By Gregory Edds
For the Salisbury Post
North Carolina’s auto insurance system needs an overhaul. Our system, created in the 1920s, was once quite popular across the country. But now North Carolina finds itself in the unenviable position of being the only state that has not left this bureaucratic, unfair system behind.
Recently, Senate Bill 490 was introduced to create a framework for providing fairer rates to consumers. In 49 other states, each insurer develops its rates, files them with the government and then implements them independent of one another creating a climate of fierce competition. But in North Carolina, all insurers pool their data and a Rate Bureau files rate requests for the entire industry at great expense and delay. The insurance commissioner reviews those rates then sets a “rate cap,” forbidding insurers from charging premiums above that rate. For this, he is considered “consumer-friendly.”
This rate cap creates a real problem, however. We all know someone with a bad driving record. If the premium necessary to insure that person exceeds the premium cap, the insurance company won’t insure them. So, where do they get insurance? Each state has a state-run insurance plan that accepts drivers the voluntary insurance market won’t take or cannot price adequately. Our state-run plan is called the Facility, and it is huge. In fact, our Facility is four times the size of the all the Facility markets in the other 49 states and District of Columbia combined. Experts believe that in a properly functioning regulatory system, a state’s Facility plan should not exceed 5 percent of the total market. North Carolina’s Facility insures 30 percent of our state’s drivers and is the single largest insurer in our state. Surrounding states don’t seem to have the same problem, having dumped our type of system decades ago. Georgia has only 41 cars insured in its Facility, Florida has 283, Tennessee 96, and South Carolina has only two. Compare that to the astounding 1,546,437 cars in our state’s Facility, and it becomes quite clear something is wrong. But it gets worse.
The state also caps the premiums for the drivers placed in the Facility, guaranteeing the Facility loses money ever year … a LOT of money. From 2004 to 2009, the losses exceeded $900 million. Guess where the money comes from to repay those losses? You! Every year, those losses are divided up and added to the premiums of all of the voluntary market drivers in North Carolina in the form of a surcharge called “recoupment.” This year, recoupment surcharges added about 5 percent to your premium but they have been as high as 15 percent in the past. Remarkably, these surcharges are hidden from consumers, and insurers are forbidden by law from disclosing them on renewal statements. If these surcharges are worth defending, why are they hidden?
The insurance commissioner and even some insurers are resisting modernization and will tell you that North Carolina has the nation’s eighth lowest average premiums. “If it isn’t broke don’t fix it” they claim. The consumer needs to understand that the problem isn’t that our overall “average premiums” are too high relative to neighboring states; the problem is how our system distributes premiums among drivers. Here’s our problem:
ABC Insurance Co. needs a total of $30 to operate and insures three people. Driver 1 is an excellent driver with a clean record. ABC charges her $5. Driver 2 has a driving blemish or two so they charge him $10. Driver 3 has a DUI and several accidents so they assign him a rate of $15. The average of the three premiums is $10. But the state tells ABC the most they can charge anyone is $11. ABC is forced to drop the premium for driver 3 to $11, but they still need to raise $30, so they raise the premium for driver 2 from $10 to $11 and the premium for driver 1 from $5 to $8. The average premium is still $10, but the system is clearly flawed when the state passes the premiums of the risky driver along to the others.
Critics claim SB 490 is just a way for insurers to “raise rates and make more money” or “this is just a way for larger companies to gain market share.” The fact is modernization has always brought about a more diverse, competitive, stable market. Our current system already results in N.C. consumers having far fewer insurers to choose from than any of our neighboring states Insurers take a peek at our bureaucratic nightmare and say “no thanks”. In addition, existing insurers are fleeing the state, leaving fewer choices for consumers.
Lastly, we also have the dubious distinction of being the last state that requires your insurer to raise your rates for a ticket or at-fault accident. SB 490 would eliminate the “insurance points system” on all voluntary market policies. If the insurer is comfortable with paying a claim without raising rates, why should the state mandate a premium increase? That decision should be worked out between the insurer and policyholder. The market will determine whether both parties have made a good decision.
To modernize or not is a classical political argument. Some believe shifting costs from risky drivers to safe drivers, hiding surcharges, building giant government-run insurance companies, mandating points systems and defending bulging bureaucracies are models for fairness and market stability. Most believe, however, that risky drivers should pay their own premiums, and safe drivers should be rewarded for being careful. Most believe an efficient auto insurance market will attract additional insurers to North Carolina, increase competition, improve service and drive down price while providing more and better choices to consumers. SB 490 will do just that.
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Gregory Edds operates a State Farm Insurance agency in Salisbury.