COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING COMMITTEE ON LEGISLATIVE OVERSIGHT - - - Room 696, City Hall Philadelphia, Pennsylvania Wednesday, April 9, 2003 10:45 a.m. - - - RESOLUTION 020525 - - - PRESENT: COUNCILMAN JAMES KENNEY, Chair COUNCILWOMAN JOAN KRAJEWSKI, Co-Chair
COUNCILMAN DAVID COHEN COUNCILMAN FRANK DICICCO COUNCILMAN FRANK RIZZO - - - V A R A L L O, INCORPORATED LITIGATION SUPPORT SERVICES 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 I N D E X RESOLUTION 020525 SUSAN SCHULMAN .............................. HERB DENENBERG .............................. 19 SAM MARSHALL, Insurance Federation .......... 48 LANCE HAVER, CEPA .......................... 117 JONATHAN STEIN, Community Legal Services ... 123 3 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525
Good morning. The Committee on Legislative Oversight is now in Session. We will continue from the last time with Susan Shulman. We're continuing with Resolution No. 6 020525. Good morning.
Good morning. My name is Susan Schulman. I was appointed by Mayor Ed Rendell to serve as the Executive Director of the Mayor's Automobile Insurance Rate Reduction Task Force in November of 1999 and continued in that position until December of 2001. My involvement with this project started in July 1999 when I was asked to analyze the status of auto insurance rates in Philadelphia and report to the Mayor whether any action could be taken that would lead to lowering auto premiums. One of the major concerns was the disparity between premiums paid in Philadelphia as compared to those paid in the suburban counties and the fact that Philadelphians were paying at least twice as much as their suburban neighbors. After several months, my preliminary analysis indicated that premiums in Philadelphia are unduly higher than 4 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 they should be in comparison with the loss experience in the surrounding counties. The data further revealed that premiums here are among the highest of any City in the United States and that Philadelphians are not benefiting from the tort reform measures enacted in 1990. It was clear that additional data was needed to do a comprehensive study of ratemaking in Philadelphia. It was also clear that competent analysis of auto insurance rates is a difficult and complex task that requires actuarial and economic expertise. In November 1999, therefore, Mayor Rendell established the Task Force, pursuant to the provisions set forth in the City Charter, to undertake this process. The main purpose of the Task Force would be to first obtain and analyze data from insurers, the Insurance Department, and national insurance organizations, and then make recommendations that would increase the availability and affordability of auto insurance in Philadelphia. A similar Task Force was created in New York City in the late 1990s by Mayor Guliani. That Task Force was established in reaction to the 5 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 dramatic 60 percent decrease in the rate of auto theft in the five boroughs of New York, while premiums charged for comprehensive coverage increased or stayed the same. I met with members of that Task Force who provided valuable information and resources. I reviewed the dynamics of the legal challenges filed in New York and was able to draw upon their experience when planning our course of action. Birny Birnbaum, the economist from Texas who testified before City Council on September 10, 2002, was the consulting economist for the New York City Task Force. We engaged his services at the outset for the work that we were about to undertake, and he was very instrumental in guiding our inquiries and analysis. I believe that the Committee has copies of the Task Force report of July 2000 that summarizes our findings after six months of work. At that point, the insurers had refused our requests for data, and we were undertaking the lengthy process of getting rate filings from the Insurance Department for analysis. We did, however, obtain relevant data from the National Association of 6 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 Independent Insurers, the Insurance Services Organization, the Insurance Research Council, and many city and state agencies that was used to conduct a preliminary study. Our findings are summarized on of that report. The following factors were important to our analysis: Rates in Philadelphia were the highest among 10 major cities, including New York, Los Angeles, Miami, Chicago, and Detroit; Philadelphia's auto insurance loss experience in the areas of personal injury and property damage claims fell within the mid range of all those major cities. 5 percent in Philadelphia. 42 percent in the rest of the state. 21 By 1996, more than 62 percent of 22 Philadelphians chose limited tort policies which restrict the right to sue for personal injury.
From 1990 through 1999, several factors improved the market for auto insurers, including the 7 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 enactment of comprehensive tort reform measures in Act in 1990, significant reduction in auto theft, 4 and increased prosecution of auto insurance fraud by 5 the District Attorney and the US Attorney. 6 Auto insurers enjoy a profitable market in Philadelphia. A comparison of premiums paid in Philadelphia and in the suburban counties is found in Exhibit D of the report. That analysis shows that Philadelphia's loss costs for bodily injury, personal injury protection and property damage claims were 60 percent higher than those in the suburbs. 3 percent higher than in the suburbs. This analysis directly relates to the impression that while Philadelphia certainly has higher claim costs that require higher premiums, those premiums are over-inflated. 4 percent reduction or about $443. This would represent a substantial savings to Philadelphia policyholders for these coverages. We made a variety of recommendations 8 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 that are listed in section 5 of the report, . First and foremost, we recommended creation of an independent office to pursue the broad range of initiatives needed to reap any meaningful long-term success at lowering insurance rates for the drivers of this City. I continue to believe that no one initiative will suffice, but that each and every remedy needs to be pursued in concerted effort. This can only be done through an office that is charged with this task and has the required legal, actuarial and economic expertise. We, therefore, recommended the creation of the Office of Public Insurance Council for Philadelphia. The goals of this office are set out on and they bear repeating: Ongoing review of rate filings; intervention in rate approval; investigation into unlawful insurance practices; litigate where necessary on behalf of insurance consumers; consumer education; stimulate market competition; and an insurance consumer lobbyist. These are the goals that we set out that would be undertaken by a dedicated office. We made other recommendations that 9 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 include: Develop a Philadelphia automobile group insurance plan; obtain necessary data from insurers and litigate challenges to enforce the Task Force subpoenas; obtain necessary data from the Insurance Department; and hold public hearings to obtain needed data and investigation. Again, I want to emphasize that we did not present these as alternative methods to proceed, but as a comprehensive plan for action. Our work continued for another months 12 after our report. During that time and under Mayor 13 Street's Administration, we undertook the 14 unprecedented effort of copying hundreds of 15 thousands of pages of rate filings from the 16 Insurance Department for analysis by Mr. Birnbaum. 17 We also sought information that the Insurance 18 Department requires from insurers that relate specifically to the limited tort/full tort premium differential. We were eventually told that this information was confidential and would not be provided. We believed that this was public information and we were preparing legal action to obtain it. We were also preparing legal action to enforce the subpoenas that we served on insurers for 10 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 the data we requested. As a result of his analysis of the rate filings and other data, Mr. Birnbaum made additional recommendations for action, and I believe that he testified in regard to these subjects at the hearing on September 10th. Among the most important findings made by Mr. Birnbaum is his opinion that there is a significant disparity in premiums that exists between limited tort and full tort coverage. 3 percent differential in premiums between full tort and limited tort coverage.
This means you get a percent discount for giving up 15 your right to recovery for some personal injury claims. If, as Mr. Birnbaum indicated, this differential should be 25 percent, we are paying 15 percent more than we should be for limited tort policies. For the 62 percent of Philadelphians holding limited tort policies, this represents a significant disparity that needs immediate correction. Mr. Birnbaum also testified to disparities in the availability of insurance in different neighborhoods within the City. We were 11 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 very concerned with redlining issues and believed that further investigation was required to determine whether legal action was warranted. In conclusion, we undertook a widespread investigation and tried to paint a picture that not only explains how and why Philadelphia's auto insurance premiums have remained as they are, but to also offer comprehensive solutions. I'm sure that I've missed some of the issues that we were investigating, however, I hope that I have captured the essence of what we were doing. And I would be happy to answer any questions you might have.
Thank you for your testimony. I did have time to read through your report. Your testimony covers most of the highlighted points that I was making when I read through it, but I do want to go over a couple issues which you spoke about and maybe we can get a little 12 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 bit more detail. The disparity that you speak of, the 15.3 percent differential, in a more layman's term, what does that mean in dollars and cents, if you can, to consumers in Philadelphia?
Well, the differential does not appear in our report. I'm sure that's what you've noticed. And that's because that data was analyzed by Birny Birnbaum after our report. That data came as a result of the hundreds of thousands of pages of rate filings that we took out of the Insurance Department. When he went through -- my understanding, again, and that he testified to this before City Council, is that when he analyzed those rate filings, he felt that the 15.3 percent was not enough of a discount for those holding limited tort policies. I don't know dollars and cents exactly what that amount comes to. My rounded guess is we would be talking about 400 or $500.
That 400 or 500 always rings a bell because back in 1993 or '94 when I drafted the initial legislation which we now refer to as Live Stop, when I was Court Administrator of Traffic Court, it was then suggested to me by a 13 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 representative of the insurance industry that we probably would see maybe around a percent 4 decrease in premiums, and the person at the time 5 didn't think that was all that much. But that 6 possibly comes to around somewhere between 400 and 7 $600 for the average automobile owner in the City of 8 Philadelphia. And I think that is significant. I 9 don't know of anyone who would not like to see an 10 additional 600 for other uses. 11 You mentioned in your statement that the 12 insurance company had refused to supply data when it 13 came to rate filings. Would you happen to know why 14 they refused? 15 I'll ask the same question of them when 16 they come up, obviously. But what is your take on 17 that? 18
Well, we had two 19 different refusals. One was a refusal by the 20 insurance companies themselves to respond to our subpoena for specific data. And I believe that the letters outlining the data that we wanted from the companies are attached to the report. So that was one area that we were dealing with and trying to get the insurers to cooperate with the Mayor's Task 14 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 Force in getting the data that we asked for. The other refusal was from the Insurance Department. And what we were specifically asking the Insurance Department for was data that they gathered as a result of what they term "data calls." And data calls are published in the Pennsylvania Bulletin, and some data calls ask specifically for information from insurers on limited tort and full tort experience. We felt that the information from those data calls was very important to what we were doing, and we requested that information. We were eventually denied our request. And it was among -- at least in my opinion, I felt that was pretty much right to know public information and I felt that we should pursue it.
