This week’s “Daily Journal” guest columnist is Eli Lehrer, vice president for Washington, D.C, operations at the Heartland Institute. He oversees Heartland’s Center on Finance, Insurance, and Real Estate. Lehrer authored the 2008 John Locke Foundation Policy Report North Carolina’s Unfair Auto Insurance System.
North Carolina’s automobile insurance system overcharges good drivers, undercharges bad ones, and guarantees profits to private companies. It’s unfair and ought to change.
In this context, it’s not surprising that a variety of insurance industry, government, and advocacy groups all have come forward with plans to modify it. None of these plans are perfect: Some strip too many protections, while others don’t go far enough in changing the system. Elected leaders, insurers, and citizens’ groups need to come together and agree on a common agenda that does away with profit guarantees for the insurance industry and huge hidden costs.
Let’s start with some background: The North Carolina automobile insurance system is the only one of its kind in the country. Although multiple private companies compete for consumers, all of them start from the same rate plan developed by an industry-run Rate Bureau.
The costs of running this Bureau — a multimillion-dollar organization — are incorporated into insurance rates for all drivers. In approving the rate plan, the insurance commissioner is required to guarantee that the industry make a profit. When a policy isn’t profitable, companies can “cede” it to a government-mandated “Reinsurance Facility” that shares staff and personnel with the Rate Bureau and loses money on writing most of its policies.
To make up for these losses, which come from bad drivers insurers don’t want to cover under the rate plan, a special tax called a “clean risk surcharge” (nearly $100 for a typical driver in the worst years) is added to every insurance policy in the state. This results in higher rates for the best drivers. It’s hugely unfair.
To fix this system, first, the legislature should abolish the industry’s legal profit guarantee. While some parts of North Carolina’s “prior approval” system — in which the government must approve rates before companies can charge them — should remain in place, the insurance commissioner shouldn’t have any obligation to ensure that private companies make a profit in the state.
Likewise, rather than being able to raise their customers’ rates in order to run the Rate Bureau, companies should be required to pay the costs of their own rate filings. The Rate Bureau itself should be allowed to wither away. (To streamline things, smaller rate adjustments should be made possible quickly and with a minimum of paperwork.)
Other hidden costs come from running the Reinsurance Facility, currently serving nearly a quarter of the state’s drivers. Those hidden costs should face elimination, although the reinsurance facility itself should continue existing.
Insurers should have to post the size of the special tax on their Web pages immediately, include it in the next statements they send out, and itemize it on every bill they send going forward. Over several years, the Reinsurance Facility should begin to charge higher rates to bad drivers and encourage them to seek coverage from private companies. This will end the “clean risk” surcharge.
In the long term, the legislature should look to shrink the facility by asking private carriers to take on its policies and letting these carriers raise rates for these bad drivers.
North Carolina needs to raise rates for bad drivers and lower them for good ones. More importantly, it must end the blatantly unfair practice of guaranteeing profits to private insurers.