R Street fellows offer primer on N.C. auto insurance reform
In the paper, “Spotlight on N.C.’s Auto Insurance System: Seven Things to Understand,” Lehmann and Smith outline how the North Carolina Rate Bureau works and how it stifles competition and innovation. They also respond to some claims offered by those who oppose reforming the system, including the assertion that moving in the direction of market competition would cause auto insurance rates to skyrocket. In reality, they note, North Carolina’s current guarantees profits to insurance companies. Moreover, auto insurance rates are low across the Southeast, including in states that have far less burdensome regulatory systems.
“Rates in North Carolina and other nearby states are lower than the national average for a variety of reasons, including caps on tort damages, reasonably tight enforcement of vehicle safety standards, demographics and relatively low traffic density,” Lehmann and Smith write. “Moreover, insurers who find they cannot justify offering collision or comprehensive physical damage coverage to particular drivers at the rates set by the Rate Bureau will typically ask those consumers to sign a Consent to Rate Form, which allows the company to charge higher rates.”
Legislation currently pending in both chambers of the North Carolina General Assembly would allow auto insurers to opt out of the North Carolina Rate Bureau – a legally mandated but privately run body through which the industry currently sets rates collectively – but would not, as defenders of the status quo claim, strip the insurance commissioner of authority to deny rate requests. The Department of Insurance would retain the power to deny rates that are excessive, insufficient or discriminatory. However, for rate increases of less than 12 percent, the department would need to justify why such rates should be denied.
The primary reason to move forward with reform, the authors note, is that more than a fifth of North Carolina drivers cannot find a private insurer willing to write them liability coverage. The result is that 1.54 million North Carolina drivers are shoved into the “residual” auto insurance market, constituting 81 percent of all residual market drivers in the United States.
“In most states, these markets are extremely small and are mostly made up of repeat drunk drivers and others with truly awful driving records,” Lehmann and Smith write. “Because of burdensome regulations, however, North Carolina has more drivers in its residual market than all other states combined.”
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