RALEIGH – I know that if I asked most Carolina Journal readers to list the top-10 issues facing North Carolina, few would think to include “auto-insurance reform.” There are many other things to worry about, needless to say, and I admit that insurance reform doesn’t exactly sound like a scintillating topic. But perhaps I can arrest your attention with this one statistic from a recent JLF report:
North Carolinians make up 3 percent of American motorists. But they account for 60 percent of all U.S. motorists who can’t buy auto insurance on the open market.
“That’s insane,” says Eli Lehrer, a senior fellow at the Competitive Enterprise Institute and the author of this new study of North Carolina’s auto-insurance system. That may be putting it mildly. The state has constructed a wacky regulatory structure that overcharges low-risk drivers and undercharges high-risk drivers such as young men in sports cars. In essence, the system imposes a tax on most of us to subsidize the accident risks of a few.
“That hidden tax penalizes the state’s safest drivers, including women and older drivers,” he said. “The tax is linked to the fact that nearly one out of every four North Carolina drivers cannot find insurance coverage in the private market.” In most states, the share of drivers who can’t get market policies and must buy from a state-run reinsurance pool can be measured in the low single digits. In South Carolina, the grand total of drivers in the reinsurance pool last year was two – not two percent, but two individuals. North Carolina’s total in the same year was 1.5 million individuals.
Defenders of the state’s current policies, starting with longtime Insurance Commissioner Jim Long, argue that we must be doing something right because North Carolina’s auto-insurance prices rank low by national standards. It’s a spurious argument. Many factors determine the price of insurance, including demographics, income, driving patterns, even the weather. Other Southeastern states with far more sensible insurance regulations also have relatively low rates.
By socializing risk and creating a needlessly convoluted, roundabout process for approving rates, North Carolina doesn’t really save consumers money in total. Instead, our system redistributes insurance costs in ways that are unfair to low-risk drivers and that protect incumbent insurance companies from robust competition.
“This system is inflexible and resistant to innovation,” Lehrer says. “A lot of products North Carolina consumers might want – rebate checks for safe drivers and pay-per-mile auto insurance – simply aren’t sold in North Carolina. Although no law explicitly prohibits these products, the sheer burdens of the state’s rate approval bureaucracy make it very unattractive for insurers to offer them here.”
In his paper, Lehrer recommends that the state begin with several commonsensical reforms. One is to allow insurers to charge actuarially justified rates, which would result in lower prices for most drivers. Second, he suggests that private insurers be allowed to sell policies to higher-risk drivers rather than dumping so many of them into the state’s reinsurance pool. In the long run, the entire system for submitting and ruling on rate adjustments needs to be rethought. It’s archaic.
Insurance regulation is yet another area where North Carolina’s traditional blarney, our unfounded belief in our progressive superiority, ends up hurting us. Convinced that the private insurance market doesn’t work – even though auto insurance is one of the most competitive industries in the United States – Commissioner Long and the General Assembly have concocted a system that no other state would think of emulating, for good reason. Then they congratulate themselves with the notion that North Carolinians reap big benefits, ignoring the fact that Tennesseans, Virginians, and others spend no more of their incomes on insurance but live under vastly different, and fairer, insurance regulations.
Okay, so if I huff and puff some more, I’m still unlikely to push auto-insurance reform into the top tier of political issues in 2008. I understand. But as it happens, Long is retiring this year, leaving the first open-seat race for insurance commissioner in a generation. The candidates to replace Long, Democrat Wayne Goodwin and Republican John Odom, are both smart and engaged leaders with years of experience in government. Now is the time to press them for their opinions about North Carolina’s odd auto-insurance market and how it might best be brought into line with our neighbors and with the realities of the 21st century insurance industry.
Hood is president of the John Locke Foundation.