Car Insurance

A new state report finds that the state’s unemployment insurance trust fund — funded by employers to cover benefits to unemployed workers — is being depleted at a faster rate than expected.

As a result, the fund balance is expected to drop to a point that automatically triggers a 15 percent “emergency solvency surcharge” next January and possibly another 15 percent surcharge in January 2005.

This would be the first time in the fund’s history that such a surcharge would be enacted and it would result in every employer in the state being taxed, on average, an additional $110 per employee for each year.

That’s on top of an average $36 per employee hike in the same tax that kicked in on Jan. 1, making for a total increase in the employer tax of nearly 60 percent in 24 months.

State officials and lobbyists said a combination of the slow economy and recently enacted unemployment benefit hikes is to blame for the rapid depletion of the unemployment insurance trust fund.

In January, the state’s unemployment rate was 6.5 percent, down from a revised 6.9 percent for December, but up slightly from 6.4 percent the year before. Los Angeles County’s January unemployment rate was 6.6 percent.

While the jobless rate is far below the levels seen during the last recession, there is increasing concern the economic slowdown could drag on through next year. Last week’s UCLA economic forecast projected only 0.7 percent job growth statewide through 2003 and a similarly meager level of job growth for 2004.

According to the forecast, government job cutbacks from the state budget deficit and the anticipated impact from the looming war with Iraq are likely to be major drags.

Triple hit

The annual benefit hikes, passed by the state Legislature in 2001, take the maximum weekly unemployment benefit from $230 as of December 2001 to the current level of $370 and $450 by Jan. 1, 2005. At the time they were enacted, employer groups bitterly opposed the hikes, saying they would deplete the trust fund.

The hikes started taking effect as the state’s economy was reeling from the dot-com collapse and the Sept. 11, 2001 terrorist attacks. As the economy slowed, more people were laid off and filed unemployment claims that have to be paid out of the unemployment insurance trust fund. What’s more, last year the Legislature passed a bill making the unemployment benefit hikes retroactive to Sept. 11, creating a one-time $500 million hit to the fund.

According to the forecast from the California Employment Development Department, the trust fund has fallen from $5.8 billion as of last June 30 to an estimated $3.7 billion this past Dec. 31. That prompted the automatic trigger of the $36 per employee per year hike in the unemployment insurance tax paid by employers.

The Feb. 27 report further projects the fund balance will drop to $1.7 billion by the end of this year. That would be less than 0.6 percent of the total wages and salaries paid in the state, the level at which the 15 percent “emergency solvency surcharge” is automatically triggered.

Even after this emergency injection of employer dollars, the report finds that the fund balance is expected to remain at $1.7 billion as it absorbs the next unemployment benefit hike. If that’s the case, the emergency solvency surcharge would be triggered once again in January 2005, creating that second $1 10 per employee charge for businesses.

“Given the current projections, we don’t see the fund recovering at all in the near future,” said Carol Evans, vice president of the California Taxpayers Association. “We could be staying on this emergency surcharge for at least the next three or four years, which means that every year, employers would be hit with higher taxes.”

Lobbying increases

To avoid these increases, employer groups and the California Taxpayers Association are lobbying for a freeze on unemployment benefit levels until the fund builds back a reserve margin of at least $4 billion. That would shelve the remaining two unemployment benefit hikes.

But that proposal is meeting stiff resistance from the Democrat-controlled Legislature and is not likely to make it out of committee.

“A freeze is like kicking the unemployed workers when they are down, and under no circumstances will I ever support it,” said Richard Alarcon, chair of the Senate Labor and Industrial Relations committee. Alarcon carried the unemployment benefit increase bill during the 2001 session; a bill to postpone those benefit increases would have to pass his committee.

Alarcon said the hikes in unemployment benefits would serve to stimulate the economy. “The unemployed spend every dime of that unemployment benefit, which puts that extra money back into the economy.”

Attacking fraud

With a freeze on the benefit hikes looking unlikely, employer groups are pursuing another tack: lobbying to enact reforms that would cut fraud and abuse. Julianne Broyles, a lobbyist with the California Chamber of Commerce, said fraudulent claims and overpayments on legitimate claims cost $600 million a year.