The Insurance Federation will probably dispute when they are asked to testify when we say that -- how would you respond to Philadelphia's claims that costs are over-inflated? Because I'm sure the insurance industry, when they get up to speak, will probably dispute this. How would you respond that Philadelphians' high number of claims is the biggest impediment? Because that is the testimony which I 15 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 read that I believe Mr. Marshall will be speaking about this morning.
I believe -- and I believe this is in our report -- that there's no 6 doubt that Philadelphians are still making a much higher number of claims than those made in the counties and in the rest of the state. However, what we believe the more critical piece of information is, is that the loss experience, the loss path, the dollars paid as a result of those claims has gone down significantly. And that was the purpose of Act 6. So I think that Act 6 worked, certainly, and it has made insurers want to come back, I believe, into Philadelphia and write policies because we're now a pretty profitable place.
Why do you believe that the Administration has not acted on your recommendations since that report was published?
Do you believe that 16 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 an Insurance Advocate representing Philadelphia consumers is the best way to ensure that? And could you speak of any other cities that have an advocate and what their success is, if there is any success at all?
I was not aware of any cities that had an advocate. There are other states. And particularly, because we were working with Birny Birnbaum and he's from Texas and he was one of the people from the Texas Insurance Department that started the Texas Office of Public Insurance Council, we certainly drew from Birny's experience and it was really invaluable to us. We felt that rather than -- that the state on a whole was not in the dire circumstance that Philadelphia is. We felt that there was debate about a state advocate as opposed to a city advocate. We eventually felt that a city advocate was really what was needed. The state rates are well within average for the rest of the country. Although, I'm sure people in the rest of the state quarrel with that. No one likes to pay what they're paying. We felt that Philadelphia was paying twice as much, and in many cases, three times as much as the rest of the 17 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 state. The purpose of the Insurance Advocate was to pick up where a Task Force would leave off. A Task Force is meant to be a short-term thing: Identify problems, identify solutions, but then to have that project if necessary moved on and institutionalized. So that even in our greatest wildest dreams, if we were successful in lowering rates during the term of the Task Force, which we were not, nothing's to say that rates wouldn't just creep up the next year. We felt that you needed a watchdog in Harrisburg, not only to intervene in rate filings, but to serve as an advisor to the Insurance Commissioner. There is a hand-in-hand. It's certainly clear that that person is a consumer advocate, but it institutionalizes that consumer advocate. And having the right person there with the credentials and actuarial backup would give drivers in this City a tremendous leg up.
Kind of a counterbalance to what the insurance industry has. I mean, they have representatives and lobbyists who go out and promote their product for their company, which is a business and that's understandable. But 18 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 there really is no one except the individual to try to take on, if you will, fight the big insurance companies.
So that's what the role of the advocate would be, someone to kind of balance that, put us both at least on a level playing field because there really is no one who can do it for us as consumers; is that correct?
My understanding about an hour or so ago that someone said to me that the Mayor is contemplating a lawsuit maybe as recent as today. I don't know that to be a fact. I just would like to know your opinion. Do you think that a lawsuit by the Administration would be helpful without an advocate?
Well, I don't know anything of that lawsuit or anything about it. We did in our report propose that certain legal action might need to be taken, and the legal action that touches on so many of these issues is very different. There's legal action for redlining; there's legal action to get documents and 19 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 information; there's legal action for all numbers of things that are problems with auto insurance. So I don't know at all what the subject matter would be.
Our next witness is the famous Herb Denenberg, former State Insurance Commissioner.
I'm only famous in City Hall because I come down and catch Councilmembers smoking.
I did quit. Don't you remember? That's what ended my career. First, I want to thank you for the opportunity to testify, and I want to congratulate the Committee on its work. I think you're right on 20 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 target. I think one of the critical things we need is an Insurance Consumer Advocate, and that can be proven to you just by hearing all of these hundreds of thousands of pages of rates. Nobody can afford to do that. You can't have a legislative committee do it. And you'll have constant and continuous problems until you have the expertise in focus to do something about it. Now, I also want to congratulate the Committee staff. Your man David Fritz is very efficient, and I'm sure he never gets any credit so we'll give it to him now. I just might give you an overview of the proposals that you might get, because I've been at this long; about 50 years. I know what everybody's going to say before they say it. Except myself; I usually ad-lib that. First of all, the industry's going to come before you and say that they've been testifying on this matter for 15 years, the problem is that there are too many medical claims and the solution is to tell your constituents knock it off. Now, they don't tell you whether to tell them to knock it off in the form of a press release or in the form of 21 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 just a general announcement to the public. But I think after years of study and consideration, if 4 they want to be taken seriously, they ought to do 5 more than come before this Committee and tell you to 6 tell your constituents to knock off medical claims. 7 They say there's long, ingrained evidence of 8 excessive medical claims. I would say, first of 9 all, they ought to prove it to the Committee; and I 10 haven't seen any proof to this Committee. All I've 11 heard here is that the insurance companies don't 12 want to give you the information. I don't know what 13 their problem is, but that's absolutely 14 preposterous. When an insurance company charges you 15 a rate, that's virtually a tax. Automobile insurance is compulsory. Homeowners' insurance is virtually compulsory if you want a loan. And these guys apparently have the gall to say you're not entitled to look at those rates on which they're telling you you have to pay 1,000; 2,000. It's laughable. It's ridiculous. And something's got to be done about it. Now, I would say they complain that nobody listens to them. And I would tell the insurance industry after 15 years of study, if the 22 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 best they can do is come before you and say, "Tell your constituents to knock off the medical claims," maybe that's why nobody listens to them. I think it tells you something about the industry, in my opinion. They have zero solutions, unless you want to count "knock it off" as a solution. They have an infinite number of excuses for not granting rate cuts. As the previous witness pointed out, they had a 60 percent cut in -- I guess it was auto theft in New York, and they still did not cut the rates. You've done really heroic work on uninsured cars, auto theft, insurance fraud. As I see it, the only way you could cut rates in the eyes of the insurance industry would be to do away with the automobile. " I think it's obvious what games the industry is playing. I can tell you something about the industry in case you dream that they might come in 23 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 with proposals. They not only don't have proposals on their own, but they seem to object to everybody else's proposals. I'll give some amazing examples which tell you something about the mentality of this industry. When I was Insurance Commissioner and wanted to and actually did started publishing shoppers' guides, we published maybe to 10 differently shoppers' guides on every subject, 11 including auto insurance.
We distributed about a 12 million of them all over the country because there 13 was such hunger just for information on how to save 14 money on auto, homeowners, life, health, and all the 15 rest. The insurance industry even objected to the 16 publication of shoppers' guides. They said it was 17 impossible to make all of the proper comparisons so 18 it would be out of context and it could not be 19 relied on. That was absolutely ridiculous. And of 20 course, as you now know, it's kind of the conventional thing to do. Most insurance departments publish shoppers' guides, including the State of Pennsylvania, although their guide is about 10 months out of date at this point. Now, I would say that the 24 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 recommendations of the Mayor's committee are right on target. But as I say, you'll be beating your head against a stone wall if you want to continue to pursue this matter because it takes too much expertise, information, and know-how. So I think you're on the right track. I'll give you a simple formula for getting rate reductions when in order and for getting a market that provides insurance rates that are more affordable and within a framework that is more equitable. There are two essential reforms and all the rest are frostings and curlicues. Reform 1 is the appointment of an Insurance Commissioner that will be more than a puppet, a lap dog, and rubber stamp for the insurance industry. No. 2 is the creation of the Office Consumer Advocate at the city and state level to make sure the views of Philadelphians are heard before the Commissioner, to make sure their interests are protected, and to help the Commissioner make sound decisions. I endorse this Committee's work aimed at creating such an office for Philadelphia. If those two possibilities come to pass, 25 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 all these other high priority reforms would be assured. But those two possibilities are difficult to achieve despite many tries over many decades. Now, let's talk about the need for an Insurance Commissioner and what the Council can do about it. We need an Insurance Commissioner who will protect the policyholder as effectively and aggressively as she has protected the insurance industry. But first, let me apologize for some of the things I have said about Commissioners in the past. I have said they were brain-dead and comatose. I apologize. They have been hard at work in Harrisburg for the insurance industry and rarely for the policyholders and the public. I could prove my collusions in various ways, but let me try this one. Where is the Insurance Commissioner? Who is the Insurance Commissioner? What has she been doing during her tenure under Governor Ridge, Governor Schweiker, and now Governor Rendell? What's her name? One of your next witnesses, Jonathan Stein, Chief Counsel of Community Legal Services has aptly described the Commissioner's department as a stealth agency. We are now in the midst of an explosion of 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 many insurance problems, not just problem after problem, but crisis after crisis. There's the medical malpractice crisis that threatens to disrupt and even destroy our health delivery system. There is the health insurance crisis with premiums skyrocketing beyond reach and employers and employees unable to afford them. With 1 million adults and a quarter of a million children uninsured, posing a direct threat to their health and their well-being. There is the Blue Cross crisis with these organizations sitting on billion-dollar surpluses with an eye on corporate ventures rather than their members. And with all kinds of urgent questions about the disposition of their accumulation. There is the auto insurance crisis in Philadelphia that this Committee is focussing on.
