North Carolina lawmakers are studying North Carolina’s auto-insurance system, specifically whether there’s money to save by doing away with the “reinsurance facility” that lets insurers offload some riskier policies.
The issue was the focus of a House Oversight and Reform committee hearing this week, which reached no conclusions other than it needs to do more research and question the facility’s officials directly.
“The discussion today has actually raised more questions than it answered,” said Rep. Harry Warren, R-Rowan, the committee co-chair who led the questioning of Insurance Commissioner Mike Causey and a committee-hired consultant.
The consultant, Nicholls State University economics professor Jon Murphy, noted that North Carolina and New Hampshire are the only states that operate a reinsurance facility.
Most states used an “assigned risk” system to ensure that most people on the roads have some sort of coverage. Any insurance market must address coverage of risky drivers, whether the risk stems from bad habits, age or other factors.
An assigned-risk pool requires all insurers to participate, and then allocates the risky insurance purchasers among them. Their assigned insurer has to write them a policy, but is free to charge what it wants. That’s invariably going to be more than the base rate, and often a lot more, making it unaffordable for some.
The result is a lot of people paying a big share of their income for insurance, or a lot of people driving around uninsured.
North Carolina started compulsory auto insurance in 1958. Until 1973, it used an assigned-risk system. But that year, the General Assembly instituted the reinsurance facility.
It allows insurers to write policy and offload it to the facility, giving up both the claims liability and any potential profit, the Department of Insurance says.
Insurers get some money back for administering those policies, which looks like a system of cross subsidies to skeptics, including Warren and committee Staff Director Joe Coletti.
That’s because car insurance buyers are paying hidden fees as part of premiums make make up 13% of the bill, says Coletti, a former John Locke Foundation fellow.
Moreover, insurers are able to unload more than just the risky policies. Some insurers cede “100% of their business” to the facility, Causey said.
For fiscal 2022-23, the facility received $891.0 million in premiums and incurred $944.3 million in losses, or paid claims.
After the various recoupments, give-backs and other line items are factored in, the facility’s year-end loss was $15.1 million. Suffice to say that’s better than being $53.3 million in the red, as would have been the case just off premiums and claims.
Murphy’s advice to the committee was to reinstitute a cap on offloads, return to the assigned-risk model and ultimately move to “flexible premiums.” That means abandoning the approval process for rate increases and letting insurers “set their own rates,” with the expectation that more firms can enter the market, including ones that “specialize in dealing with high-risk policies.”
North Carolina’s rates are low compared to many states in the nation, including South Carolina and neighboring states. Murphy concedes that there are “significant risks” involved, and said the facility may be “the best possible option here.”
Causey said North Carolina abandoned the assigned-risk system in 1973 because it “was a disaster” here. He believes Murphy’s advice would “likely result in higher rates for North Carolina drivers.”
Insurance Department officials instead advise giving a piece of new legislation, Senate Bill 452, time to work. It will allow insurers to collect inexperienced-driver surcharges for eight years instead of three, starting for people licensed after the start of 2025.
Warren, however, signaled that the committee will continue to work on the issue.
“It seems like the state’s mandate for requiring auto insurance and for insurers to have to write those policies has resulted in programs beneficial to the insurance industry,” he said.
“It seems to be unfair to the good drivers, and cannot provide quantifiable benefits that justifies suppressing a free-market approach” that can perhaps yield the same results.
