announcement this week, according to an investment bank analysis
Earlier this week, State Farm received permission for an 8 percent average premium rate reduction.
That move came in the wake of an appeals court rejection of efforts by insurance organizations to secure an injunction to stop Insurance Commissioner John Garamendi's auto rate regulations that de-emphasize a driver's place of domicile as a rating factor from taking effect.
“While the outcome of these legal battles remains unclear, State Farm's move could create pricing pressure in California, even if Allstate and others prevail in the courts,” wrote Bear Stearns analyst David Small.
Insurers, while they have not been able to immediately halt application of the regulations, have a suit in progress challenging their legality.
Three trade associations–The Personal Insurance Federation of California, The American Insurance Association and the Association of California Insurance Companies–filed a lawsuit in state superior court in Sacramento earlier this year asserting the Garamendi reforms violate the terms of Proposition 103, the 1988 voter insurance reform initiative, because they require insurers to charge arbitrary rates.
AIA spokeswoman Nicole Mahrt said the groups have not decided on appealing the injunction denial to the Supreme Court. Thus, the new rates will remain in effect until the actual case comes before Superior Court in the future.
Mr. Small wrote that the reduction by State Farm, and the publicity the issue has gotten in the press, could lead to increased customer shopping if they see a potential for lower premiums.
“We suspect the impact will be less than some expect, as it is important to note that the decreases by State Farm in other states have not led to market share or profit deterioration for the larger players, given State Farm's less sophisticated pricing technology,” Mr. Small wrote.
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