I could extend this catalog of crises and problems almost without end: Credit insurance with consumers being overcharged without even knowing it, homeowners' insurance, commercial insurance and all the problems falling from one of the great insurance disasters of history, problems of affordability, availability, 40, 50, 100 percent increases. 27 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 The Insurance Commissioner should be in the forefront of the efforts to investigate these problems and to propose solutions to see that they are implemented to address the public concerns and questions. But she is hibernating in Harrisburg while Pennsylvania's burning. She meets the problems head on without a thundering continuous symphony of silence. Where is she? She was invited to this hearing today and, I guess, could not attend. I heard the Governor say that she was going to put out a report on malpractice. As far as I know, it never came out. There's all kinds of things she should be on top of, but she isn't. I know what she could and should do because I was in the office from 1971 to '74, and I made insurance problems and insurance questions breakfast table conversation. I could come to my office in the morning and get action by noon. The Office of Insurance Commissioner is a unique bully pulpit because the public is in the dark about insurance, it's consistently getting the shaft, it's hungering for help and advice, and is getting next to nothing from the Office of the Insurance Commissioner. But the Office of Commissioner is more 28 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 than a bully pulpit; it is one of the most powerful and important of cabinet positions. It exercises immense power over an immense trillion-dollar industry, acting, as one noted authority put it, as judge, jury, and prosecutor on insurance industry questions. It regulates the industry from birth to death. It regulates virtually every aspect of the industry operations, including rates, policy reforms, investment, sales and marketing practices, accounting, claims, underwriting, and all the rest. In addition, the Commissioner has an office full of insurance experts and technicians that preside over one of the great repository of information on the industry. The Commissioner can make things happen by calling a hearing, by making a phone call to an insurance executive, by issuing a shoppers' guide, by public statements. And the Commissioner can use that immense power in the public interest when needed, and it certainly is needed now. When the Commissioner speaks, people listen; that is, if she speaks and has something worthwhile to say. We need an Insurance Commissioner to exercise some of that great power to solve some of these problems, but will we get it? 29 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 The Governor appoints the Commissioner with advice and consent of a Senate. You can be sure the insurance industry executives and lobbyists have their ear to the tune of over 40 million. They are on his transition committee. They swarm through the government buildings in Harrisburg. The new Governor, Ed Rendell, is off to a bad start to this question. He has retained the do-nothing Commissioner from the previous Administration, and there are even rumors that he plans to keep her on a permanent basis. But that Insurance Commissioner should have been on the job from the beginning of the Administration and should have gotten off to a fast start. The public should pressure the Governor to appoint a commissioner who will pay attention to the concerns of the policyholder as assiduously as past commissioners have paid attention to the concerns of the industry. City Council should pass a resolution to that effect to provide some countervailing power to that of the industry. City Council should ask for a Commissioner who will regulate the insurance industry instead of being regulated by it. Who's up there speaking for the consumer?
30 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 When I was commissioner, you know how we got consumer groups? We had to beat the bushes for them. We had to almost go out and organize them. There were a few great organizations like CEPA which still exists, but there's virtually no voice up there. And if you wanted consumer representation, you had to go out and enlist it. So that brings the second crucial and central reform which you're talking about. We desperately need an Office of Consumer Advocate for insurance just as we have one for Public Utilities. Senator Schwartz is the lead sponsor of Senate Bill 14 63 to create that office at the state level and this committee, as I understand, is going to do the same thing at the City level. As I noted, the insurance industry has an army of lobbyists in Harrisburg, in Washington, and wherever laws or regulations are being made. They come through the Legislature and Insurance Department like a swarm of locusts, one of the worst of policyholder plagues. They get to know not only the Commissioner, but also the employees of the department. They hire these people right out of the department and, of course, the commissioners 31 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 typically use the office as a stepping stone to a better paying job in the industry from whence they came. " Do you suppose the commissioners want to keep their past and future employers happy while they work for their benefactors or for policyholders? Those questions have clear answers, and one answer is that we need an Insurance Consumer Advocate. Is it too much to ask that the people that pay the premiums, the public whose premiums give rise to this trillion dollar industry, the people who are supposed to be protected by the Insurance Commissioner have a voice in Harrisburg? Ask yourself, who speaks for the policyholder? Who speaks for the insurance industry? We know the answer and that's why we're in this sad state of affairs. But even if a star rises in the east and by some miracle we get the commissioner we need. We still need an Insurance Consumer Advocate. Just as a judge wants attorneys on both sides of the case and relies on them to develop the issues; by like 32 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 token, the Insurance Commissioner needs to hear both sides of the case. Now he hears one side while the absentee policyholders of Philadelphia and elsewhere have no representation. If I haven't made my case yet, I have another way to do so. To be convinced of the need for the Insurance Consumer Advocate, all you have to hear are the insurance industry arguments against it. They were provided to me through a series of newspaper clippings and interviews, as stated by your next witness, the President of the Insurance Federation of Pennsylvania, Mr. Marshall. Judge for yourself. My judgment would be to borrow a statement from Abe Lincoln that these arguments against the Insurance Consumer Advocate are weaker than watered downed soup made from a pigeon that starved to death. Here are some of them, provided in the form of direct quotes wherever possible. Argument 1, "We think the Insurance Department and the Commissioner are the best regulator. " That's the argument of Mr. Marshall. You can guess why the insurance industry thinks the Commissioner is such a good 33 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 regulator. Once more, this argument misses the point. The Office of the Insurance Consumer Advocate would not be another regulator. It would be an advocate. That's why he's called an Insurance Advocate. We ought to be able to figure that out. As already pointed out, even if the Commissioner is a perfect regulator, she still needs advocates on both sides of an issue to make sound decisions possible. As a mater of fact, the Office of Insurance Advocate in Texas was established by a commissioner who I just talked to this week. He advocated that office because he knew it would make his job easier.
It's hard to make decisions when you're up there and you've got all these insurance lobbyists in one ear and there's nothing coming into the other ear. How would you like to be a defendant in a lawsuit with an army of lawyers speaking against your case but no lawyer to speak on your behalf? That would not be conducive to a sound decision, and that's why policyholders get the shaft and lose before the Commissioner 100 to 1. This in effect is a form of taxation without representation. That gave rise to the Revolutionary War and it ought to give rise to an insurance revolution, at least a 34 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 consumer advocate. Argument No. 2, the Federation argues that funding for the proposed office would eventually come out of the pocket of the policyholders. That may be true. There are no free lunches, but it would be more than offset by getting lower premiums, prompt payment of claims, and a fair treatment in the insurance system. Now the consumer foots the bill for bloated premiums, nonpayment and slow payments of claims and other abuses. So don't just think that it's just rates you have to worry about. That's the tip of the iceberg. There's all kinds of claims issues, underwriting issues and the like. Argument 3, the Federation also claims the Office of Insurance Consumer Advocate would fail as it has to represent different consumer interests such as Philadelphia versus the suburbs. He claims the Commissioner is now a "consumer advocate," and if asked they would have to admit she is also a company advocate. The industry thinks the Commissioner can be trusted to represent more than one interest but not the insurance advocate. Even when multiple interests are involved in rate cases, 35 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 for example, with the interest of one group of policyholders diverging from another, the Insurance Consumer Advocate could still represent their common interests, which are fair and reasonable rates that do not discriminate unfairly. Argument 4, one of the Federation's most ridiculous arguments is that there would be conflicts between the Consumer Advocate and Commissioner. Marshall just doesn't get it. You want a conflict. Would you want a lawyer representing you that was afraid to get into a conflict with the other side on an issue? The insurance industry likes the peaceful environment of the present system, with the Commissioner surrounded by insurance lobbyists without a consumer representative in sight. And that is literally true; that is not a figure of speech. " True enough. But the short answer to that argument is that we don't have a Commissioner that provides that regulation and we don't have a market that provides that competition. Ask the Philadelphian how much well-regulated competition he 36 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 finds. Argument -- here is one more 4 ridiculous argument. " The Federation believes the Insurance Commissioner can withstand the pressure of a trillion dollar industry, but the poor little Insurance Consumer Advocate will be afraid to be labeled anti-consumer. As they say, give me a break. Or they ask, what's he smoking? Argument 7, a final ridiculous argument comes in this form. " With compulsory auto insurance, with homeowners' insurance virtually compulsory by virtue of the demands of lenders, with health insurance a necessity, with employees getting insurance through fringe benefits and with all of them being beneficiaries of Workers' Compensation coverage, virtually all consumers are policyholders and all policyholders are consumers so they could not possibly be a conflict. 37 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 In my view, the arguments against the Office of Insurance Consumer Advocate prove we need that office right now and it's long overdue. I could go on without end suggesting other insurance reforms for this Committee and you may start to believe that I might do that, but I'm not.
