Be wary of insurance rate cut

Although it may seem like an early New Year’s present, North
Carolina drivers have every reason to be wary of the 16.1 percent
“decrease” in auto insurance rates that Commissioner Jim Long has
ordered. The supposed “cut” in rates — scheduled to go into force Jan.
1 — will likely hurt as many drivers as it benefits and, for all of
Long’s populist rhetoric, actually serves to strengthen North
Carolina’s system of guaranteeing profits to private insurance

Some background: The auto insurance rates Long
considers during frequent hearings have little direct impact on most
drivers in the state. The “cut” refers only to an insurance
industry-written “bureau” rate plan that serves as the basis — and the
maximum — rate that insurers can charge drivers. The great majority of
North Carolina drivers pay less than the bureau rate because all
insurers file “deviations” that provide extra discounts to good
drivers. When bureau rates fall, some of these discounts will vanish as
insurers try to patch revenue shortfalls by cutting back on discounts
for better drivers. Thus, while a teenage boy with a fast new sports
car might see his rates fall, a grandmother who gets around in an early
1990s land yacht will likely see her rates rise.

Even worse
for drivers across the state, their taxes — and thus their costs for
auto insurance — will rise as a result of the “cut” in rates. This will
happen because North Carolina law doesn’t let insurance companies use a
wide variety of useful information in setting insurance rates. A 20-year-old
man and a 55-year-old woman get treated the same. In addition, all
insurers can give up potentially unprofitable policies to a
state-mandated “Reinsurance Facility.” While drivers placed in the
facility still receive policy statements from private companies and
usually pay the same rates that the bureau sets, the facility itself
takes on the real risk of covering them.

On balance,
insurance companies do a good job protecting their own profits: the
facility consistently loses money writing coverage for the customers
insurers give up. As a result, every driver in the state pays a special
tax to make up the difference. (For more than 20 years, insurers have
been prohibited from telling their policyholders about the tax.) The
lower the government forces bureau rates to fall, the more drivers end
up in the facility and the more auto insurance costs rise for roughly
three quarters of North Carolina drivers who stay outside of the

While this system does a good job protecting
insurer profits — every major auto insurance company does business in
North Carolina — it doesn’t save money for consumers. With taxes taken
into account, North Carolina residents spend about the same percentage
of their income as those who live elsewhere in the Southeast. Residents
of states such as Virginia and Tennessee pay less while those in
Florida and South Carolina pay a bit more. Because the system requires
so much paperwork to introduce a new product, furthermore, widely
advertised products like insurance rate comparisons, “good driver”
rebate checks, and pay-per-mile auto insurance aren’t sold in North

If it wants to fix the system, the legislature
should take radical steps: It should end the system of profit
guarantees, abolish the N.C. Rate Bureau, make product innovation
easier and hold every insurer in the state responsible for setting its
own rates. In short, it should let the free market work. That’s the
best way to protect consumers.