N.C. Insurance Commissioner Jim Long ordered Thursday a 16.1 percent decrease in North Carolina’s maximum auto insurance rates. A news release from Long’s office estimated “potential savings of more than $1 billion.” The true picture is more complicated, according to Eli Lehrer, senior fellow at the Competitive Enterprise Institute. In July, Lehrer’s John Locke Foundation Policy Report labeled North Carolina’s auto insurance system the worst in the country.
“This decision doesn’t come as a surprise to me, but it’s a real problem for anybody who wants fairly determined auto insurance rates,” Lehrer told Carolina Journal Thursday. “Like any effort at rate suppression, Commissioner Long’s decision will result in a haphazard distribution of costs and risks for everyone in North Carolina. This ‘rate cut’ really won’t cut rates for many — perhaps most — drivers in North Carolina. Instead, it will likely serve to increase the percentage by which safe drivers subsidize riskier ones. It’s a big loss for consumers.
“Jim Long is an honorable public servant who is doing what he perceives as his duty,” Lehrer added. “It doesn’t make sense to blame him. The real problem is that North Carolina’s auto insurance system is broken. The Commissioner’s dual role, the Rate Bureau, and the practice of letting insurance companies pass off any unprofitable policy to the state Reinsurance Facility are all problematic. The legislature should act to abolish the Rate Bureau and end the practice of rate hearings altogether.”
Before Long’s latest order, Lehrer discussed N.C. auto insurance rates with Mitch Kokai for Carolina Journal Radio. (Click here to find a station near you or to learn about the weekly CJ Radio podcast.)
Kokai: Eli, a lot of people know they need car insurance, know they have to pay for it, but probably haven’t thought a whole lot about the way that they’ve gone about it. Your report shows that North Carolina’s system isn’t that good.
Lehrer: No. I say without reservation that it is the very worst in the United States, period. Essentially about a quarter of the drivers in the state cannot find a private company that will actually insure them. The system is screwed up to the extent that most drivers, including many who have no tickets, no problems, can’t find a private insurance company that will write them a policy, and they get put into the state Reinsurance Facility. The Reinsurance Facility is invisible to most people who are in it, but it still has enormous effects on the way insurance works in North Carolina.
Kokai: Now some people may say a quarter sounds like quite a bit, but how does that compare with other states?
Lehrer: The next highest state is Massachusetts, which has 5 percent in its equivalent of the North Carolina Reinsurance Facility. The Massachusetts system is changing as we speak, and that will probably be 2 or 3 percent by next year. The national average is 1.9 percent, but that is misleading because if North Carolina didn’t have anybody, the national average would be about 1 percent. About 60 percent of all people in these residual auto pools in the country are from one state: North Carolina.
Kokai: Now does that mean that North Carolina has a lot more bad drivers than every other state?
Lehrer: Not at all. If anything, as best as I can tell, North Carolina drivers are probably a little bit better than average. The real problem is that the government makes up the prices that insurance companies charge.
Kokai: So if this system is out of whack in North Carolina, how do some other states do this, that work much more effectively?
Lehrer: Well, South Carolina, for example, had a very similar system. It eventually resulted in a situation where almost nobody could get auto insurance. So they said, well, let’s have the market set prices. In general, prices fell, and furthermore, perhaps just as importantly, the Reinsurance Facility, the government-run market, became depopulated. Today I believe there are eight people – not 8 percent – eight people in South Carolina’s market.
Kokai: Now if North Carolina’s system is so out of whack, how has it existed? Why is it still in place?
Lehrer: It exists, in large part, because it actually guarantees profits to insurance companies. This is really a business-subsidy system. It is not clear at all that individuals save money. In fact, there is a tax, and I am figuring out the exact amount of it. But it has probably been over $2 billion in the last decade in extra taxes that are hidden. They are not itemized. They are not shown, but they are on about 75 percent of auto policies in North Carolina that pay for the maintenance of this broken system.
Kokai: What do you hope happens next to improve the system?
Lehrer: Well, it is going to be hard. There are few proposals that are promising. One that [N.C. Insurance] Commissioner Jim Long has supported and makes some sense would be to get rid of this hidden tax altogether and make people – these so-called “clean risks” at the Reinsurance Facility, these are people who may not have bad driving records but are people like young males with fast sports cars who insurance companies quite understandably think should pay higher rates – that they should pay their own way within the Reinsurance Facility. That would be one thing. That would reduce premiums 5 percent, 6 percent, on average for the other 75 percent of the state and raise premiums for people who don’t drive as well. That would be a small step.
There are also steps that would decrease the politicization of the process. [Senate] Majority Leader Tony Rand has a bill that would make the process a little bit less political, a little bit more objective for setting rates. But these are incremental steps. What really needs to be done is pretty simple – let the free market set rates. Have people pay auto insurance rates based on the amount of risk that they pose. And let customers and insurers decide what products should be offered and how they are paid for.
Kokai: Some people may hear this and say, “The free market, we know it sounds good, but I’m worried that my insurance rates are going to go up if it is totally left to the market and the government is out of the picture.” Is that what would happen?
Lehrer: Probably not, no. Certainly some people’s rates would go up. If you are a bad driver or a teenager who likes driving his Corvette really fast, yes, your rates are going to go up, and they should. People who have more risks should pay more for auto insurance, period. If you are a 45-year-old female who drives a minivan, your rates will go down.
The fact is that if rates in general were being kept down in North Carolina, if the total amount being collected by insurers was inadequate, insurers would leave the state in droves. That is what has happened in places like Massachusetts and South Carolina. The total amount being collected is presumably about adequate for the people being insured. So just the way it is distributed, right now the best drivers are not getting the lowest rates, and the worst drivers are paying less than they should. This is an arbitrary way that rewards people who don’t drive well, so there is really no point in maintaining that kind of system.
Kokai: Someone who is not sure where he or she sits on this spectrum and whether they are in this hidden-tax area, if you were trying to describe to the typical driver how much more he or she is paying for insurance than he probably ought to pay, would most of them find that they are paying quite a bit more?
Lehrer: It’s not quite a bit more. It is – you know, I would say that most drivers are probably paying about 10 percent too much. But that’s not insignificant. That’s 10 percent of your premium. Do you want to pay 10 percent less for anything? Would you pay 10 percent less for groceries if you could? Of course you would. Furthermore, this is just a matter of simple fairness, and the free market is the fairest mechanism for doing this.
Kokai: Based on the way the system stands, do you have some confidence that this is going to change at some point?
Lehrer: Maybe, maybe not. You know, it needs to be made clear that there is this sizeable hidden tax on all policies, that this system really doesn’t benefit consumers at all. It is primarily a profit guarantee for insurers, and that, furthermore, it stops insurers from offering innovative products, things that are advertised nationally. State Farm has a program that sends you rebate checks if you go without accidents. You can’t get that in North Carolina because the system is so cumbersome. Progressive advertises throughout the country – we will give you multiple quotes. You can’t get multiple quotes in North Carolina. So it is also reducing the number of products that are available to people in North Carolina.