I just want to mention one other easy one. Insurance companies are now using credit history and credit scores to make underwriting and rating decisions. So those who lose their job and miss a few bills as result will suddenly be deemed bad drivers or property owners. If a child gets ill and saps the cash of a family, causing some late payments, the parents will suddenly be transformed into bad drivers. If someone believes in cash and doesn't use credit and therefore doesn't have a credit rating, the person would be considered a bad driver. How does the insurance company make these strange determinations? Several years ago, I did a story and asked Allstate to show me proof of the connection between credit scores and credit history and driving ability. They never gave it to me when I was doing the story, and I'm still waiting for it. Just this 38 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 week, I talked to the Office of the Insurance Commissioner of Maryland where legislation has sharply reduced the industry's use of credit scores in underwriting and rating insurance. I was told the Maryland Commissioner asked the companies for proof of a connection between credit scoring and driving. He was never given these studies. He's still waiting for them. But even if the industry would come up with a study, there's still a public policy question as to whether credit scores should be used to determine insurability. Incidentally, the Maryland Commissioner did do a study that found those most severely penalized by credit scores are those already plagued by the highest rates because of where they live. This is just another financial penalty heaped on those who can least afford them. This, too, might be the subject of a City Council resolution or perhaps another public hearing. So I conclude by saying, how do we get action? I mentioned City Council resolutions a couple of times. Resolutions are sometimes eye wash, but here they are of critical importance. The consumer movement is weak and disorganized. It has 39 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 almost no lobbying clout in Harrisburg or anywhere else. It could use some help and encouragement. I think your action on this issue would send an important message to Harrisburg to start paying attention to the consumer, the policyholder, and your constituents. They are not asking for much, just a decent Commissioner and a Consumer Advocate to give them a real voice. I also think by your action on an Insurance Consumer Advocate for Philadelphia, you would send a message to Harrisburg and at the same time provide some long overdue representation for your constituents before that office in Harrisburg. Thank you very much.
Thank you, Madam Chair. Thank you, Mr. Denenberg, for your testimony. You mentioned in your testimony several times about the state advocate. Do you think we just need a state advocate or we should have one specific to Philadelphia?
It would be nice to have 40 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 a Philadelphia advocate. First of all, I'm not sure we're going to get a state advocate. We've been talking about this issue --
We may not get a Philadelphia advocate either. I just was curious.
Well, if you can't get a Philadelphia advocate, then I'll give up. How's that? I'll give you an incentive to get rid of me forever. I'll tell you how bad it is. Now, this relates to testimony in 1974. I usually bring it along. I don't have it so I can't give it to you verbatim. But this actually happened because I was there. The witness was complaining that he had a problem with airline safety and he could not even get the Federal Aviation Administration to pay attention. This is the same FAA that gave us the World Trade Center, they would not pay attention. The witness said, "I had to write them many times and they finally just kind of filed me off and I could not even get action on a serious problem of aviation safety before the Federal Aviation Administration." The then senator from Connecticut said to the witness, "Well, if it makes you feel any 41 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 better, these regulatory agencies jerk us around the same way." So that's a US Senator saying that. I know what happened because I was the witness and I was complaining and I almost fell off my chair when the US Senator said, "We get jerked around the same way." That was 1974 or '75, something like that. That really was the foreshadowing of the World Trade Center catastrophe because everybody knew the FAA was a joke then. I used to do stories on it all the time. I could go out and do anything I wanted in the airport. I could put metal all over my body and I'd never be picked up. I used to even wait on a day when they had just had a big alarm, some nut would get on a plane with a gun or some thing and they tighten security. I'd say, "Okay, let's go down now and see if we could get by." It didn't make any difference. They had no security. Everybody knew the problem. Nobody did anything about it. This is the same thing. There have been study after study out of General Accounting Office and elsewhere that Insurance Commissioners are too cozy with the industry. They come out of the industry. They go back to the industry. The old 42 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 revolving door. Therefore, the case is conclusive. And I think we've got to -- should not do like the US Senate; they talked about it and I still have hearings two inches full of all the testimony for it and they thought they would pass it and nothing ever happened. Same thing happened in Harrisburg. If this doesn't pass, it just proves again the need for it to pass. Because the arguments against it are just so weak they're ridiculous, they're embarrassing, as I said.
Yes. They had a very good advocate. I used to see them all the time. That's the problem.
What was their role? What was the interaction from the Federation to you as the Commissioner?
We had a good relationship. I mean, they're always nice. 43 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525
This had nothing to do with personality. Some people think I'm nice and some people don't think I'm nice, but I have a job to do so --
Well, we would exchange ideas back and forth, but these guys are coming in all the time. You see them, they're -- just to show you how bad things are, when I was Insurance Commissioner, I never granted a auto or homeowners' increase and I never got sued by the company because I was doing something illegal. And it had just been routine to give them anything they wanted. They would come around, they'd ask for higher rates, they'd asked --
That is my question. When they came to you, what was the nature of the reason that they came to you traditionally? What would they come to see you for?
Well, they would come, really, on any matter of interest to the whole industry with their point of view. They were lobbyists and they were there all the time. Companies were there all the time.
So they're 44 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 advocates for the industry?
I'm trying to establish it for the record. I think I understand what their role is.
It's a trade association of the industry. But if the Insurance Federation would disappear, it wouldn't make any difference because they have their own people up there. Their interests are different. And maybe that's one slight excuse for the Federation never having any proposals, because they have to come up with a proposal that all their members agree with, I would imagine, and therefore that's hard to do.
During those three years, did they ever come to you with a proposal to reduce rates?
No. But, boy, I can remember companies' presidents coming in, Nationwide, State Farm, "If you don't give us this increase, we're going to leave the state." They're still here. I heard more crying and whining than in anytime of my life. 45 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525
Commissioner, good seeing you. It's great to have you here today. Thanks for all your continued good work.
Listen, I promise to get out of the business and give up if you guys don't pass this advocate measure, so I'm counting on you.
You know, Commissioner, I've got a question and maybe you've already answered it or addressed it here today. I appreciate the Live Stop Program. It's a good program. But if a police officer stops a person and they don't have insurance, they just give them a ticket. And the Police Department and others say that they don't have this the technology to verify 46 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 it because a person doesn't pay their insurance, it doesn't come off the computer, or they pay and it comes on the computer. I think that there's political reasons that our police officers don't enforce the Live Stop on a person who doesn't have insurance. If they don't have an owner's card or they don't have a proper registration or inspection, from what I understand -- and if I'm wrong, I'll apologize -- that a person could be stopped and not have insurance and just be issued a ticket and continue to go on. I'm wondering from your experience whether you believe that it is impossible for law enforcement to determine with accuracy whether a person's insured or not.
That may have been a good excuse 30 years ago, but now with the Internet and Web and computer technology, I think it's utterly ridiculous to assume that they can't get the information. Somebody should have the information, and if it's there, it should be easily accessible. And I don't think there's any excuse for it.
Are you aware that that is part of the criteria here in the City with the Live Stop Program? 47 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525
No, I wasn't aware of it. But you said it's a political matter. The problem of the uninsured has been with us forever. And I can remember the same kinds of things being said 10, 20, 30 years ago that there's this huge problem. I remember talking to the guy who ran the insurance program for Yellow Cab. He claimed 50 or 60 percent of the people in some areas were uninsured. This is not a new problem, but politicians don't like to touch it. As you know better than I am, I'm a failed politician, you're all successful politicians. They won't touch it because they don't want to take cars away from people. We have a society that doesn't have mass transportation, thanks to the car industry, and therefore you've practically destroyed the man's life if you take his car away. So I would imagine the politicians don't want to do that and I would also imagine that the police don't like to do it.
Commissioner, and again, that's one of the flaws, I believe, in the system. And if it's a political reason, you know, don't want to take cars away from people, but we have a process that in many areas is criticized that 48 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 we're not really serious about removing people from the street that don't have insurance when the police officer just writes a ticket and the explanation is that, well, that's the process that if a person doesn't have insurance you write them a ticket and they go to court and they produce insurance. It just seems phony to me, and that's how I feel about it.
I believe our next witness is Sam Marshall, President of the Insurance Federation of Philadelphia. Good morning.
Good morning. I guess Herbert's already given my testimony, but maybe I'll try to do it myself.
