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It’s time to tune up N.C.’s system

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It’s time to tune up N.C.’s system

Lehrer article in News & Observer

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.