North Carolina is currently considering multiple changes to both its auto insurance regulatory system and how auto insurance rates are changed. While North Carolina’s insurance rates are comparable to neighboring states in the Southeast, rates for good drivers are still higher then they need to be as a result of the current regulatory system.
Critics of the current system argue that it is unfair to safe drivers and in desperate need of reform. The financial risk of more-dangerous drivers is passed on to low-risk drivers, hiking up insurance costs for many policyholders. In addition, supporters of reform cite the need to phase out North Carolina’s government-mandated, privately run insurance pool for risky drivers, which is many times the size of the national average while also charging a “hidden tax” of around 6 percent to every insured driver.
Reform of the auto insurance system has been slow because some in-state private insurance companies support the status quo. The state-run pool for risky drivers allows the private insurers to shed these more-costly policies, while policyholders are unaware if they are in the pool because they continue to receive bills from their private insurance company.
On January 25, Eli Lehrer, vice president at The Heartland Institute and director of its Center on Finance, Insurance and Real Estate testified before the Joint Study Committee on Auto Insurance Modernization on North Carolina’s automobile insurance system, offering several suggestions on how the state’s insurance system may be reformed. Lehrer’s written testimony is reprinted below.
January 25, 2012
Mr. Chairman, Senator Apodaca, and Members of the Committee:
Thank you for inviting me to speak today. My name is Eli Lehrer, I’m Vice President of the Heartland Institute, a national free-market think tank. At Heartland, I run our Center on Finance, Insurance, and Real Estate, the largest of Heartland’s six policy centers. In work I have done with the Raleigh-based John Locke Foundation, I have written extensively on North Carolina’s automobile insurance system.
I come to you today as a disinterested party. I do not—and will not—support any of the particular proposals you have heard today. I do, however, wish to speak with you about the facts about North Carolina’s automobile insurance system and offer some suggestions as to how it might be reformed. I’ll start by making some points.
The Basic Facts
First, auto insurance rates in North Carolina are average for the region. The Southeast is a good place to buy auto insurance, and, like all nearby states, auto insurance in North Carolina is generally more affordable than it is elsewhere in the country. North Carolina auto insurance rates are lower than those in Virginia, almost identical to those in Tennessee, and higher than those in South Carolina. According to insure.com, which researches the actual quotes extended to insurance consumers rather than revenue to insurance companies, 2010 rates for North Carolina averaged $1,154 while South Carolina rates averaged $1,095. Virginia rates averaged $1,272 and Tennessee rates averaged $1,146.
These states regulate insurance in very different ways: North Carolina places numerous restrictions on companies’ ability to raise and lower rates, while Virginia and South Carolina place very few restrictions and Tennessee is somewhere in-between. It’s likely that no set of reforms with any serious amount of support will result in average rates that are vastly higher or vastly lower. Even reforms that lower rates on average would almost certainly increase them for some individuals.
Second, auto insurance industry profits are guaranteed in North Carolina. Insurers cannot lose money writing coverage in North Carolina unless they have truly incompetent management. Current North Carolina law both requires the insurance commissioner to take profitability into account in setting rates and, through free ceding, lets insurers dump any policies that aren’t profitable (or profitable enough.) The result is pretty good for the insurance business. What private, profit making company wouldn’t like a system that assured it would always make money? And that’s what North Carolina’s current system does. This leads directly to my third point.
Third, the insurance product mix available to North Carolina consumers is behind the times. A variety of insurance products like pay-per-mile automobile insurance and auto insurance that offers regular cash rebate checks are not sold at all in North Carolina. This is largely because of the cumbersome Rate Bureau process that insurers must graft all new products onto. It’s just too much trouble for them to offer innovations even though they are assured profits once they are introduced.
Finally, North Carolina’s residual auto insurance market—the number of people who cannot get auto insurance in the private market—is enormous. North Carolina has just about 3 percent of the country’s population and almost 80 percent (78 percent to be exact) of the drivers who are in residual markets in the entire country. All of these drivers, I would submit, pay the “wrong” rate: some pay too little and some pay too much.
The bottom line is simple. The auto insurance environment in North Carolina is pretty good for business. That’s why so many insurers want to keep things the way they are. I don’t blame them for that. But the overall environment is not good for consumers. That’s why some reforms are needed. The right reforms can offer modestly lower rates on average, more choice for consumers, and safer roads in the state.
What to Do?
If the legislature is serious about making meaningful reforms, it should consider following plans that embody five principles.
First, auto insurers should be required to file rates themselves without going through the Rate Bureau. The Rate Bureau is expensive and anachronistic—no other state requires auto insurers to file rates in the same way. Filing rates directly with the insurance department, as Commissioner Goodwin has rightly pointed out, will almost certainly require that the staff of the department be enlarged. This will almost certainly need to be done if the Rate Bureau is eliminated.
Second, the range of rating factors allowed should be expanded. This means, for example, that North Carolina should drop its rule that prevents auto insurers from considering sex in determining auto insurance rates. Solid research indicates that men are more likely to get into accidents than women. The specific range of rating factors allowed is a question that has no perfect answer; the use of some rating factors may offend our sensibilities or values. But the evidence strongly supports allowing insurers to consider the sex of drivers.
Third, requiring insurers to file their own rates would also make it easier for them to offer innovative new products available in almost all other states. The insurance department should do what it can to encourage insurers to offer these products in North Carolina as they file their own rates.
Fourth, profit guarantees should be eliminated. Although, as the insurance industry will point out, a mandate to require the insurance commissioner to consider profitability is common, it’s neither necessary nor wise. If insurers don’t believe they can make money, they will leave the state. There’s no need for a legal mandate. Ending “free ceding” to the residual market would be very disruptive in the short term, but, in time, the legislature should look to phase it out. Insurers that do not want to write a policy should not be able to make a penny off of it if they do not take at least a very large portion of the risk.
Finally, the Committee and legislature as a whole should realize that doing these things will allow the state’s overgrown residual market to wither away and all North Carolina consumers to find solid, fairly priced automobile insurance that meets their specific needs.
Quite simply, North Carolina’s automobile insurance system is not as fair as it could be. It can change and it should change. Changes may not benefit insurers. But the right changes, made in the right way can—and will—offer more choices and fairer prices to all of the State’s citizens.
The Heartland Institute