Auto insurers in North Carolina are once again divided over the prospect of changing how the state sets insurance rates with some insurers advocating for rate deregulation while others are supporting the status quo.
The debate comes as state Insurance Commissioner Wayne Goodwin announced that the North Carolina Rate Bureau, which files rates on behalf of the 160 auto insurers operating in the state, will be seeking no change in private passenger auto and motorcycle rates this year.
North Carolina’s method of setting automobile insurance rates is unlike any in the country. Instead of each insurer filing their rates separately with the state Department of Insurance, all 160 companies operating in the state file their rate requests with the North Carolina Rate Bureau. The bureau in turn proposes a statewide base rate on behalf of the companies, which must be approved by the insurance commissioner.
Companies can only adjust individual policies by offering safe driver and other discounts, along with dividends.
Insurers say the rate scheme prevents them from offering other auto insurance products such as pay-per-mile policies and policies that offer regular cash rebate checks. Insurers are also prevented from applying some underwriting techniques common in other states such as taking into effect credit reports, the gender of the driver, and the type of car driven.
Eli Lehrer, vice president of the Heartland Institute and director of the pro-free market group’s Center on Finance, Insurance and Real Estate, said the state’s current ratemaking methodology is antiquated and prevents insurers from responding to market conditions.
“The insurance product mix available to North Carolina consumers is behind the times,” Lehrer said. “This is largely because of the cumbersome rate bureau. It’s just too much trouble for companies to offer innovations.”
That may be the case, but as far as premiums level go, North Carolina’s auto policies are among the lowest in the southeast.
According to insure.com, where researchers list actual quotes to policyholders as opposed to company revenues, North Carolina’s average premiums equaled $1,154 as compared with average rates for South Carolina at $1,095, Virginia at $1,272, and Tennessee at $1,146.
Independent Insurance Agents of North Carolina Vice President of Insurance Operations Stuart Powell said his association is still assessing the various reforms proposals, but in general it supports some form of a modified rating system. However, he said, the state’s low rates do present a potent argument against reform.
“A better marketplace may not be a cheaper marketplace,” said Powell.
Reinsurance Facility Poses Questions
Any rate reform would likely tackle North Carolina’s so-called “high-risk” pool. The North Carolina Reinsurance Facility includes nearly 1 million of the state’s 5 million drivers, which is more than all the combined drivers in auto residual markets around the country. About 25 percent of those drivers are considered bad risks and pay rates roughly 30 percent higher than other drivers.
However, the other 75 percent in the risk pool are “clean risks,” drivers who haven’t been cited for a traffic violation in three years, but whom insurers will not cover due to underwriting criteria they otherwise cannot apply under the current ratemaking methodology. For example, drivers who are unemployed, in the military or have low credit scores are often ceded into by the reinsurance facility.
Those drivers don’t pay the additional 30 percent and their premiums collectively fall roughly $150 million short of what they would otherwise be, studies show. As a result, all drivers in the state end up paying a surcharge of nearly $20 per year in hidden costs.
Kathy Feinburg is the assistance vice president for FAIR NC, a coalition that includes State Farm Insurance Mutual Insurance Co., GEICO, USAA, Allstate, and the National Institute of Mutual Insurance Companies.
She points out insurers often place policies in the reinsurance facility without disclosing the fact to policyholders since their policies are still written on their private insurer’s policy forms.
“North Carolina drivers are blind to the financial burdens thrust upon them,” said Feinburg. “Lawmakers have the opportunity to turn this around and provide North Carolina drivers with a system that brings transparency and competition to our state.”
A Split on Reforms
The main obstacle to rate reform in the state is the divergent views between instate insurers and their out-of-state counterparts, even though the basic outlines of reforms have long been drawn out.
Lehrer said that an industry profit is virtually guaranteed in North Carolina since the insurance commissioner must take profits into account. Additionally, since there is no restrictions on what risks may be ceded to the reinsurance facility, it allows insurers to in essence “cherry-pick” the market.
“The auto insurance environment in North Carolina is pretty good for insurers,” said Lehrer. “That is why so many insurers want to keep things the way they are. I don’t blame them for that. But the overall environment is not good for consumers.”
Last year, lawmakers considered a bill that would have potentially removed the rate bureau’s role in setting rates letting each insurer file their own rates. The bill also would have removed the insurance commissioner’s ability to approve rates except in cases where the rates would have been excessive, inadequate or discriminatory. It also would have created a flex-band rating methodology where insurers could raise or lower rates between 10 percent and 15 percent annually.
Lehrer said this would go a long way toward pulling the state into the 21st century by opening up a free market.
“The legislature as a whole should realize that doing these things will allow the state’s overgrown residual market to wither away and allow all North Carolina consumers to find solid, fairly priced automobile insurance that meets their specific needs,” Lehrer said.
FAIR NC’s Feinburg agrees, saying the new ratemaking methodology would reduce the number of “clean-risk” drivers in the reinsurance facility and remove the hidden tax on all drivers that is as much as 7 percent per driver.
But the state’s large in-state insurers take a much different view of the possible reforms. Nationwide Insurance for North Carolina, which has the state’s largest market share with 670,000 policyholders, and North Carolina Farm Bureau, which holds the third ranking in market share, have been vocal about their opposition to the bill.
“North Carolina’s insurance system is fair to all drivers, protects consumers from unjustified rate hikes, and encourages everyone to but insurance,” said Lee Morton, vice president for Nationwide North Carolina. “We do not believe the people of North Carolina want higher insurance rates, less independent oversight, more uninsured drivers, or a more volatile insurance market.”
Powell said that any set of reforms would have to deal with the reinsurance facility and give insurers more leeway when setting rates. However, he said, it is a process that would require several years of implementation to avoid any radical upheavals in the market.
“It would be extremely disruptive to agents and consumers,” Powell said about the prospects of instituting reforms overturning the current ratemaking system.
Goodwin Stands Firm in Opposition
One roadblock standing in the way of any reform is North Carolina Insurance Commissioner Wayne Goodwin.
Goodwin has been a staunch opponent of any reform that would eliminate the Rate Bureau’s role in calculating rates and his ability to have the final say on rates, taking the position that the current system benefits consumers and holds down auto insurers’ profits.
“Nothing that has been proposed to date does anything but raise insurance rates for drivers,” Goodwin.
That position is unlikely to change given that Goodwin is up for re-election this year and has made North Carolina’s low auto rates a centerpiece of his accomplishments.
Goodwin is opposed by Republican Mike Causey, who unsuccessfully opposed former Democratic Insurance Commissioner Jim Long in 1992, 1996, and 2000. So far, Goodwin has outraised Causey by more than three-to-one in contributions and has a substantial lead in the early polls.
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