RALEIGH — North Carolina’s auto insurance system penalizes the state’s best drivers and guarantees profits for private insurance companies. It hurts women and older drivers, and hampers innovation. Those are key findings in a new John Locke Foundation Policy Report.

“North Carolina’s messy, complex system for providing automobile insurance places many of the state’s best and safest drivers at a disadvantage in the insurance market,” said report author Eli Lehrer, vice president of Washington, D.C., operations for the Heartland Institute. “The system is fundamentally unfair and needs to change quickly.”

Lehrer recommends five changes that would lead to better outcomes for most Tar Heel drivers. He’s releasing his recommendations as the state Senate Insurance Committee prepares to consider bills targeting auto insurance reform.

Proposed changes in Lehrer’s report involve fundamental restructuring of a complicated system that’s unique among the 50 states, he said.

“Five parties play a major role in North Carolina’s cumbersome, labyrinthine auto insurance rate-making process,” Lehrer explained. “As a Rate Bureau, elected insurance commissioner, Reinsurance Facility, court system, and private insurers all influence rates, the final product seems to produce a better deal for insurance companies than for drivers.”

The Reinsurance Facility is a government-mandated, tax-subsidized pool, Lehrer explained. Private insurers can dump any risky driver into the pool at any time.

“In fact, almost a quarter of N.C. policyholders are in the pool, compared to less than 1 percent nationally,” Lehrer said. “Some private insurers like the system because it guarantees them a profit.”

A tax dubbed the “clean risk surcharge” allows this system to continue, Lehrer said. “That surcharge averages about 6 percent a year on every auto insurance policy in the state,” he said. “In other words, the safest drivers are paying more so that private insurers can shed policies that might carry higher risks.”

Few North Carolina residents know about the tax, since insurers have been forbidden to disclose it on statements for more than 20 years, Lehrer said. “Not only is the tax hidden, but it’s not entirely clear why an insurance company moves a particular driver from the private market to the subsidized pool. Still, it’s fair to call the surcharge a ‘teenager tax’ because it most likely reduces rates for young — especially male — drivers who are considered a greater risk on the road.”

Since the system penalizes the best drivers, certain groups fair worse than others, Lehrer said. “Women and older residents lose under the current system, since every study on the topic shows what most people already know: Men are worse drivers than women, and young people are worse drivers than older ones.”

The complicated regulatory system also hampers innovation that could help drivers save money, Lehrer said. “State-mandated base rates and a long approval cycle for new products means that insurers are not eager to offer new, innovative products in North Carolina,” he said. “Many of the deals drivers hear in commercials on their car radios are unavailable in this state.”

Average North Carolina rates are in line with other states in the Southeast, but that’s no reason to preserve the current system, Lehrer said. “Good drivers are still paying more than they should,” he said. “Reforms suggested in this report would simplify the current bureaucratic system and lower rates for many, if not most, drivers in the state.”

Lehrer’s first recommendation involves ending the rate-making role of the Rate Bureau, a state agency that’s independent of the N.C. Department of Insurance and largely under control of the insurance industry.

“No other state uses a Rate Bureau to establish a rate plan for all automobile insurance in the state,” he said. “North Carolina should require insurers to file rate plans at their own expense instead. Ending the Rate Bureau’s role could require an increase in Insurance Department staffing levels.”

Second, a reform plan should end the insurance industry’s profit guarantee. Third, the subsidized drivers known as “clean risks” should be required over time to pay their own way in the Reinsurance Facility. “This means the ultimate end of the ‘teenager tax,'” he explained. “The system has little value for the state. It lowers premiums for drivers who insurers know will not drive well while raising premiums for nearly everyone else.”

Fourth, the state should allow insurers to make smaller changes in rates with a minimum of paperwork, using a tool called a “flex band.” Fifth, the Insurance Department should encourage more product innovation by allowing insurers to use a broader range of data in setting rates.

Lehrer cites a simple “bottom line” in offering these ideas to legislators and policymakers. “North Carolina’s insurance system is unjust, expensive for good drivers, choice-limiting for all drivers, and burdensome for insurers,” he said. “It could be better. With the right policies, it can be.”