Would you please state your name for the record? 49 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525
Yes, ma'am. I'm Sam Marshall. Thanks for the chance to be here today. I'm President of the Insurance Federation of Pennsylvania. I'm joined by John Doubman, our Secretary and Counsel. The Federation is a non-profit trade association. We represent the insurance industry. We have all shapes and sizes of insurers who do business in this Commonwealth and in this City. We include most of the major auto writers doing business in Pennsylvania and in Philadelphia. I want to answer the immediate question in Councilman DiCicco's letter. It referred to Operation Live Stop, which somehow seems to have been largely forgotten by some of the past presenters. We'll focus on that at the outset because that's what you had asked about. Operation Live Stop on its own has not so far made a large dent in auto rates in this City. And we want to get the unfavorable news out of the way early on; it's not going to. Now we'll explain why. Operation Live Stop has over the past nine months resulted in the seizure of over 2300 50 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 cars. It's an impressive number, it's dwarfed by the number of uninsured cars in the City. Nobody has a precise calculation of that number, with estimates ranging from 75,000 to 400,000. Those variances are frustrating, but they're understandable. It's impossible to tell the number of cars that are unregistered and uninsured. Generally, when we talk about uninsured, we're talking about cars that are registered and, therefore, PennDOT has a record of them as being registered, but they don't have insurance; they don't have a record on their insurance. Unregistered and uninsured simply fall under the radar screen. And of course, the number of cars that are registered that don't have insurance changes on a daily basis. And you can't tell what portion of these cars that Operation Live Stop has seized are abandoned or otherwise not in use, as opposed to being uninsured but driven. That holds true with cars seized in Operation Live Stop. It holds true when you're trying to calculate the number of uninsured cars being driven. We don't know how many of them are in active operation and, therefore, are potential causes of claims or were 51 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 abandoned or otherwise not in use. Let's make several assumptions here. First, go on the low side and let's assume there are 100,000 uninsured cars that are being driven on our streets before Operation Live Stop. Let's make a second assumption this time on the high side. Let's assume that all 2300-plus cars seized under the program were being driven, active use. And that these vehicles are either now insured or they're off the streets. That would mean that Operation Live Stop reduced the number of uninsured motorists by about percent. Just go on those numbers. So the 14 simple math suggested everybody's uninsured motorist 15 rate should be reduced by 23 percent. 16 Unfortunately, it isn't that simple. First off, 17 understand that uninsured motorist coverage is only 18 a portion of the overall auto premium we all have to 19 pay, and it's a relatively small portion, at that. 20 A survey of our members shows that that's what it's 21 called when you see it on your bills, the UM 22 portion, uninsured motorist portion of your bill 23 ranges from 5 to 10 percent, with most people paying about 10 percent of their total premium for this coverage. 52 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 Second, understand that uninsured motorist coverage is optional. You don't have to buy it. For most of our companies, about 70 percent of their customers do buy it. With at least one major low-cost writer in the city says only about half of the policyholders do. So we're dealing with a program that only impacts an optional, not a mandatory, coverage. Third, understand the number of uninsured cars isn't the only number relevant to figuring out the uninsured rates. Pennsylvania has a unique system for handling claims.
Every other claim goes to the judicial system. It's what we all normally think of. With the state's Insurance Department, the one that Herbert seems to think we're in such cahoots with, the State Insurance Department requires uninsured motorist claims and underinsured motorist claims to go through arbitration. You always hear complaints about the expense of an unduly generous judicial system in Philadelphia, and we think it's true. But however generous Philadelphia juries might be, Philadelphia lawyers are even more generous; and they're the ones who run the arbitration system. 53 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 We've been trying to get that changed. We've been trying to fight that and we know that it would reduce auto rates in Philadelphia, the Insurance Department, the Insurance Commissioner has ruled against this time and time again. But you have a system right now that's more favorable to the uninsured claimants than the normal system that applies to all other claims. We're not talking about it being favorable to us; we're talking about it as it compares with all other claims. We've been battling, as I said, with the Department and the trial lawyers for years. It's now before the Supreme Court. But I can tell you the mandatory arbitration system is an enormous inflationary factor in UM rates. You also have costs within the system and within auto rates generally that are on the upswing. That goes to the cost of repairs and medical costs that are associated with all this. Those both on the upswing these days, I think Herbert mentioned the rising cost of health insurance which reflects a rising cost of healthcare. The cost of car repairs has obviously gone up as the cost of cars themselves, and 54 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 therefore, their parts have gone up. That doesn't mean that reducing the number of uninsured cars doesn't help. It does, or at least it should because it should reduce the number of uninsured claims. But please understand the limitations of Operation Live Stop in terms of it's impact on auto rates. It's taken possibly 9 percent of the uninsured cars off the road, meaning 10 at best it could reduce uninsured rates by that 11 much. With uninsured rates at about 10 percent of 12 the overall premium for the consumers who elect it, 13 that means a possible reduction of the overall 14 premium of some 2 percent, going from 10 percent 15 down to 8 percent. 16 That doesn't factor in the other costs 17 of the uninsured motorist system, especially the 18 arbitration requisite, but also rising medical and 19 repair costs. It also doesn't factor in real life 20 experience which is a true test. Nine months into the program, we don't know what it's done to the size of uninsured motorists claims in terms of the number of claims and in terms of the amount sought in each claim. We don't know that because it takes some time. The claim may happen on day one, we 55 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 don't necessarily hear about it and hear about a lawsuit stemming out of it. The statute of the limitations lasts for two years. It generally happens a bit quicker than that, but you don't know nine months into it just with the impact is. We'll accumulate the real life experience in due course. That's what's going to drive the rates. I know that doesn't answer your need to lower auto rates in Philadelphia. It isn't immediate enough, it isn't guaranteed, and if it ends up being only a couple of percentage points on the uninsured motorist portion of people's auto rates, it's not going to be a big enough drop. But that's the reality of insurance rates, and it holds true whether the rates are going up or down. Insurers can only make projections and changes in rates based on experience and it has to be the total experience. I can't tell you, you have at least two important protections here.
First, auto rates are regulated by the State, and I know that Governor Rendell is going to be vigilant in making sure that Philadelphians quickly get whatever savings emerge from any Philadelphia program. Second, you have a 56 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 competitive market here. It's not as good as it could be, but it's far better than it was years 4 ago. Nothing, not regulators, not lawsuits, and 5 frankly Herbert may criticize me for calling it 6 another layer of bureaucracy, but that's nonetheless 7 what it is. Not a few more people, a few more city 8 or government or state officials getting involved, 9 whether they're good or bad, nothing, in our 10 opinion, in our experience, is better market competition. Nothing better assures that the savings go into the pockets of policyholders better or more quickly than competition for those policyholders. And we now have that competition. That's one reason auto rates here over the past 10 years have remained flat or even dropped for many insurers. We have rate comparisons that show you rates from 1995 to 2002. What it showed for a number of the companies in Philadelphia is that rates have actually gone down. Herbert said there had never been a decrease filed when he was Commissioner. I can't speak for that time. I can tell you that since 1995 there have been rate decreases in Philadelphia. You don't hear about it. Underlying rate is still a problem. They've gone 57 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 down in many companies here. It's done in comparison to Pittsburgh. That doesn't mean that the rates of Philadelphia doesn't have the highest in the state; they do. Doesn't mean you have to address that, because affordability is a key problem. That's the case. But I think we understand there had been rate decreases in Philadelphia. That reflects in part to the success of Act 6. It also reflects as you get some predictability, you bring in competition.
I know you went a little off of your written prepared notes. You mentioned rate reductions in Philadelphia. Are you speaking about a company overall reducing rates for its clients or customers? Or are you talking about on an individual basis?
A company overall reducing rates for its clients. It would make the rate filings with the Insurance Department and they'll have an X percentage decrease. It's interesting. I saw the other day former Representative Dick Haden who used to represent the Manayunk area in the State Legislature. And he was one of the proponents of Act 6, he was one of the 58 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 prime sponsors of Act 6. And he saw me and he called over and said, "Hey, 10, years into it and 4 my rate's gone down." He was speaking as -- 5
I'd like to get his 6 number because my rates actually went up in the last 7 two years and I bought a car that is totally 8 different than the first car I bought in 1999. And 9 I've seen somewhere between a 2 and $300 increase. 10 I'm a 57-year-old man; I'll be 57 next month, 11 bachelor, no children living at home and I have a 12 garage kept vehicle. You can finish with your testimony. I have a serious problem with that. I don't know anybody in my neighborhood whose gotten a reduction.
Again, Councilman, I don't know your insurer. The rates are on file. You can see it. The reality is what the reality is.
The reality is when you live in a neighborhood like South Philadelphia and you talk to people and they tell you that their rates are going up, I have a tendency to believe that they're not just telling me that.
Councilman, I suspect they're not. I didn't say all insurers' rates. And 59 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 of course, sometimes somebody -- one minute you're insuring a $20,000 car and then you get a new car and you're insuring a $40,000 car.
Well, I think again why we need an advocate. We need somebody to pay attention to some of these issues.
I apologize for interrupting, but you kind of went off of your written testimony, so why don't we go through your written testimony and then we'll come back.
I'm trying to address as I do some of the points that have been raised by previous --
I have no problem with that, but I was just thinking of my premiums. I pay monthly. I just signed a check the other day, and I'm paying $300 or so more a year. And I got rid of the fancier car that some of my opponents were claiming that I shouldn't own because for whatever reason. But anyway...
I'd be more than happy to learn who your insurer is and happy to look into it. And again, we documented what the rate filings are. 60 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525
It won't change my opinion about the industry, buy anyway...
I didn't expect it would. I always appreciate an open mind, though. Now, does this mean that Operation Live Stop isn't working or isn't worthwhile? No. The state mandates that people have auto insurance. That isn't a mandate that we support, but it is the law. Any program that promotes compliance with the law is a good one, although I personally favor programs that make the law's mandatory coverage more affordable. Live Stop also helps with urban blight and apparently has collected about $30 million in unpaid fines, so it's had economic and social benefits well beyond a possible impact on the uninsured motorist portion of people's premiums. But it does mean that everybody has to be realistic in evaluating the program. Expecting it to produce major across-the-board reductions in auto premiums here is unrealistic. It should help control one portion of auto cost, a relatively small one and an optional one at that. Nothing more, nothing less. Yes, it is a good program, but it isn't the magic bullet and it doesn't go to the main 61 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 reason auto rates are so high here. Now, Herbert already spoke about that, but I'll try to speak about it in my own tongue.
