Geoff MargolisCalifornia Department of Insurance
This interview discusses how new and old insurance trends affect businesses in California and the United States.
Interviewee: Geoff Margolis, Deputy Commissioner and Special Counsel at the California Department of Insurance
Interviewer: Stephanie Ho
SH: Tell me a little about yourself, how you got into insurance, and anything else you would like to share.
GM: Okay, I’m Geoff Margolis, the Deputy Commissioner and Special Counsel to the CA Insurance Commissioner and in this capacity. I advise the Commissioner on legal issues, handle litigation, oversee rulemaking, and . . . various other things at the Department of Insurance (DPI).
I got into insurance as a lawyer . . . I studied political science undergrad and thought I was going to work in the CA legislature, or do Washington D.C. And, in fact, spent a year in between undergrad and law school in Washington D.C., initially working for Congressman Vic Fazio who represented parts of Yolo and Solano County, and I guess part of Sacramento County . . . at the time. And I really liked public policy and politics, but thought it would be useful to get out to law school to enrich my background in that area. And being, oh, twenty-two or so years old . . . I had the foresight to take the LSAT and apply, get my applications all done before I headed to Washington D.C. And then, while I was there, I decided after spending some frustrating time on the hill, that I would definitely come back to law school . . . and then reenter the political arena. Went to McGeorge School of Law, graduated in 1992 . . . ‘91 excuse me . . . And immediately upon graduating, I got a job for a small firm in Sacramento for general practice, doing all kinds of areas of law. I also had a little bit of an entrepreneurial streak and took over a bar, restaurant, and nightclub in 1992. Did that for a year or so, and started my own practice, which focused on business, entertainment, and sports law.
After doing that for four five years, I decided the public policy side of me was sort of aching and decided that I wanted to change my career. I considered going into the capital and doing something else other than traditional legal practice. But, being in Sacramento . . . there I figured I should give being a government lawyer a shot. And I got a job working for the California State Controller side, where I worked on unclaimed property issues, state payroll, state tax, and other financial related issues. After being there for a couple of years, the DPI began expanding its legal office, and I was recruited to join a new section of the DPI’s legal branch that had formerly been in San Francisco . . . which was now expanding into Sacramento. So, I transferred from the State Controller’s Office in the DPI. At the time, I was very worried that insurance would not be interesting . . . so I did not seek out insurance as an area that I wanted to practice in. I did not grow up developing any exposure or particular attention to insurance or insurance issues. I did not have any members of my family in the insurance business. I never worked in the insurance industry, and I merely took the job because of the fact that the legal office in the DPI was substantially larger than the agency from which I was coming. And like I said, I was extremely worried that I would not find the work interesting . . . and that could not be further from the truth.
GM: And as it turns out, I find insurance to be so pervasive in everyone’s lives, the issues are fascinating and important, and everyday has been outstanding since.
SH: That’s good. That actually leads me to my next question. I know insurance touches every part of our lives from life insurance, car, health, etc. Do you think having insurance makes things more efficient for consumers or less? How do you think insurance affects our living?
GM: Well, it’s only more efficient if a disaster occurs. Initially, I think people would say it’s less efficient for two reasons. One, it costs money and requires some attention to ensure that you have proper protection. Insurance is a safety net . . . so that if a significant event occurs that could harm you, your loved ones, your future, there is liability or other protection there to help you get your life back in order. But, in order to have that, there are steps you need to take. You have to secure the insurance, there’s underwriting, you have to make premium payments. So, you’ll hear frustrations from individuals . . . particularly business owners . . . about workers’ compensation insurance, having to provide workers with health insurance, and other things that one might suggest is inefficient for business.
But insurance is about spreading risk. And it serves its purpose rather well. And so, all the people that might otherwise complain its inefficiencies are . . . absolutely thrilled when it’s not you having to shut down your business. If, for example, you had a restaurant, and you did not have proper coverage for fire, and you had a kitchen fire . . . you will not, in all likelihood, be able to reopen the business after the disaster. If somebody doesn’t have automobile insurance, and they’re in a horrific car crash, they may never be able to put their lives back together if they don’t have adequate insurance. So, I don’t know if that completely addresses your efficiency-related question . . . but, it’s completely efficient when you need to make a claim when the insurance company correctly places the claim. It’s an incredibly efficient way to get your life back in order . . . when it may take years and years to acquire the assets necessary to rebuild your life or business.
SH: And, at the same time, while these businesses are happy to have coverage, there’s a lot of disputes over the rates or classifications. Do you think there should be more coverage or less coverage?
GM: Well, I’m not sure what you mean by classification . . .
SH: Like, for workers’ compensation. I noticed that restaurants, for instance, have a certain amount or kind of coverage. And the restaurant owners are always complaining, “we don’t need this much,” or, “we only paid for this much,” or, “we’re only willing to pay for this much, we don’t need more.”
