North Carolina’s antiquated rate bureau system
There was a time, not so far in the distant past, when virtually all property and casualty insurance rates were calculated by industry-owned rate bureaus.
It wasn’t necessarily a terrible system. Smaller insurers could compete on relatively even ground with the big guns, because all had access to the same data for underwriting and rate-setting purposes. There wasn’t a tremendous amount of competition in price, but that meant greater competition in the areas of service and reputation.
But the system did have some significant drawbacks. The most obvious one is that, by definition, it required collusion by insurers. In response to this collusion, there evolved a system of rate regulation, particularly in the personal lines like home and auto, in which state insurance commissioners would review the rates submitted by the rate bureaus to determine whether they were sufficient and neither excessive nor discriminatory. Even though the rate bureaus are mostly a thing of the past, this command-and-control system of rate regulation still persists in most U.S. states.
Another major problem is that, by enforcing a one-size-fits-all approach, the system stifled innovation and competition, and left quite a few potential insureds out in the cold. There developed a whole market of “non-standard” home and auto insurance products and, in most states, large residual markets to take on the sizeable number of risks that didn’t fit into the boxes the rate bureaus designed.
With the advent of advanced underwriting techniques that take troves of consumer data and churn them through customized algorithms that can craft remarkably precise rates for virtually every customer, the residual markets have shrunk to irrelevancy in most states (in auto insurance, overwhelmingly so.)
But there is one major outlier to this trend. In both home and auto insurance markets, the State of North Carolina continues to maintain a “pure” rate bureau approach that harkens back to this earlier time. And despite years of complaints that the system is outdated and robs Tar Heel state consumers of many of the new products those in other states enjoy, the chances of a real overhaul anytime in the near future don’t look good.
Reform to the auto insurance program, where North Carolina is virtually alone nationwide in having a residual market of any real size, is already off the table for now. Despite convening an Automotive Insurance Modernization Committee that was charged with recommending reforms to the North Carolina Reinsurance Facility (which insures 20% of the state’s drivers) and changes to the state’s methods for setting rates, lawmakers earlier this year announced they would punt on addressing the issue until 2013.
Prospects had looked somewhat brighter for property insurance reform. And, indeed, Gov. Bev Perdue earlier this month signed S.B. 836, offered as “an act to improve the rate-making process.” Among the bill’s provisions, it would:
- Provide the insurance commissioner, who currently can only either approve or reject filings by the rate bureau, the power to instead specify appropriate rate levels between the bureau’s filings and current rates.
- Allow the cost of reinsurance to be considered as a factor in rate-making
- Require the rate bureau to provide rating plans for coverage that excludes wind and hail perils
- Require the Department of Insurance to accept public comments on all property insurance rate filings
- Commission an insurance department study of the fairness and efficacy of current geographic rate territories.
None of these are bad ideas, of course. But neither do they do a tremendous amount to overhaul what is an absolutely antiquated system in which rates are determined centrally by a single party, and one that uses just a single catastrophe model to guide its recommendations, at that.
As one agents group recently told Insurance Journal:
“I wouldn’t call this a substantial piece of legislation,” said Stuart Powell, vice president of insurance operations for the Independent Insurance Agents of North Carolina. “It nibbles at the edges of the issues, but doesn’t deal with the heart of them.”