I thought your formal name might have been Herbert. I didn't know we were that close --
I've always referred to him as Herbert Denenberg, so I'll continue with that here, but Mr. Denenberg. That goes to the second question. Why are Philadelphia auto rates among the highest in the country and by far the highest in Pennsylvania? We've said it before, we'll say it again today, in Philadelphia you don't have that many more accidents per driver than the rest of the state. And the damage to cars isn't that much more than the rest of the state. But we sure do have more medical claims coming out of those accidents than anywhere else in the state. We've shared the data with the City before. For every 100 accidents in Philadelphia, we 62 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 have over 50 medical claims. In the suburbs, you see about medical claims. In Pittsburgh and 4 elsewhere, it's about 17 medical claims. And for 5 Philadelphia that's actually progress. A decade 6 ago, the number was about 70 medical claims for 7 every 100 accidents. The number has dropped largely 8 because of the limited tort option, and that's one 9 reason rates here have dropped or held firm even as 10 they have gone up or not dropped by as much in other 11 regions. 12 But it's still too great a disparity, 13 and it's why rates here are so much higher than 14 anywhere else. And it isn't just the medical claims 15 themselves, it's what comes with them as 16 multipliers: Claims for lost work time, claims for 17 pain and suffering. 18 I don't have a solution for this, or at 19 least not one that's immediate and guaranteed. This 20 disparity between Philadelphia and the rest of the 21 state didn't come about overnight, and it won't be 22 solved overnight either. But I do have some ideas. 23 First, everybody has to acknowledge the 24 problem. We point it out, and we get, at best, 25 polite nods. But we also get accusations that we 63 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 never said it before, that we're always complaining about uninsured motorists or auto theft as the main reason insurance cost so much here. Well, we've testified for the past 6 years, again Herb mentioned that, and we've been 7 consistent about the problem. Things like uninsured 8 motorists and auto theft are, relatively speaking, 9 small parts of the auto premium and, therefore, 10 small parts of the auto problem. The single 11 overwhelming reason rates are high here is the 12 abnormally high number of medical claims here. 13 Address that, and you'll get rates comparable to 14 Pittsburgh or at least our suburbs. Ignore it, and 15 you're only going to nibble around the edges. Second, we have to fight the problem every step of the way. We have to understand that it can be a long fight. Nobody seems to have an appetite for it, probably because it means pointing the finger at ourselves. It's sort of a pogo-esque, we met the enemy and he is us. " That's especially here because we have a long, 64 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 ingrained habit or inordinately excessive medical claims. And we have extensive infrastructure to perpetuate that habit. But winning this fight, bringing Philadelphia's claims habits in line with those of the rest of the state -- there's no reason we shouldn't be -- is the key to bringing significant and lasting savings to Philadelphians in their auto rates. The sooner we aknowledge it and work together, the sooner your constituents who are also our policyholders will get the rate relief they want. We've said this many times to City officials. As I said earlier, we get, at best, polite nods; at worst, accusations and lawsuits against us that, whatever the headlines, don't address the underlying problem. John Doubman and I are lawyers ourselves. We understand that sometimes litigation is a great way of avoiding the problem, not solving it. In this case, it seems some people are more bent on suing the messenger than addressing the message. I know it's frustrating for you. It is for us too.
In all of our talks with City officials, everybody acknowledges the problem of 65 04/09/03 - LEGISLATIVE OVERSIGHT - RES. " Maybe that's because of the skepticism you have for insurers. We here it all the time. Insurers don't really care about addressing the problem, we're content to live with this disparity between medical claims in Philadelphia and everywhere else in the state. We get accused of using it as a convenient excuse to let Philadelphia remain an expensive and comparatively underserved market. Somehow, we get accused of liking all these medical claims, although nobody ever said we like paying them. Let's get real. First, Philadelphia's too big a market to let this problem go unaddressed. As an industry, we have a huge commitment here, not just in auto insurance, but in all lines and also as employers and investors. Second, what happens in Philadelphia does spill over into surrounding areas, which is one reason why you see medial claims in our suburbs being so much higher than places like Pittsburgh. So this isn't just a Philadelphia problem, it's a regional problem and addressing it is going to add 66 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 benefits in the entire region. Third, we're business people. We want the largest, most publicized and leading market in this state to be one that's affordable, stable and competitive. We make money when policyholders are happy, meaning they're pleased with their rates, their service and their choices. We don't have a lot of happy policyholders here right now. I think Councilman DiCicco made reference to that. Frankly, it is better than it used to be. We also recognize you don't have a lot of happy constituents either, at least in terms of their auto rates. It makes good business sense from our end, makes good political sense from our end and obviously from your end to work together to change that. We're here today as we have been in numerous other city forums to do just that, work together to bring more affordable rates.
Thank you, Madam Chair. And good morning again, Mr. Marshall. 67 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 What is the Insurance Federation?
We're a trade association. We represent the insurance industry in Pennsylvania.
Basically, you're more or less lobbyists for the insurance industry.
So you're not lobbyists on behalf of the consumer; your interest is in the people who you represent, the companies who sell insurance.
We represent the companies. And we had a long discourse on this, but yes, and what we work for is a well-regulated, competitive market place. I recognize people can differ on what constitutes good regulation. I would say it's clearly true in the case of a mutual company, and many of our members are mutual companies. Mutual companies are owned by their policyholders. I've always looked and thought, yeah, we represent the companies; I don't think there's huge disparity between the companies' interests and the policyholders' interest. I think ultimately any good business stays in business by 68 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 keeping its policyholders happy. But yes, you are correct, we represent the insurance industry.
I think I might take exception to that last statement, respectfully, that any good business wants to stay in business -- the problem is that we have many people in this City who have no other choice but to carry automobile insurance because they own homes and businesses and properties, and if they're in an accident and they're sued, they need some protection. So although it's not mandatory, in many cases, you have no other choice. So people are basically forced to carry -- responsible people are forced to carry insurance.
I'm sorry, Councilman, what I was referring to -- we represent a competitive industry. You don't have that in all segments of the insurance industry. Frankly, you don't have it in the healthcare segment where the Blues are the dominant players and have a variable monopoly share. Within our membership, we have companies, none of whom like each other, none of whom work with each other, but the only thing they do agree on is they want a place where they can 69 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 fairly compete. That works well, I think, for companies. It also works well for policyholders. Yes, they have to have insurance. What they don't have to have is insurance from Company A or Company B. What we want is for people to have choices among insurance. Do we think it's an indispensable product? Yes.
Who created the Federation? How did it come about? How long has it been around?
I guess in some, way, shape or form some group in 1929. It really came about through our founder, a gentleman named Tom Finley who Herb had mentioned he knew. And Tom Finley passed away a short while ago.
But Mr. Finley, who was our founder, put it together. We don't have anything like it in other states, so it goes back 30 years.
How do other states operate without a federation to do the things that you mentioned the federation does? 70 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525
I think in other states they have swarms of lobbyists that Herb referred to. In the Federation I guess we just have one -- a small swarm.
I would think that the companies have in addition to the Federation their independent lobbyist for each company as well.
No. There may be a couple of companies that do, but most of the companies rely on the Federation.
You mentioned several times in your testimony that -- I think you used the word "small," these are small issues relating to premiums, the uninsured motorists.
Small portion is reflected in the premium when you talk about uninsured motorists, the fact that there's a high rate of auto theft. You may have mentioned that three, four, five different times, small, small small. I mean, cumulatively, if you add up all those small pieces, it can be a fairly decent piece of change, if you will, to a consumer. I don't know if the gentleman in the 71 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 back was the person I met back in 1993 or 1994 when I was the court administrator of Traffic Court. Were you there, Mr. Marshall, at a meeting I convened with the Insurance Federation and other folks?
He may not have been the gentleman. It's been a long time.
That's who it was. Thank you. And that's the time that I was drafting a legislation on the Live Stop Program. I asked him a question because he commented that, "Well, it's really not going to make all that much of a difference. It just would be possibly a small reduction in the premiums. And I said, "Give me your most conservative estimate as to what you think that reduction would mean to the consumer in Philadelphia." And he said, "Oh, somewhere between 10 and 20 percent." And it's kind of reflected, I think, in your testimony as well. When you speak of 10 or 20 percent, are 72 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 you speaking of 10 or 20 percent of the total premium or of the line item that says "uninsured motorist"?
If you look at -- everybody can pull out their policies. For most companies, it ranges from what your UM rate is. You look at your policy and you can see. Every policy sort of has -- it's broken down as to what each item of coverage that you have costs. If you look at the UM line on your policy, what you find for companies is that UM ranges from 5 to 20 percent. When we did a survey of the companies --
Of the overall premium. It is on average, and it's actually a high estimate, but it's about 10 percent. It's probably 8 to 10 percent, but we'll call it just for easy numbers 10 percent. What that means is that if you had absolutely no uninsured motorists in Philadelphia and in Pennsylvania so therefore you had no 23 uninsured claims, that you would see a reduction of 10 percent.
You speak about the 73 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 number of unregistered and uninsured cars, and we're speaking about Philadelphia, how does that compare to the rest of the state? I mean, there have to be uninsured motorists, I assume that are driving throughout the Commonwealth of Pennsylvania, not just in Philadelphia.
