Insurers Divided Over North Carolina Auto Insurance Rate System

A divided auto insurance industry will try again next year to change a unique regulatory system in North Carolina, which enjoys some of the lowest rates in the country. The industry will use the argument that average costs are low because the best drivers are paying more than they should.

North Carolina motorists had the lowest auto insurance rates on the East Coast but for Maine in 2010, according to the latest consumer cost information analyzed by the National Association of Insurance Commissioners.

The average $707 annual premium combining liability, collision and comprehensive coverage was eighth lowest in the country behind Maine, Idaho and five Midwest states, the NAIC data released last week showed. The national average was $907. The only big state with better overall rates was Ohio at $699. The report said the combined average premium fell by 3 percent over the five years since 2006.

A less-extensive but newer estimate pegged North Carolina drivers enjoying an even better deal. Insure.com’s state rankings reported the state’s drivers had the fifth-lowest auto premiums in 2012 at $1,022.

Automobile insurance also is likely lucrative for companies operating in North Carolina despite limits on how much insurers can compete on price, said Stuart Powell, vice president of Independent Insurance Agents of North Carolina, which represents the middlemen in the industry between companies and consumers.

Still, a group of insurers led by State Farm, Allstate, Geico and Progressive want to overhaul the system setting rates for the state’s nearly 7 million insured personal vehicles. They say the changes will benefit good drivers.

“It’s great to throw out the statistic that our prices are the lowest in the country, but why? Rates are being suppressed. There are a number of drivers who are not adequately assessed at the rates that they should be paying,” said Oyango Snell of the Property Casualty Insurers Association of America, which is part of a coalition seeking changes. “It is not fair to subsidize somebody else’s bad driving.”

There are several reasons North Carolina has low auto insurance rates, said Powell and David Marlett, a professor and insurance expert at Appalachian State University. Good roads, good traffic law enforcement, and low population density in the state’s wide rural areas mean fewer collisions, Marlett said.

A bigger factor is that North Carolina law is one of a handful of states that makes it difficult to win personal injury lawsuits by evaluating whether an injured person’s actions had any role.

“If you are one percent at fault, you might as well be 100 percent at fault,” Powell said.

What hasn’t been well measured is how much low insurance premiums are the result of North Carolina’s unique regulatory system.

North Carolina is the last state which regulates insurance companies by requiring each of the 64 auto insurers doing business in the state to propose a common, industry-wide rate increase or decrease. That request is reviewed by the state Insurance Department, which could push for changes. Company costs to work through the process are passed along to consumers.

The regulatory system was created decades ago to bolster smaller insurance companies, which generally didn’t have enough of their own data to make accurate probability estimates on who was likely to be a safer driver and who was riskier, Powell said.

North Carolina’s auto insurance market also is distinguished by a very large insurance pool, where premiums are high as insurance companies share the risk on claims for motorists they’d rather not cover. A fifth of the state’s cars are insured through the pool, but 75 percent of those sent to the North Carolina Reinsurance Facility actually have clean driving records.

Each insurance company decides for itself who goes to the reinsurance facility.

These so-called “clean risk” drivers are charged the maximum rates in the traditional insurance market. But those premiums aren’t enough to operate the pool, so all other policy-holders must pay a surcharge of about $17 per car to make up the difference. The charge will drop to about $12 per car in April, the state Insurance Department said.

When Marlett teaches North Carolina’s system as one that tends to cap costs for higher-risk drivers and charges good drivers more, his students are outraged they may be subsidizing someone else. Marlett reminds the 20-somethings that as a driver in his mid-40s, he’s likely subsidizing them.

“The reason I can live with that is because I want to make sure you all have insurance,” Marlett tells his students. “If it’s too expensive, and you guys can’t afford it and start driving uninsured, then that’s going to have an impact on all drivers.”

One of the biggest opponents of changing the system to allow companies more price-setting ability is Nationwide Insurance, which has the No. 1 automobile market share in North Carolina. If costs rise and the number of uninsured motorists rise, damage and injury costs left behind by those lacking coverage will work back into the rates everyone else pays, Nationwide’s top North Carolina executive, Lee Morton, told lawmakers earlier this year.

While changes sought by some insurers offer the promise of greater fairness, Snell said, “no company can promise that rates are going to go down with reform and modernization.”