by Eli Lehrer
June 27, 2008

WASHINGTON - Few can doubt that North Carolina Insurance Commissioner Jim Long relishes the fight he’s about to get into with the auto insurance industry. When he faces off with the industry-run N.C. Rate Bureau on Monday, he’ll demand what he calls an auto insurance rate cut of 20 percent, while the industry will ask him for what it will call a 13 percent increase.

Given that Long both serves as hearing officer and “prosecutor” with regard to the state’s insurers, there’s little doubt that he’ll decide to order a “cut” and, in so doing, cap his final year in office with an act that will cement his reputation as a populist champion who keeps insurance rates down. The image of North Carolina’s gentlemanly insurance commissioner facing down a corporate-style rate bureau that serves big out-of-state companies makes for good political theater. But for all the bluster, it’s not clear that this auto insurance system helps the state.

SOME BACKGROUND: Although they provide a framework for setting insurance rates, the government-mandated rates the commissioner and the industry fight over have a direct impact on very few drivers. In fact, they simply serve as a price ceiling: individual insurers set policy rates for most drivers and charge about 70 percent of them less than the government rates.

Other drivers—those for whom no insurers will write coverage within the government-set price cap—end up in the rather ominously named “North Carolina Reinsurance Facility.” Although nearly invisible to the quarter of North Carolina residents who end up in it—they still get statements and claims service from private insurance companies—the Facility’s current structure raises insurance premiums for almost everyone in the state.

While the worst drivers, those with serious accidents and multiple tickets, pay Facility-set rates that correspond to their relative riskiness and cover their own expenses, drivers who pose significant risks but haven’t accumulated serious violations—think 18-year-old boys with red sports cars—receive a subsidy from all of the state’s other drivers.

This subsidy, which comes in the form of a hidden tax built into 75 percent of the state’s auto premiums, varies each year but has added as much as 10 percent to auto insurance bills.

Thus, rate “increases” and “cuts” aren’t always what they appear. A “cut” in the maximum rates that insurers could charge might result in lower profit margins for insurers writing policies to middling drivers. This, in turn, could lead them to make up the profits by raising rates on good drivers. An “increase” that lets insurers charge bad drivers more could actually result in price decreases for drivers currently insured through the Facility because “higher” private market rates would actually be lower than Facility rates.

BY SUBJECTING EVERY CHANGE IN THE PRICE CAP TO ENDLESS WRANGLING —rate cases have ended up in court seven times in the past 20 years—the current system also reduces choice. While national television ads tout special rebate checks from one major insurer and online price comparison from another, the sheer complexity of North Carolina’s insurance system means that residents don’t have access to these products.

And for all of Long’s attacks on the industry, he presides over a system that guarantees profits. By letting insurers turn over any not-so-profitable clients to the state-run reinsurance Facility, the current system actually makes it nearly impossible for any insurer to lose money doing business in the state. And North Carolina’s insurance rates aren’t out of whack with those elsewhere in the Southeast: Virginia residents actually spend a smaller percentage of their income on auto insurance.

Many in the General Assembly appear to have woken up to the system’s problems. Significant numbers of legislators have supported proposals to eliminate the hidden Facility tax, appoint a special judge to oversee rate hearings (thus making the commissioner a pure advocate for the state’s consumers) and give insurers some flexibility to offer lower rates for bad drivers in the Facility. All of them deserve serious consideration. In the end, North Carolina needs to recognize that it has a broken auto insurance system.