Correct. The only numbers I've seen come from PennDOT which collects all this, Pennsylvania Department of Transportation. I know the House Insurance Committee had hearings on this maybe five years ago, and I haven't heard of anything that would suggest the numbers have changed -- of course, PennDOT can't tell you how many unregistered cars there are. They don't know that because the information never comes to them.
To be on the PennDOT list, their inventory where they have numbers, you have to have -- John's giving me some stuff. PennDOT can't tell you how many unregistered cars there are. It's an inexact number because nobody ever sent it to them.
They can only speak 74 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 to the number of registered cars.
They can speak to the number of registered cars that lack insurance. I think they had also said here in other parts of the state it's about 5 percent. And in Philadelphia it's maybe 20 to 25 percent.
Five percent of the total population of vehicles that are driven in the Commonwealth outside of Philadelphia?
Yeah, 5 percent of the registered vehicles outside of Philadelphia.
They would know how many number of vehicles that represents?
Do we know what the number of total registered vehicles in the Commonwealth is today?
You have to identify yourself for the record, please.
I'm John Doubman. I'm Secretary and Counsel for the Insurance Federation. 75 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 I just noted when you were asking the question that the Insurance Department put some numbers together several years ago, so these are a little bit out of date but I thought maybe you wanted to get an order of magnitude. They traced it based on PennDOT records, which is really a methodology we think that is very conservative because it only works with the comparison between registered vehicles and those that lose their coverage, so who knows what happens to somebody who brings in a junker and never has it registered, never gets in that system, so that's why it's conservative. Between 1989 and 1994, they developed some numbers. They thought that 1989 maybe 9 percent, some 660,000 vehicles were uninsured.
Well, 662,857, about 660,00 vehicles which would have been 9.2 percent were uninsured. By 1994, their calculation showed that it had come down to 480,000 vehicles or 6.3 percent. 76 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525
And that is obviously a bit higher because statewide includes Philadelphia.
Well, I guess that goes to another question. In your testimony, you said that no one could figure out how many uninsured -- I've got to look at your testimony. Just bear with me. No one has precise calculation of that number, that number meaning the number of uninsured vehicles in Philadelphia. It could be anywhere from 75,000 to 400,000. So if you use the 400,000, does that mean that every car in the Commonwealth that is uninsured is in Philadelphia?
Well, that wasn't our number. That came from a councilman. It was quoted in the Inquirer, as you're aware. But if you want the Philadelphia number --
If you look at the Philadelphia number -- the 400,000, as John mentioned, came from one of your colleagues. The number that the Insurance Department -- and it used PennDOT data in doing the report. And in 1994 the Insurance Department calculated the number of 77 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 Philadelphia registered but uninsured cars to be 128,000.
So as a result of Live Stop, that number should be reduced significantly.
And in fact, when we spoke about it, I was going with -- that's what I was saying here, make an estimate that frankly tried to make the uninsured motorists problem -- I said go with 100,000 on the assumption that you may have -- since 1994, you may have had some further progress because one of the things we saw between 1989 and 1994, we saw the number go down because auto rates went down.
You talk about the Live Stop Program and you do acknowledge it has been somewhat successful. We've taken somewhere around 23,000 vehicles off the street that had been driven by uninsured motorists. There's a certain portion of those motorists, by the way, who reclaim their cars that have to show proof of insurance in order to get their car. So the number of insured 78 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 motorists would have to go up at the same time that uninsured motorists is going down.
Well, that's true, but remember a couple things. First of all, those people that have to go over and show the Traffic Court an insurance card, we don't know how long they're going to stay for. So you may have somebody -- I don't know what the shortest period you can get insurance for in the City is. Can you get it for --
Thirty days, 60 days, and I'm well aware of that. Which when leads me to another question.
The other thing you don't know -- which I am fascinated because I have talked with your successors from time to time in trying to help them get a line on who has insurance and verifying some of this stuff. The other question is the vehicles that are sold at auction. And I have no idea how that's going. There may be a real problem in making sure that theirs is insured because sometimes they have somebody go who may have -- I don't know if they have a license to buy -- I mean, I don't know that process. But you could wind up with a fair number of those vehicles going back 79 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 out on the street and being uninsured as well, which you know.
I understand that. And I can go back again to my days at the Traffic Court when we began this process with the drafting of what is now referred to as Live Stop. I had asked at the time would the insurance company as an industry, would they be willing to work with the law enforcement agencies to create some sort of a central data system so that when a police officer stops an individual for a traffic violation, alleged traffic violation, that the police officer at the time of the stop would be able to access whether that person -- within the most reasonable amount of time, can access whether that person was still fully an insured. Because I agree that people will take out insurance for a specific period of time, let it lapse, and then go on their merry way. But I was also told that one of the things that was an obstacle, if you will, in the early stages of the state authorization to Philadelphia to allow us to implement the Live Stop Program is that the insurance industry did not want one of the violations that a person could be written solely for 80 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 not carrying insurance. So if a police officer stops someone for allegedly going through a red light, they could not just issue a ticket for the red light and insurance. They can only issue it for the red light and failure to carry a registration because they do not have the ability to prove on the spot whether that person is insured at the time of the stop. So the insurance company basically allows these people to slip through the cracks because they didn't want that to be a criteria for the stop.
But you need to understand. First of all, PennDOT reporting in a state database for auto insurance is a topic that we could spend days talking about. But the problem 16 is, there isn't a state in the country where you can 17 do that. Now, I realize you all want to say how 18 wonderful the technology is. Florida has spent six 19 years and over $25 million trying to get a database 20 that will work. They've got nothing. They've got the biggest database in the country sitting down in Miami at their Department of Transportation, and it doesn't work. So that's a whole other topic which I really -- I mean, we could talk about it for days. And you are correct in your assertion 81 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 that we were very nervous about having an officer able to take somebody's car because of the theory that they didn't have an insurance card or didn't have the insurance when it can't be immediately verified.
But we can take it when we assume at the moment, based on the most accurate records that the police officer is able to access through PennDOT, that the person is either unlicensed or has a suspended license.
That's right, because the number one reason that PennDOT suspends car registrations; no insurance. So in essence you have a proxy doing the same thing.
But there are cases where an individual comes up as having no record as to whether or not they have a license.
We hold the car 82 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 until that person shows proof that they are licensed and do have a proper registration. But we don't hold it if they can't show proof at the time of the stop for not being able to produce an insurance card. So in effect, we may be allowing people who are still uninsured to continue on their merry way. And that is a result, I believe, with the insurance company was lobbying against at the time that the state was considering authorizing the City of Philadelphia to implement the Live Stop Program. And I think that they're in some jurisdictions -- I don't know if they're in Pennsylvania or not and smaller counties. And this may not be your problem but maybe it's something we need to work on. That's why I think we need an advocate. If you are stopped by a police officer and you don't have a driver's license, a registration and/or a valid insurance card, they hold your car. They take you to the police station. And someone -- "I forgot my wallet at home. I left it on the bureau." I worked at Traffic Court for 16 years. I mean, I've heard every excuse imaginable. They will hold you until someone produces those three pieces of information and then release you. But they also give you a fine 83 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 for the amount of time it took the police officer to take you from the scene of the incident to the police station, because it's valuable police time. And I think most people will remember to take their wallet with them the next time they go out. It's an interesting concept. I don't want to get off the track here. But if we're going to say that we -- if you own a car, you're mandated to have automobile insurance. Why is not the insurance working a little bit more closely with us to figure out a way in which we can verify proof of insurance and not letting that slip through the cracks where "I don't have it with me. I left it home," and maybe you get a ticket for failure to carry and you either go to traffic court and produce it within five days and get it discharged or you don't show up and it just becomes another ticket that was ignored.
Councilman, speaking as a lobbyist, and I work for Henry for any number of years. I can't account for everything he might have said in meetings with you, but obviously you're aware of it. One of the reasons, people say, "How come you guys aren't -- why don't you go? There's been bills in Harrisburg that say, "Let's have huge 84 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 penalties for people who get caught driving without insurance, fine them in a big way." It's not that we oppose those things. We say, look, for the most part people don't have insurance in Philadelphia because it's too expensive. And what we need to focus on is making the insurance more affordable, not adding to the penalties when people can't afford it. If you have it as an affordable product, then throw the book at them. It's not our idea that it be mandatory. We don't favor mandatory auto insurance. We think, again, it ought to be market driven. But assuming that it is mandatory and it's going to stay mandatory, what we say is let's use the talent that we have, the effort that we have, the resources that we have -- and I don't mean "we" the insurance. I mean sort of a collective people who are involved in the public policy debate. Let's focus on trying to make the coverage affordable, because this isn't something where the people are scofflaws. There are some who are and there are some --
And from your position, 85 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 you would have seen the many. But I also think that there are a lot of people out there who say, "Look, I'm trying to get by. I'm making 25, 30 grand a year. I've got a car that's worth 1500 bucks and I can't afford 2,000 in auto insurance for this car." What we have tried to do is say, look, let's use our efforts in a collective sense -- and we can all point fingers at each other and say, "You guys are the culprit," and all that and everybody can do that. But let's use our resources to say, "Here, what can we do to make the coverage in Philadelphia more affordable?" Nothing will reduce the number of uninsured motorists than to have more affordable auto insurance.