GM: Yeah, there’s a constant tension . . . you know, in a capitalistic society where the businesses are trying to make money. Everything comes off as a bottom line [and that] is a challenge for a business operator. And workers’ compensation is mandated in the state of California . . . and virtually anywhere in the US, [it] is a frustration for business owners. And as such, they’re always trying to get their employees rated in the most cost-effective classification because there’s great disparity in the injury rates, and therefore the workers’ compensation costs associated with different classifications. So, the pressure is on the bus owners to push the workers into lower class classifications. And there’s pressure on the insurance company and WCIRB (Worker’s Compensation Insurance Rating Bureau) to make sure that workers are properly classified because they’re covering those risks . . . and they price this on expectations that workers are in the right classifications.
SH: So do you think there should be more coverage? As in, they should have to pay for more because it’s mandated, or do you think it should be less, or just right, where it stands now?
GM: You mean the classification rules?
SH: Let’s go back to that restaurant example. Right now, it’s at a certain rate. And this is covered. And they have to pay this much for however much money they’re paying. So . . .
GM: Well, it depends on the class the employees are put in. So, really large restaurants are going to have employees in a variety of classifications. Whereas in smaller restaurants, they might not because there’s a few employees to do all the duties . . . so, as in any area of regulation, there can be constant improvement.
But there’s quite an elaborate classification system that is out there . . . that tries to properly place workers in a category that correlates with the risk of injury for that employee doing the function of that job. Over time, there has been some evolution of that system . . . particularly, in an effort to try to find ways to classify, when possible, all the employees of particular business in a particular category, and have that commonality whenever possible . . . I’m not sure that I have an opinion about whether or not the rules should be relaxed or strengthened . . . or that there’s a general trend of employees not being in the proper category, or being in the proper category. I guess, if forced, I would suggest that we’re seeing fewer disputes in this area over time. So, it seems to be working to some degree.
SH: Okay, so what do you think about the new models that are cropping up? Like, carsharing, the solar industry . . . is it even a business yet? And I feel like insurance companies are trying to catch up to these models and trying to figure out ways to cover it.
GM: One of the challenges in our economy is that the insurance industry is very reactionary and as needs for products develop, insurance needs for those products [develop] . . . and puts them into the marketplace. But when we have the private insurance model that we use, in order for the insurance company to be motivated to insure the product and put it into the marketplace, they have to believe that that product will be . . . viable. And therefore, as innovations occur, insurance is often lagging behind the innovation . . . because until the innovation occurs, the insurance company is not going to develop the product in advance.
So, in your example, carsharing or solar . . . carsharing is a great example where automobile insurance for the most part fits into two very significant categories. There’s what [is] called “private passenger mobile insurance,” which covers you and I, and all individuals who drive automobiles. And there’s commercial auto insurance, which covers taxi-cabs and truck drivers, and other people that operate commercial vehicles. And insurance falls into one of those two categories. There’s some specialty insurance products . . . but 90% of automobile insurance falls into one of those two major categories. And as the sharing economy starts to develop, carsharing is something that certain entrepreneurs started to figure out makes sense. You have people in populated areas like San Francisco . . . have automobiles that are used infrequently. But they pay a high cost to park and otherwise own those vehicles. And there are people also in that community who only need them for only very, very short periods of time. So individuals figured out that they could connect those . . . they could connect those with the vehicles and those who need the vehicles, and create a carsharing system. The problem is, as you asked in your question, are there insurance products that cover such a thing? And, not only were there questions whether adequate insurance were available when this started developing, there were some legal barriers to even having insurance in such situations. So, I had the opportunity to go into the capital in 2009-2010 to work for the current Insurance Commissioner when he was a member of the CA Legislature . . . and develop legislation that removed some of the barriers to having a carsharing environment, and deem sharing a vehicle under such environment ought not to be a business activity . . . and therefore invalidate private automobile insurance if they were to put their cars into the carsharing environment. So, it is true that there is innovation in the insurance company. Sometimes [it] is a step behind, and we need to find ways to make sure that the lag is not significant, so that we don’t keep innovation from flourishing . . . There’s always going to be a reactionary insurance model when there is the private insurance model that we have now. The products have to be profitable or else the insurance companies can’t put them out there.
SH: And going back to the private model, I’m reminded of the earthquake insurance problems in 1991 . . . how I believe the insurance companies just wouldn’t insure certain features of the house for earthquakes or landslides, or things like that. How would you address this problem?
GM: Well, the earthquake insurance is a very, very interesting tale in the insurance world. And it highlights a problem when you have a private insurance model, and the insurance industry doesn’t want to cover a particular risk. And, as you pointed out in your question, we had an issue many years ago where insurance companies no longer wanted to write earthquake insurance. So, the California law mandated . . . the reaction by the government was to mandate that insurance companies that wanted to write homeowners’ insurance must offer earthquake insurance. Well, that didn’t . . . the fact that that was the case wasn’t incentive enough, and insurance companies were leaving the state of California because of it. So, the California Earthquake Authority had to be established, which created this quasi-governmental entity that facilitated the sale of an earthquake insurance product that . . . in a pool-type environment that the homeowners’ insurance could participate in . . . solve the problem of creating a product that insurance companies that wanted to sell homeowners’ insurance could then offer to California homeowners. But it does illustrate that there is not always a natural private market for a product that public policy makers think is necessary to protect people’s lives. So, sometimes you have to resort to creative public-private partnerships or quasi-government entities in order to solve a problem.
