There’s a lot to like about the unique way car insurance rates are set in North Carolina. The state has the lowest rates in the South, and the seventh-lowest in the nation. That could change quickly under a proposal the legislature is considering.
Here’s how it works now: Car insurance companies have to agree to an industry-wide rate increase (or decrease) each year with the N.C. Rate Bureau. The publicly elected insurance commissioner reviews that request, decides whether it’s justified and can approve it or seek a lower hike. That approach has protected drivers for decades.
Under a bill sent to the Senate Judiciary Committee Monday, insurance companies could set their rates individually. They could raise them by an average of 12 percent every year without the insurance commissioner’s approval. At that pace, it wouldn’t take long for North Carolina to shoot up the national premium rankings. That’s what happened in South Carolina, where rates jumped 25 percent after a similar change in the 1990s.
The bill is supported by at least 14 insurers, including State Farm, Allstate, Geico and Progressive. They argue that a free-market approach would force companies to compete aggressively on price, letting drivers shop around for the best deal.
But insurers already compete on price. The rate bureau method sets a ceiling, not a floor; insurers are free to charge less to attract customers, and often do.
Free markets are efficient, of course, when they’re truly free. But the insurance business is not a free market – N.C. drivers are required by law to purchase auto insurance. Without regulation, the industry could charge almost anything it wanted to a coerced market.
The bill’s supporters argue that good drivers currently pay more than they should, and they point to a little-known $10-12 annual surcharge that we each pay to help insure drivers who the insurance companies deem risky. The legislation would get rid of that surcharge, but that savings to consumers is a fraction of the higher rates they’d likely have to pay.
Insurers can already charge much more of drivers with accidents, convictions and points on their license. The new legislation, sponsored by Sen. Wesley Meredith, R-Cumberland, could prompt higher rates on all drivers and particularly on those whom insurers consider risky but who have clean driving records – such as military families and the unemployed.
The bottom line is that there is little protection for drivers in the bill. And it’s a good bet the insurance industry isn’t pushing it for philanthropic reasons. It would boost their bottom lines. That might be defensible if North Carolina needed to attract insurers. But some 160 companies already operate here, so apparently the profits under the current system aren’t so small that insurers are scared away.
The industry makes at least one legitimate point: The current system blocks insurers from being able to provide certain discount packages and other “product enhancements” that they can offer in other states. So legislators should consider a competing bill introduced Tuesday by Sen. Tom Apodaca, R-Henderson, that preserves the rate bureau while giving insurers more flexibility on what products they can offer.
That may be a more targeted approach than Meredith’s, and one that doesn’t jack rates up on millions of responsible N.C. drivers.