Publisher's note: The author of this post is the CJ Staff, who is a contributor to the Carolina Journal, John Hood Publisher.
Report says reforms are unlikely to lead to significant short-term rate hikes
RALEIGH North Carolina's auto insurance system imposes a special tax on all drivers that helps subsidize rates for high-risk drivers. That tax is part of a system designed to guarantee profits for insurers. Those are just two of the key facts highlighted in a new John Locke Foundation Spotlight report.
Promoting seven facts about the current auto insurance system, the report arrives as the General Assembly considers potential reforms. Bills in both the House and Senate call for changes.
"North Carolina's automobile insurance system guarantees profits to insurers," making it "literally impossible for insurers to lose money," write report co-authors Alan Smith and R.J. Lehmann, co-founders and senior fellows at the R Street Institute, a Washington, D.C.-based free-market public policy think tank.
All insurers in the state use the same fundamental rate plan, Smith and Lehmann write. "There's far less opportunity for insurers to try new ways of managing risks," they write. "The overall results are pretty good for the insurance business (which is why some insurers, including the state's largest, defend the current system) but bad for consumers."
One of the worst consequences for consumers is the special tax on drivers dubbed the "clean risk surcharge," according to the report. "As a result of this surcharge and other government red tape, the least risky drivers -- who tend to be older and female -- pay far more than they do for auto insurance in similar states," Smith and Lehmann write. "On the other hand, risky drivers pay less than they do elsewhere. This is the opposite of how insurance is supposed to work."
One consequence of the current system is that it's difficult and undesirable for insurers to offer "innovative new products" in North Carolina, according to the report. "North Carolinians can see these products described in the litany of national television ads for auto insurance, a market that in most states is highly competitive," Smith and Lehmann write.
Among the products available in other states are policies with deductibles that drop the longer a driver avoids an accident, policies that offer discounts for drivers with good credit, policies with regular rebate checks, and policies that offer deep discounts to those who provide real-time driving data to insurers.
"If the market for autos worked the way North Carolina's market for auto insurance does, Ford, Chrysler and General Motors, along with all of the foreign car makers, would get together to define what their product -- "a car" -- should be," according to the report. "They would determine how big it can be, how fast it can go, what color it should be, even how many cup-holders it can have."
Smith and Lehmann address critics who claim the current auto insurance system helps lead to lower rates. Residents across the Southeast pay relatively low rates, according to the report. "North Carolina and the states that it borders have rates several hundred dollars below the national average," Smith and Lehmann write. "While North Carolina had lower rates than its neighbors in 2012, it had the second-highest rates of that group of states in 2011. Quite simply, there's no evidence that North Carolina's system provides cheaper average rates than systems in other nearby states."
State regulation does not keep North Carolina's auto insurance rates lower than those in other states, according to the report. Smith and Lehmann credit other factors for lower rates throughout the Southeast, including caps on lawsuit damages, "reasonably tight" enforcement of vehicle safety standards, demographics, and relatively low traffic density.
Another flaw in the current system relates to insurers' legal right to "cede" any policies that might not make money to a "special reinsurance facility." The clean risk surcharge subsidizes that facility. More than 20 percent of North Carolina drivers end up in that facility.
"In most states, these markets are extremely small and are mostly made up of repeat drunk drivers and others with truly awful driving records," Smith and Lehmann write. "Because of burdensome regulations, however, North Carolina has more drivers in its residual market than all other states combined."
Smith and Lehmann do not endorse the reform proposals set out in Senate Bill 154 or its companion bill, House Bill 265. The authors do rebut criticisms leveled against those bills.
"Whatever their merits -- or demerits -- reform proposals currently before the legislature would not result in significant short-term rate increases for any drivers," according to the report. "Insurers would compete more vigorously for the least risky drivers, and this might eat into some of the profits the current system guarantees them. But even risky drivers who currently receive subsidies from everyone else would not see massive rate increases."
The state insurance commissioner would maintain his power to deny rates that are "excessive, insufficient, or discriminatory," Smith and Lehmann write. "The only difference would be that, when an insurance company requests a rate increase of less than 12 percent, the commissioner would have to demonstrate a reason to challenge that request," according to the report. "Moreover, the best estimates we have are that even 'clean risk' drivers would see their rates increase by only about roughly $1.50 per month immediately following the reforms."