SH: And do you think this will increase in the future, having more government control? Or do you think it’ll go halfway . . . or what do you think the trend will be?
GM: I think that, as climate change impacts insurance . . . let me rephrase that. As climate change impacts extreme weather events and insurance losses, insurance markets and problems will . . . shift in such a way that we will likely have to face new problems that are analogous to California’s history with earthquake insurance. For example, we may find areas in CA, or other states, where the water supply becomes so scarce [and] the wildfire risk becomes so large that it becomes difficult to find available and affordable insurance for homeowners. And the government may have to step in and create a mechanism like the California Earthquake Authority to continue to provide insurance protections for people.
SH: Are there people working on that now, or are there discussions taking place?
GM: Yes! As a matter of fact, California . . . under California Insurance Commissioner, Dave Jones . . . is leading that discussion by engaging actively in the NAIC (the National Association of Insurance Companies) climate change working group . . . By surveying the entire insurance industry to measure how it’s handling the impact of climate change, on its underwriting, investment strategy, business, and policy holder litigation. And [he] is also engaging climate scientists, actuaries, policy makers, and others in the discussion about the impacts of climate change in the insurance industry, and how to mitigate and adapt to those impacts where possible.
SH: And would you say that California is often the leader in these discussions concerning new insurance policies or why do you think that is?
GM: California is the largest insurance market in the nation and has a robust insurance regulatory department . . . the CDI . . . the largest consumer protection agency in the state with nearly 1300 employees. And therefore, it has an interest in all issues that impact California consumers and insurance policy holders. Therefore, we’re uniquely positioned to be out front on most issues, including climate change and other aspects of regulating insurance.
SH: I feel like you mentioned climate change a few times. Do you think that is going to be one of the most significant factors in . . . how insurance will affect business in the future?
GM: Yes. I think there are both short- and long-term impacts because of climate change. We are seeing impacts in weather patterns that can have devastating effects on businesses in certain areas because of wildfires, because of floods, because of agricultural disasters . . . Businesses can be wiped out . . . [and] the business supply chains can be affected in such a way that the businesses are affected. So, I believe climate changes are going to cause changes in types of coverage, [and] increase the need for additional coverage. For example, business interruption insurance is probably going to increase as climate change impacts both the extreme weather events, as I mentioned, as well as the overall climate and the ability of the natural environment to absorb and respond to extreme weather events.
SH: But California is relatively progressive in terms of talking about insurance coverage and, maybe, consumer protection in general. Has the agency encountered obstacles from other states or other agencies that aren’t as open to the idea of climate change?
GM: Yes. The obstacles have come from outside of California. There are other states whose regulatory perspective have not been consistent, or is not consistent, with California’s. And [they don’t] see the agency as a consumer protection agency, but more as an advocate for insurance companies. In 2009 and ’10, when the NAIC was disclosing its climate risk disclosure survey, initially all states agreed to administer the survey. But before it could be done, there was essentially a revolt by a bunch of small states that did not want to acknowledge climate change or even measure its impact on the insurance industry . . . because it did not want to engage in any sort of public policy decision-making or analysis that would involve responding to climate change. Because of that, the NAIC’s efforts to survey the insurance agency were not particularly robust. And in 2012, under California Insurance Commissioner Dave Jones, California led its own efforts with the states of New York and Washington to survey the industry. And we have been successful in conducting [and] administering the NAIC survey. Last year, [we surveyed] companies that wrote more than $300 million in premiums, which was approx- 500 companies. And this year, we have doubled the size of the survey to over 1000 companies, which represent something like 80% of the state. And we have added participation by the state of Connecticut and Minnesota.
SH: California seems to be at the lead or forefront of all these issues. Do you have any ideas for change?
GM: The one thing that California could improve upon is how it regulates healthcare. We are the only state, to my knowledge, that bifurcates regulation of healthcare. All other states, the Insurance Commissioner, or Supervisor . . . the name changes from state to state . . . but they’re all Insurance Commissioners who regulate healthcare insurance. In the state of California, we split that between the DPI and the Department of Managed Healthcare, which regulates HMOs, which dominate the market in California. And there are major issues with federal healthcare reform for the ACA, and the rates that are charged for healthcare insurance that, unfortunately, don’t fall under the purview of the Insurance Commissioner because they fall under the Department of Managed Healthcare. And therefore, the CA consumers aren’t as protected as they could be if the entire regulation of healthcare was housed here in the DPI.
SH: Great. That’s all the questions I have. Thank you very much.
GM: You’re welcome.