North Carolina’s Auto Insurance System Badly Needs an Upgrade

It’s easy to understand why many North Carolinians are skeptical of proposals to change how the state regulates auto insurance. In a state where homeowners insurance rates are fairly high, and auto insurance relatively affordable, the old adage about not fixing what isn’t broken holds a lot of sway.

But scratch the surface just a bit, and the North Carolina system – one in which the insurance industry conspires to set rates and is guaranteed profits by law, good drivers are taxed to subsidize bad ones, and consumers can’t get products and discounts available all across the rest of the country– quickly reveals itself as one that is, in fact, broken. What’s more, the existing system doesn’t deserve the credit it’s been getting for keeping rates low.

Under the current system, auto insurers get together through the North Carolina Rate Bureau to set rates and terms of coverage for standard insurance policies. The insurance commissioner then reviews those rates and terms, and can reject them if he finds they are excessive, insufficient or discriminatory.

But those who argue it is the insurance commissioner’s authority to reject rates that keeps rates low need to explain North Carolina’s commercial auto insurance market. For this coverage – sold to businesses for company cars, delivery vehicles and others autos in their fleet – North Carolina also has some of the lowest rates in the country in that market, even though those rates are set individually by the carriers, with no rate bureau.

In fact, it’s not just North Carolina. Neighboring states like Virginia, South Carolina and Tennessee also have very low insurance rates, despite mostly allowing companies to set their own rates. South Carolina may offer the best comparison, as it had a very similar system until the late 1990s. Despite strong rate regulations, South Carolina’s premiums rose by 30.6 percent in the eight years before it moved to a more free market, a rate of increase that was cut by more than half in the decade after passing reform.

Another important lesson from South Carolina example is how reform helped shrink the pool of people who couldn’t find coverage from a private carrier. In 1998, nearly one in three South Carolina drivers had to resort to coverage from the so-called “residual market” for auto insurance. Today, it’s less than 1 percent. Meanwhile, in North Carolina, there are some 1.54 million drivers, about a fifth of the market, who cannot get a standard auto insurance policy and have to be written by the N.C. Reinsurance Facility.

Today, North Carolina is home to about 81 percent of all the residual market drivers in the United States. It’s not a great situation for these higher-risk drivers, as drivers only get liability coverage from the facility and may have difficulty getting covered for collision, but it’s an even worse deal for the rest of the state. To subsidize the facility, safer drivers are charged hidden fees on their insurance bills that have added up to nearly $900 million over the past five years.

Worst of all, the one-size-fits-all rate bureau system means North Carolina consumers can’t enjoy the innovative new products that auto insurers have rolled out: deductibles that drop the longer you avoid an accident, discounts for drivers with good credit, regular rebate checks, deep discounts to those who provide real-time driving data to their insurer.

More choice in products would mean real competition, which is why some of the established insurers have fought so hard against reform. For them, changing the status quo could mean losing market share to new rivals. But for the sake of consumers, North Carolina lawmakers would do well to finally bring the state’s insurance system into the 21^st Century.

Topics Auto North Carolina