North Carolina lawmakers have decided to postpone any major effort to reform the state’s automobile insurance market until next year citing the complexity of the subject and a lack of time due to a shorten legislative session.
The Automotive Insurance Modernization Committee, however, said it would like to see some changes to make the market more competitive by restructuring the state’s “high-risk” pool and possibly the method for setting rates.
The committee’s decision came months after Insurance Commissioner Wayne Goodwin announced there would be no changes in auto rates this year.
Lawmakers have been debated auto reforms for the last several years without being able to find a consensus on any changes. Complicating the issue is that the industry is split on the subject and Goodwin has constantly opposed any changes in the ratemaking process.
Sen. Tom Apodaca (R-Henderson) said he didn’t necessarily see the need for major reforms, but added that something needed to be done to stimulate competition.
“We can bring the rates down for the majority of the good drivers,” Apodaca told reporters. “I don’t know what the answer is, but I do think we need to do something.”
Any major change to the market would include a restructuring of the North Carolina Reinsurance Facility, which provides coverage to 1 million of the state’s 5 million drivers.
Roughly 25 percent of those divers are considered bad risks and pay rates around 30 percent higher than other drivers. However, the other 75 percent of drivers in the risk pool are considered clean risks who are not covered by private insurers due to underwriting criteria. For example, unemployed individuals, people in the military or those with low credits scores often end up in the high risk pool despite having a clean driving record.
Since those drivers pay lower risk pool rates, the pool has an annual shortfall of $150 million. As a result, all state drivers end up paying a surcharge of $20 per year.
FAIR NC, a coalition of insurers that include State Farm Mutual Insurance Co., Geico, USAA, and Allstate, is in favor of making changes to the risk pool to promote competition. One idea floated by committee is to allow insurers to charge higher rates for clean risk drivers, thus reducing the surcharge on all drivers.
FAIR NC Vice President Kathy Feinburg said right now there is little incentive for insurers to cover those clean drivers since there are no restrictions on what risks may be sent to the risk pool. As a result, insurers can “cherry-pick” the market and guarantee profits.
“Lawmakers have the opportunity to turn this around and provide North Carolina driver with a system that brings transparency and competition to our state,” Feinburg told the committee.
Much of the prospects for reform turn on the state’s method of setting rates, which 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.
The Heartland Institute said in a report that the state’s ratemaking methodology is antiquated and prevents insurers from responding to changes in the market.
“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 to 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 the state’s low rates do present a potent argument against reform.
“A better marketplace may not be a cheaper marketplace,” said Powell.
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