North Carolina’s insurance system is in need of reform. Under the current system, the North Carolina Rate Bureau, an entity unique to North Carolina, controls whether rate hikes are allowed to be charged by insurers. This system, a form of prior approval, makes it difficult for insurers to quickly change their rates to adapt to new risks or changes in the economy. In addition, under a prior approval system rates are often held unnecessarily low due to political pressures.
The Property Casualty Insurers Association of America recently proposed in written testimony to the North Carolina Legislative Research Commission Subcommittee an alternative program that would allow insurers greater flexibility in changing their rates while still limiting the extent of rate increases. Under this system, known as “flex-rating” insurers are allowed to charge rates within a certain range without any specific rate-filing. PCI believes that flex rating could be a intermediate step towards creating an open system for insurers where participation under the NCRB is optional.
The Property Casualty Insurers Association of America (PCI) today submitted written testimony to the North Carolina Legislative Research Commission Subcommittee in support of important rate making changes for homeowners insurance. The changes would encourage insurers to write new business and also provide a fairer rate environment for policyholders.
Specifically, PCI urged the committee to consider a flex-rating program as a transition to an open rating environment in North Carolina and applauded lawmakers for taking up the issue of property insurance rate making.
“Flex-rating programs would provide more flexibility to insurers already doing business in North Carolina, likely attract more insurers to the state, increase competition, and lower insurance premiums for many policyholders,” said Don Griffin, PCI’s vice president, personal lines.
In addition to its flex-rating proposal, PCI recommended that North Carolina consider changing how it approaches territorial rating. Currently North Carolina is divided into various rating territories that are used to determine auto insurance premiums. PCI recommends that the state consider geographical location in their classification of risk exposure.
The location of insured property can have a great effect on the risk it faces, and thereby its insurance rates. People who build houses on sand dunes or the Atlantic coastline should expect to pay higher homeowners insurance rates than those who live inland. PCI argues that since the rating zones in North Carolina are too broad and do not differentiate between homes on the coast and inland in the same county, they create a system where inland policyholders subsidize riskier coastal homeowners.
Additionally, PCI suggests that the state classify risks by geographical location, whereby high-risk areas would pay a fair share of the costs for their particular exposure. Territorial rating has long been used in the pricing of insurance rates. Because of wide cost differences occurring in different areas due to differing events, insurers must be able to distinguish regions with greater loss potential from those with less.
“In order to achieve price equity among policyholders, companies must be able to rate on the basis of the risk insured,” Griffin said. “The greater the exposure to an insurable loss, the higher the premium should be. If rates do not reflect costs, subsidies will occur whereby lower-risk policyholders must pay more to offset the losses of higher-risk policyholders. This is precisely what has happened in North Carolina, since rates are the same for all residents of the same county. Therefore, PCI supports territorial deviations from, with actuarial justification, the North Carolina Rate Bureau established territories. Again, a significant number of policyholders would benefit from such flexibility.”