We all agree on that. I think the heart of why we're here, one of the main reasons is that I think Philadelphia has done significant work in addressing some of the issues, notwithstanding the medical costs. And I understand that sometimes people get tapped in the rear bumper and they think they hit the lottery. I'm a realist. I know what it's all about. I've seen it. But we've also done an excellent job in 86 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 reducing the number of auto thefts. We're a national model. I know there's percentages somewhere in Ms. Schulman's testimony that speaks to the number reduction, the huge, huge number, not a slight number, a very huge number in reduction of auto thefts. And this only goes back to 1995. We have done a magnificent job in reducing the uninsured motorists. Claims have gone down, have decreased dramatically in Philadelphia while the rest of the Commonwealth, they're going up. But we still have not seen any slight reduction, overall reduction, in premiums to the constituents, the consumers in Philadelphia. So I think we've begun our part many years ago and we're still working at that. And yeah, I think we all ought to sit down together. But again, that's really not -- I mean, we will bring awareness to this Council. We'll talk about it, we'll get stuff on notes of testimony, we'll speak about it, but -- and I know it's not for you to answer, but again, I think you're making the compelling reason why we need an advocate who can deal with those issues, collectively work with the Federation and the insurance company, to sit down and say "This is what we've done." 87 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 Now, it's 2300 cars. What happens if by the end of year we have taken 50,000 cars off the street? Is there a magic number, or is there not a magic number? But I have to believe if you take 50,000 or 100,000 or 200,000 over a two-year period of uninsured vehicles off the street, it should make a difference. You used the word "should" in your testimony in one of those areas that I'm speaking to. Why hasn't it? Why hasn't it happened yet?
There were a series of things there. Let me start -- and I'll trust you'll correct me when I forget something you mentioned along the way. But you started off talking about things that the City has done. Just so everybody understands, auto theft, you're exactly right, the City has a model program. It happens because we have a very good Auto Theft Prevention Authority that was created by the General Assembly. It was a statutory creation. Now, you know who came up with that model legislation? We did. That was our proposal. We paid for it and it was our proposal. And we said because we want to reduce the number of auto thefts primarily. It's not Philadelphia, it's actually -- you go to some of the surrounding malls 88 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 in the county areas and it's probably a bigger when you go up to the Franklin Mill Mall or King of Prussia. But the one thing we said all along, you could have no cars ever stolen again in the Commonwealth of Pennsylvania, and that's 4 percent of your auto premium. It's a good thing to do to get rid of auto theft --
That's 4 percent. Ten percent on uninsured. We're up to 14. We're getting there. It's starting to look a little better.
And, Councilman, you're exactly right if it went to zero. But understand, we not only support the auto theft initiative, we came up with it and we fund it. The same thing with fraud, the Insurance Fraud Prevention Authority, that was something -- it was model legislation that we suggested, proposed, got people behind, including the District Attorney, the State Attorney General's Office. Your question about if you do this, where will the savings be. If you have -- and I am assuming. Maybe it's because I'm an optimist; I don't know. But I am assuming that Operation Live 89 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 Stop, if continued, will reduce not only the number of uninsured motorists, which is nice in and of itself, but the most important, from an insurance perspective, is going to reduce the number of uninsured motorist claims. When you reduce those claims, that will reduce the amount of that coverage. That's the single overriding purpose.
But apparently we're not there with only removing 23,000. I mean, what is the threshold? What is the magic number here?
The number of companies make their filings on an annual basis when the Insurance Department has data calls on an annual basis. Again, it's how the claims progress. That's the telling number.
We have it. Ms. Schulman supplied it. I'm not being sarcastic, but if Ms. Schulman has it --
Well, given that her 90 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 report came out right around when -- if she has studied the impact of Operation Live Stop on uninsured motorist claims, I'm happy to see the data. But I don't believe that's what she said because I think her report actually came out before Operation Live Stop began.
It did. But I'm referring to the number that she speaks to in her report that from 1995, I believe -- from 1990 through 1995 the number of uninsured motorists decreased by 85,000 motorists, from 175,000 to 90,000. And I have to believe that that number is even lower as a result of Live Stop.
Again, Councilman, it goes to the number of claims and it goes to the amount that the claims get. That's the telling number. And it's one of the reasons -- and we presented it to the City any number of times. Frankly, when you look at the UM system, it is the arbitration requisite that is -- it's why we've been banging our heads. I appreciate you, Phil, you bang your head against the wall when you deal with us. We feel at times we bang our head against the wall when we deal with the Trial Bar or the Insurance 91 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 Department. We've been trying to correct the arbitration system for years. Can't get anywhere. That, more than anything else, is the single biggest, what we call in our industry, cost driver of UM rates. But certainly, as UM claims go down, the rates for UM coverage are going to go down.
Do you have a copy Ms. Schulman's report? Have you ever seen it?
I'm just going to reference some talking points I have. Ms. Schulman's report on , that a study of all civil jury verdicts, including appeals from arbitration in 1989 and 1999 showed that decisions were split equally between plaintiffs and defendants.
I don' think she was -- we talk about the arbitration system. The arbitration system that controls for uninsured motorist coverage in Pennsylvania is binding arbitration; there are no appeals. So I don't think that her report was referencing this very unique -- I mean no other state in the country has it. We don't have in any other form of law where uninsured 92 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 motorist claims -- it's mandatory arbitration. It's trial lawyer -- frankly, it's the plaintiff's bar that --
I see Ms. Schulman. She's ready to jump out of her chair shaking her head no in the back. She's more than welcome to come up and rebut if she'd like. If you'd like to come up, Ms. Schulman, you can. But in the meantime, this is a situation that is not unlike just about every other thing that we have to deal with in life. There's always a certain group of people who will pay the price for other folks who don't care to either pay attention to the law or just want to scoff the law. You have working class people who own a property, own a home, who own a vehicle, and they are basically -- they can't drive without insurance because they can lose everything they've ever worked for. And they're paying the freight for everybody else. And without being disrespectful to you, I think the insurance company understands that. And they rely on the fact there's always a certain number of people who, no 24 matter how much the rates go up and how much they complain, have no choice but to carry it. And as 93 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 the premiums go up, we'll figure a way how to pay it, so that the people at the other end get away with it. So we don't care about the uninsured motorist, per se. We've done our job in the City, we're removing them from the streets. We had been, not only during Live Stop, but even before Live Stop. But the weight of the responsibility and the payments will rely on the people who have no choice but to carry insurance. And if you really wanted to make it affordable for everyone, you certainly increase your customer base, and that should, I think would translate into reduction because you have more people paying in. Small slight reduction, again. Small here, small here. You know, I'll tell you, I know people in South Philadelphia, in Kensington, in Port Richmond that I represent, City Council, Mayfair and Bridesburg. If someone said to them tomorrow that your premiums will be reduced 10 to 20 percent, they would be ecstatic; ecstatic. And I think that would just send a better signal to people that, "Hey, we're getting our act together. The industry's working with us. The City's doing its job to make the streets safer." We understand that you've been 94 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 bearing the main brunt of all these outrageous premiums for the last several decades. And you know what? It's one the reasons that people move out of the City. Like I said earlier, I'll be 57 next month. When I was in my early 20s and it was the norm for people my age to get married and start a family many, many, many of my friends moved out of the City for a variety of reasons, but the biggest reason they moved at that time is that they knew when they moved across the bridge into South Jersey that their automobile insurance premiums would be slashed by two-thirds and that the money they would save on those rates they would apply to the mortgage and get the house with the deck and garage. Automobile insurance rates drove people out of this City. Now, I'm not, again, trying to condemn you or criticize you. It's a reality. And the more people who leave who are people who are responsible people, the burden just gets greater on those that are left behind. And it's the same thing with real estate taxes; the more we continue to increase real estate taxes, the more people say, "Hey, you know what? I sent my kids to private school so I don't get the 95 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 schools. I don't get this, I don't get that. I got the highest automobile premiums in the country. I'm getting out of here." And then they move to the burbs. And you wind up insuring them anyway out there, but they don't have to pay as much.
Councilman, you're exactly right. That's why we want insurance to be more affordable in Philadelphia. We want it to be a better market. People may not like the fact that we say, "Look, we think the most important way to address that is to reduce the number of bodily injury claims you have per hundred accidents here to try to bring it in line with what a Pittsburgh is, to try to bring it in line with where the suburbs are, with where the rest of the state is. We sit there and we say that because that that alone -- if you focus on that, we think that's going to lower rates enough. The reason Pittsburgh has rates and doesn't have a high number of uninsured motorists, the reason that Pittsburgh is at 5 percent and Philadelphia is at percent in terms of number of 23 uninsured motorists is, I suspect, because 24 Pittsburgh auto rates are about a third or a half of 25 what they are in Philadelphia. It's that much more 96 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 affordable in Pittsburgh than it is in Philadelphia.
And we need to work collectively to get that together. With that, I'll just ask my final question. I appreciate your patience, Madam Chair. I know there are a couple other witnesses. Does the Federation have any opinion about an advocate for the City of Philadelphia?
I'll send you our letter on consumer advocates so that you can have the full flavor of it because, in the same sense if I picked a few words out --
We're never going to get to do what I suggested, figure out a way working together, unless we have someone who can do this full time.
If the City wants to have a city advocate to get involved in auto hearings, you're doing that now. Mayor Street -- and you referenced something about Mayor Street filing suit today.
The Mayor's Office has 97 04/09/03 - LEGISLATIVE OVERSIGHT - RES. 020525 three legal actions against auto insurance. It's challenging their rate filings.