Signs of hope in North Carolina
The facility is a state-mandated entity for drivers who can’t get liability coverage from traditional auto insurance companies. It serves as the largest residual auto insurance mechanism of any state, by several orders of magnitude. Roughly one-in-five North Carolina drivers end up in the facility, which represents more than 80 percent of the residual market policies sold in the United States.
The facility gets a lot of both younger and older drivers, as well as drivers of muscle cars and sport cars. The difference between what these drivers should be charged to pay the facility’s claims and expenses, and what they are actually charged under existing North Carolina law, becomes a recoupment charge levied on all insured drivers in the state. This keeps the facility from going bankrupt.
The state government has a system that defines certain drivers as “clean risks,” i.e., good (or good enough) drivers. But even some of them can’t get insurance from most auto insurance companies. Largely, that’s because the state’s politically invented definition of “clean risk” has little to do with the factors the actuarial tables show makes one a good bet for liability insurance.
North Carolina’s system is today the only one in the country in which auto liability rates are set communally through a rating bureau cartel, instead of letting companies develop their own rates. North Carolina doesn’t allow a number of rating factors (age, for one) that are used in virtually every other part of the country. Thus, it is slow to permit innovative new insurance products to come to market, as state policymakers refuse to recognize that companies can figure out better than the government which drivers are better risks.
Of course, it doesn’t help that some of the biggest players in the state’s insurance market stand behind the existing system. Part of the reason for this is that the system actually does allow companies to charge more than the rate advised by the Rate Bureau, so long as the company gets permission from the driver. The biggest companies have a perfect incentive to keep the status quo, as they have a disproportionately large number of these “consent to rate” policies which collect higher premiums and which no potential competitor is allowed to match. This is part of a bigger unfortunate trend of companies using the government to get a leg up on the competition by favoring certain practices that potential competitors either won’t or can’t copy.
Overhauling this system has proven a difficult to impossible task in recent years, so advocates of reform have turned their attention to a number of smaller, more modest changes. Transparency is one such effort. If the current bill passes the Senate and becomes law, drivers finally will know about their surcharges, and can better gauge what they are paying for protection.
Finding out exactly what one is paying can be highly motivating to reformers. This is a solid trend, and one we hope spreads far and wide.