Ever thought about what would happen if your insurance carrier went bankrupt? It’s not impossible. Insurance companies are businesses–and like any business, it’s not unheard of for them to face financial difficulties, including insolvency. Policyholders need to pay attention and react swiftly to protect their companies.

Here’s what happens when an insurance company goes bankrupt. A public notice is issued, and the carrier also notifies policy-holders, says Holly Bakke, commissioner of the New Jersey Department of Banking and Insurance and chair of the National Association of Insurance Commissioner s’ Insolvency Task Force.

“There is a national system of guarantee funds that provides a safety net for policyholders,” says Bakke. Particulars differ by state, but essentially, the guarantee fund pays some pending claims–typical]y up to $300,000, but not all types of claims are covered–refunds unearned premiums, and provides shortterm coverage while you seek replacement insurance.

Bakke says that with the insolvency notice, you’ll also receive a set of instructions. It’s important to follow those instructions promptly and completely, especially if you have a claim you haven’t filed yet. And don’t delay your search for new coverage; the period during which the guarantee fund will protect you varies by state, but it’s not a lot of time.

The best way to guard against a bankrupt insurance carrier is to buy your coverage from financially sound, well managed companies. Bakke says your insurance agent should provide you with this reformation, as well as an explanation of how your state’s guarantee fund works. “Your agent should be educating you on this issue long before it ever becomes an issue,” says Bakke. And let’s hope it never does.

Under a plan offered by British insurer Norwich Union, GPS helps determine how much drivers pay for their auto insurance.

The company’s Pay As You Drive plan uses GPS to calculate monthly insurance premiums based on how often, when, and where a person drives, basing the premium on the individual’s driving habits–rather than everyone else’s–and potentially saving the customer some money.

A black-box GPS unit provided by Trafficmaster is installed in the trunk or under the dashboard so it cannot be disturbed or tampered with. Once the unit is fitted on the car, the insured motorist’s journeys are monitored to see what types of road they drive on, and whether they drive at peak or off-peak times. This generates a price per mile that is totaled on their monthly bill.

The objective is to help drivers control insurance costs by making informed choices about when to use the car. Examples of pricing might be 1 penny per mile for off-peak motorway driving for 24 to 65 year olds, and as much as [pounds sterling]1 per mile for an under 24-year-old driver at night.

Norwich Union has been piloting the project since 2004, with 5,000 customers recording data on 100 million miles from more than 10 million trips.

The program especially targets young motorists. “We tested young drivers because they have an issue with high insurance charges so we wanted to find ways to help them,” said Norwich Union’s product development manager Sue Rowland. “On average, they saved 30 percent on their premium.”

The Pay As You Drive bill looks similar to a mobile phone bill, with premiums for each journey calculated and totaled. According to lain Napier, director of Pay As You Drive insurance, this transparent approach to motor insurance will help customers control insurance costs.

“We’re confident that Pay As You Drive insurance is simply a fairer way of calculating premiums and gives customers greater control, flexibility, and choice,” Napier said. “That is why we expect this unique UK proposition to be a huge success with motorists.”

The Association of British Drivers (ABD) is not fond of the plan. “Aside from the obvious implications for privacy and civil liberties, the ABD warns drivers that this information can also be used for the government’s planned road charging scheme.” In that proposal, aimed at cutting congestion, “pay-as-you-go” road charges would replace road and gas taxes. Every vehicle would be equipped with a GPS black box to track its journey. Costs would range from as little as 2 cents per mile in rural areas to [pounds sterling]1.34 per mile for peak time in city areas.

An ABD spokesman who participated in the initial 5,000-vehicle trial said, “Insurance premiums are already based on a driver’s accident/conviction history, age, the number of miles traveled annually, and the vehicle’s insurance group. Why do we need to attempt a micro-managed premium calculation? We don’t. The government’s own research shows that they are not trusted with an individual’s personal journey details by the majority of the British public. The use of service providers, such as insurance companies, is seen as a way around the problem.”