Letter from Washington: The Tarheel State’s sticky auto insurance market
This coming week, I’ll be testifying before a North Carolina study committee on that state’s auto insurance system. I’ve written a good deal about the system in the past. To preview my presentation, I have three basic points about the system that I hope the legislature takes into account in formulating a better system.
North Carolina has average rates for its region. For a variety of reasons—geography, demographics and, perhaps, culture—the Southeast has cheaper auto insurance rates than the rest of the country. By national standards, rates in North Carolina are low, but so are rates in Virginia, Tennessee and South Carolina. There’s very little chance that any set of reforms would send average rates up significantly. On the other hand, if the current system is designed to keep rates down, it’s doing a bad job of it.
Moreover, North Carolina guarantees profits to auto insurers. State statutes explicitly require the insurance commissioner to consider insurer profitability in approving rates and, if insurers feel they aren’t making enough money, the practice of “free ceding” to a state reinsurance facility allows them to shed any policies they don’t like. The result is that only a truly incompetent insurer could ever lose money writing insurance in North Carolina. The commissioner must set rates that allow profits and if he or she does nut, companies still can make normal returns by servicing policies.
Finally, the North Carolina reinsurance facility—the state’s residual insurance market—is way too big. Nearly 80% of the nation’s residual auto insurance market policyholders are in North Carolina. No other state is even close. And this shows that many residents are not being well-served by the private market.
In response to these realities, I believe that the legislature should act to require insurers to file their own rate plans. In short, the Rate Bureau should go. To do this, the insurance department is going to need a larger staff to review rates while maintaining current levels of service. (A modest increase in premium taxes should cover this and I trust Insurance Commissioner Wayne Goodwin to handle it well.)
The state also should liberalize the rating factors that insurers are permitted to use. North Carolina actually allows the use of some of the most important data—such as credit scores and location—but places all sorts of unusual restrictions on other rate-setting and underwriting variables, such as a ban on charging men more than women. I’m sorry, fellow men, but we are worse drivers and the ban simply doesn’t make sense.
The profit guarantee also should end. While ditching “free ceding” right away would be disruptive, the reinsurance facility should eventually be closed to all but people who can’t get anyone to write them in the admitted market. Meanwhile, it’s silly to require profits to be taken into account. If an insurer isn’t making a profit, its best action is to leave the state. There shouldn’t be any legal entitlement to make money.
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Rebecca Wodder, former head of American Rivers, called me last Thursday evening to tell me that she was withdrawing her name from consideration to be the Interior Department’s assistant secretary for fish, wildlife and parks. Unlike many of President Obama’s environmental nominees, she is surely someone conservatives could—and should—have worked with. On a number of issues, almost all of them areas where her job had no authority, I disagree with Wodder’s positions. For example, she supported the Waxman-Markey climate change bill that imposed huge new energy taxes and she probably wanted to regulate natural gas exploration in ways that would have seriously impeded it. But the position to which she was nominated, even her opponents admitted, has no authority over either of these issues, where she simply held the same positions as the president and his other nominees.
The real genesis of the opposition to her came from her dislike of “economic development” boondoggles in the form of huge, environmentally destructive dams that waste tax money to destroy scenic rivers. That was the problem and that was the reason she withdrew her name. It’s a sad commentary on the environment in Washington that it has come to this: the one top environmental nominee who would have done a lot of things that conservatives ought to like gets blackballed for exactly that.
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I’ve been obsessed, probably beyond all reason, with the story of the Costa Concordia. There’s a decent insurance angle here: It looks to me like Costa parent Carnival will probably be made whole by its insurers. And I’ve been on three cruises with Carnival-owned companies myself. But that really isn’t my interest.
Instead, it’s in the actions of the captain and crew of the ship and, in turn, what they say about the virtues and limits of regulatory policy. USA Today’s travel blogger, Anne Campbell, raises a number of questions, mostly relating to things that would best be dealt with by imposing new regulations. But as is almost always the case in disasters, existing systems intended to prevent catastrophe all failed at the same time.
It’s true, as Campbell points out, that many lifeboats on the ship couldn’t be lowered because it tilted and that putting lifeboats on the decks rather than over the sides could have solved this particular problem. But had the ship been evacuated as soon as it started to take on water, it wouldn’t have listed and all the lifeboats could have been deployed. Likewise, had crew members not told passengers, falsely, that the ship was simply experiencing electrical problems, many might not have returned to their cabins. Finally, had Captain Francesco Schettino remained on board and coordinated the rescue, much of the chaos that passengers report probably could have been avoided. And so forth.
There do seem to be cases where different regulations could have helped. For example, if such a rule doesn’t exist already, there should be a pretty clear mandate (either in law or standard operating procedures) to evacuate any ship that has begun taking on lots of water. But for every rule like that, it seems like there are many cases where the real failings were moral rather than regulatory. Captains, obviously, shouldn’t abandon their ships. And that’s a lesson for anyone thinking about writing new regulations.
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Full disclosure on the last item: I own Carnival stock that I purchased right after the disaster. I have already made some money on it and believe that I’ll make more. It’s pretty simple from my perspective: bad as it was, a single freak cruise ship crash, which evidence to date seems to suggest stemmed from the captain’s negligence, is not going to change the fundamentals of a company’s business. I purchased BP stock during the Deepwater Horizon disaster and have made out quite well on it. I expect I’ll do the same with Carnival.
