by Eli Lehrer
September 19, 2008

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 companies.

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 facility.

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 Carolina.

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.