Legislative watchdogs and North Carolina’s insurance commissioner take opposite stances on a little-known piece of the state’s car insurance system.
Lawmakers offer better arguments. That’s the conclusion one reaches after consulting John Locke Foundation research dating back more than a decade.
The dispute involves the North Carolina Reinsurance Facility. It’s a “government-mandated, tax-subsidized pool,” Locke explained in 2011. “Private insurers can dump any risky driver into the pool at any time.”
The state House’s Select Committee on Oversight and Reform reviewed the facility on Dec. 11. “Many if not most people in the state are unaware of the reinsurance facility … let alone they’re subsidizing it,” said committee Chairman Harry Warren, R-Rowan.
A report from former Western Carolina University economics professor Jonathan Murphy pegged reinsurance facility membership at about 25% of North Carolina drivers. That’s far more than other states with high-risk pools. Murphy concluded that the pool raises insurance costs for all drivers.
Count Warren among those supporting reform. He called the current system “unfair to good drivers.” After hearing arguments supporting the status quo, “I remain skeptical,” Warren said.
Insurance Commissioner Mike Causey defended the current system before Warren’s committee. “We’re consistently among the lowest average insurance rates in the nation,” Causey said. “The report’s recommendations, in my opinion, … will likely result in higher rates for North Carolina drivers.”
The John Locke Foundation has recommended changes for years.
“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 were key findings in the 2011 report, “North Carolina’s Auto Insurance System: Still Unfair, Still In Need of Improvements.”
“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,” wrote Eli Lehrer, now president of the Washington-based R Street Institute. “The system is fundamentally unfair.”
Lehrer called for fundamental restructuring of a complicated system unique among the 50 states. “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,” he argued.
“Some private insurers like the system because it guarantees them a profit,” he added.
A tax dubbed the “clean risk surcharge” underpins the system, Lehrer said. “The safest drivers are paying more so that private insurers can shed policies that might carry higher risks.”
Few drivers knew about the tax. Insurers had been forbidden for decades from disclosing it on statements, Lehrer explained. “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.”
Certain groups fair worse than others. “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,” Lehrer said.
The system hampers money-saving innovation. “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,” Lehrer 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 southeastern states. That’s no reason to maintain the status quo, Lehrer said. “Good drivers are still paying more than they should.”
Lehrer called for ending rate-making by the Rate Bureau, an agency independent of the Insurance Department and largely under control of the insurance industry.
The Locke report also argued for ending the insurance industry’s profit guarantee. Subsidized drivers known as “clean risks” should be required over time to pay their own way in the Reinsurance Facility.
A tool called a “flex band” could help insurers make smaller rate changes with minimal paperwork. The Insurance Department could encourage product innovation by allowing insurers to use a broader range of data in setting rates.
“North Carolina’s insurance system is unjust, expensive for good drivers, choice-limiting for all drivers, and burdensome for insurers,” Lehrer said in 2011. “It could be better. With the right policies, it can be.”
A dozen years down the road, it still makes sense to pursue policies that expand consumers’ choices and limit bureaucratic drag. Legislative reformers seem open to moving in the right direction.
Mitch Kokai is senior political analyst for the John Locke Foundation.