Hood column: Insurance policy is insane

RALEIGH — If I asked most readers to list the top-10 issues facing North Carolina, few would think to include "auto-insurance reform." But perhaps I can arrest your attention with this statistic from a recent John Locke Foundation 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 author of this new auto insurance study. 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," Lehrer said. Nearly one out of every four North Carolina drivers cannot find insurance coverage in the private market, he said.

In most states, drivers who can't get market policies and must buy from a state-run reinsurance pool — where the price of coverage is subsidized by surcharges on the premiums of other N.C. drivers — 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 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.

"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."

Lehrer recommends that the state begin with several commonsensical reforms. One is to allow insurers to charge rates that accurately reflect risk, which would cut prices for most. 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. 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 blarney, our unfounded belief in our progressive superiority, hurts us. Convinced that the private insurance market doesn't work, Commissioner Long and the General Assembly have concocted a system that no other state would think of emulating. 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 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. But Long retires this year, leaving the first open-seat race for insurance commissioner in a generation. The candidates, Democrat Wayne Goodwin and Republican John Odom, are 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.

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Hood is president of the John Locke Foundation.