Is it more important to keep overall car insurance premiums low, or to make sure everyone’s paying what they deserve?
North Carolina legislators once again examining the unique rate-setting system for the state’s roughly 7 million insured personal vehicles will be hard pressed in 2012 to agree whether changes are needed to address the balance between insurance risks and costs. Insurers are divided on the issue.
Proposals floated in 2011 at the General Assembly to alter the system could have lowered rates for bad drivers considered too risky for conventional insurance. But supporters of the current system say the bills would have raised rates on many others who have neither caused accidents nor been convicted of speeding recently, yet still sit in the state’s large high-risk pool.
“I don’t think you have a clear consensus among the industry that they want change,” said David Marlett, a professor and insurance expert at Appalachian State University.
The proposals are about better matching premium rates with the level of risk each driver presents, according to a group of insurers led by national industry leader State Farm, along with Geico, Progressive and trade associations seeking a system overhaul. They say they’re hamstrung in what they can charge customers because all auto insurers file one combined annual plan to raise or lower rates together through what’s called the North Carolina Rate Bureau. The state insurance commissioner can approve or change those rates.
The coalition supported legislation filed this year that would have eliminated the Rate Bureau for auto insurance and given insurance companies more authority to raise or decrease rates by up to 15 percent overall annually without the commissioner’s consent.
“It’s an antiquated system that was used way long ago and no longer has a purpose in today’s marketplace,” said Liz Reynolds with the National Association of Mutual Insurance Companies, a member of the Fair Automobile Rates for North Carolina coalition.
Nationwide Insurance, which has the No. 1 automobile market share in the state, along with North Carolina Farm Bureau Insurance at No. 3, and others, aren’t in the coalition. Nationwide says the rate-filing mechanism promotes stability and hasn’t discouraged insurers from writing policies in North Carolina.
Depending on who’s calculating, North Carolina’s average premium rates rank 7th or 8th lowest in the country.
“North Carolina has a system that is fair and competitive. There is no reason to dismantle it,” Nationwide spokesman Eric Hardgrove said.
Commissioner Wayne Goodwin, who strongly opposed the 2011 bills, said the changes would have harmed the public.
“You’d have more people who have no convictions and no points getting higher rates,” Goodwin said in an interview. “That’s unfair, and I don’t think that’s the way North Carolina wants our drivers treated.”
The Republican-led Legislature agreed to study the auto insurance system over the next few months, only three years after a similar panel created under Democratic rule covered the same ground. A key GOP leader said he’s unsure whether changes are needed.
“Whatever we do, we really don’t want to increase our premiums on consumers,” said Sen. Tom Apodaca, R-Henderson, co-chairman of the new study commission that will report to the full Legislature in time for the May work session.
Arguments have focused again upon North Carolina Reinsurance Facility, the pool for drivers that insurers aren’t willing to insure at the rates worked out through the Rate Bureau and Goodwin. North Carolina state law requires liability insurance for drivers.
About one in every five insured automobiles in the state are placed in the facility. The pool includes drivers considered bad risks because of their driving history. They pay rates about 30 percent higher than the rates in the conventional market.
But more than 70 percent of the pool’s population involves experienced motorists who haven’t been cited for violations in at least three years. These “clean risk” motorists don’t pay the additional 30 percent, but their premiums fall $151 million short of what it takes to cover their losses and expenses, according to a presentation at the committee’s first meeting this month.
To make up the difference, the facility issues a surcharge on liability policies statewide that’s currently $17 a year on average, bureau general manager Ray Evans said.
Goodwin, a Democrat seeking re-election in 2012, pointed to a 2006 department review of criteria insurance companies said they used when deciding whether to surrender these policies to the facility to suggest who could face higher rates. The review found insurers sometimes looked at credit scores, occupations, types of car driven, education levels and even if the person is in the military.
Marlett suggested lawmakers could consider granting flexible rates to encourage insurers to take on more bad risks currently in the pool. The change would lower the facility size, and the surcharge for everyone could fall.
That, however, doesn’t resolve the huge number of clean risks in the pool. Some argue allowing insurers to charge higher rates for clean risk could raise the percentage of drivers who avoid insurance altogether.
There are good things about North Carolina’s market, Marlett said. It’s competitive, average premiums are low and auto insurers make profits. But the size of the facility should raise flags, Marlett said.
“We have the largest one in the nation by far, and that’s the sign of an unhealthy market,” he said.
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