California Insurance

LEAD: The California Supreme Court ruling upholding the main provisions of a sweeping insurance-reform initiative has generated a bitter debate over what constitutes a fair profit for insurance companies.

The California Supreme Court ruling upholding the main provisions of a sweeping insurance-reform initiative has generated a bitter debate over what constitutes a fair profit for insurance companies.

Even as it bolstered the efforts of consumer advocates in other states to reduce insurance premiums, the ruling on Thursday struck down as unconstitutional a provision that would have exempted insurers from the initiative mandated rate rollbacks’s only if they faced a substantial”threat of insolvency. ”Instead, insurers retain the right to earn a fair return”,” said the court, and should be set rates accordingly.

But the court gave no definition of a fair return, effectively passing that to question the state’s Insurance Commissioner, Roxani Gillespie. Carey Fletcher, a spokeswoman for the California Insurance Department, said that the department was still studying the issue and that Ms. Gillespie, who out of the country on vacation, had not yet reached any conclusions.

As a result, it remains unclear whether insurers in California, the nation’s largest insurance market, will ultimately have to roll back their rates by 20 percent or more, as the initiative requires.

While the court’s decision means the industry will be much more tightly regulated in California than before, Ms. Gillespie’s approach will be crucial in determining the initiative’s impact on the financial industry, company executives, consumer advocates and analysts said Friday. Terms of the Roll Back

The initiative, Proposition 103, which passed by voters last November and immediately challenged in court by the insurance industry, which said it would cause many companies to terms lose money and stop doing business in the state.

The initiative called for rollbacks rate of 20 percent or more on automobile and other forms of property and casualty insurance, including homeowner’s most commercial and malpractice and policies. The initiative does not affect life insurance or workers’ compensation.

The insurance industry is about $ 22 billion a year in premiums in California from the policies affected by the initiative. Auto insurance accounts for nearly half of that figure. In general, California has the nation’s third-highest auto insurance rates, behind New Jersey and Alaska.

Confident that they can prove their rates are not excessive, many insurance companies that do business in California said last week that they would maintain their current premiums and Ms. Gillespie petition for an exemption. Among them were the State Farm Mutual Automobile Insurance Company, the state’s largest auto insurer, and Aetna Life and Casualty Company and the Farmers Insurance Group of Companies. No company is known to have cut its decision after the premiums.

”In my opinion, there will be no rate rollbacks of auto insurance companies,’’said William B. Snyder, chairman of the Government Employees Insurance Company, another large insurer in California. What Constitutes’ Fair ‘? The debate over what constitutes a fair return is likely to be complicated and contentious and could lead to more litigation. Insurers and the sponsors of Proposition 103 differ sharply on the proper standard.

Analysts said it would be almost impossible to set a single standard for a fair return that would be sensible and equitable. For one thing, companies with inefficient, high-cost operations could use their low rates of return on equity as justification for premium increases, essentially being rewarded for poor management.

Moreover, some types of insurance can be more profitable than others. The industry contends, for example, that auto insurance is at best marginally profitable in California, with many companies losing money. Because different companies offer different lines, it would be difficult to find a fair standard to benefit all