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North Carolina’s ‘Other’ Auto Insurance Market

I’ve already covered in these pages some of the things the editorial pages of North Carolina’s leading newspapers are getting wrong about S.B. 154, legislation to modernize the state’s system of setting auto insurance rates. But co-sponsor Sen. Jeff Tarte, R-Cornelius, does a better job than I ever could of getting to the heart of the matter.

To refresh your memories, S.B. 154 would allow auto insurers to opt out of setting their rates collectively through the North Carolina Rate Bureau, the last “pure” auto insurance rate bureau system in the country. The change would permit insurers the option to offer a range of products and discounts not currently possible under the one-size-fits-all rate bureau system.

The insurance commissioner would continue to have authority to disallow rates deemed to be excessive, inadequate or discriminatory, but regulators would need to show cause to challenge proposed rate increases of less than 12 percent.

Opponents of the bill have seized on that change to argue that the new system would lead to massive rate increases in what has been undeniably a relatively affordable state for auto insurance (albeit one in which lower-risk are bearing a disproportionate amount of the costs generated by higher-risk drivers.)

In a letter to the Charlotte Observer, Tarte explains a serious flaw in that prediction:

Some people have suggested that the N.C. Rate Bureau is responsible for keeping North Carolina’s car insurance rates low. But consider this, N.C’s commercial auto insurance market does not use a rate bureau to set rates. Are commercial rates significantly higher? No. North Carolina enjoys some of the lowest commercial auto insurance rates in the nation.

Indeed, as Alan Smith and I note in a new primer published by North Carolina’s John Locke Foundation, there are any number of reasons North Carolina has low average auto insurance rates, but the insurance department’s authority to set price controls are not among them. In reality, auto rates are low throughout the Southeast. Rates in North Carolina and other nearby states are lower than the national average for a variety of reasons, including caps on tort damages, reasonably tight enforcement of vehicle safety standards, demographics, and relatively low traffic density.

Tarte also offers a concise summary of why the system needs reform:

More important, hidden fees that are charged to every driver to help cover the cost of insuring risky drivers would be eliminated. Did you know that this fee by state law cannot be mentioned on your insurance bill? It cost North Carolina residents nearly $900 million over a five-year period, and most drivers never knew that they were being charged.

This hidden fee is only necessary because our state has insurance companies lump good drivers together with high risk drivers through the N.C. Reinsurance Facility. This practice leaves all drivers with the responsibility for insuring risky drivers, while the insurance company makes a guaranteed profit for servicing these accounts. Does your business get a guaranteed profit for taking on risky business?

North Carolina consumers deserve better. We deserve a system that lets good drivers take advantage of discounts and does not force us to pay hidden fees to help insure risky drivers.

This is how everyone else in the country does business – not because it is good for insurance companies, but because it is fair to every driver.

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