Policy Documents

North Carolina’s Auto Insurance System: Still Unfair, Still in Need of Improvements

Eli Lehrer –
April 25, 2011

North Carolina’s auto insurance system is unfair to low-risk drivers because it overcharges them in order to subsidize some of the state’s more risky and dangerous drivers.

Every insured driver pays a hidden tax – which averages about 6 percent – that goes to the government-mandated, privately run insurance pool for risky drivers. This pool uses the tax to subsidize the policies of risky drivers who should, but don’t, pay higher rates because of a legal cap. Insurance companies are allowed to dump into a risk pool anyone who has risk factors that make them unprofitable. The tax money is used to make up the difference between the capped rate and the amount that the high-risk driver should pay.

Some private insurance companies like the system because it guarantees them a profit by allowing them to dump risky drivers into the government mandated tax-subsidized pool. In fact, almost a quarter of N.C. policyholders are in the pool compared to less than 1 percent nationally. Not only is the tax hidden, the pool is hidden because risky drivers in the pool continue to receive bills from their private insurance company. This allows the private company to sell these customers other types of insurance, including collision coverage for their cars as well as life and home insurance.

Who are these risky drivers who receive unfair subsidies from good drivers? Nobody knows for certain since companies can cede any risky driver they want into the pool. But it’s highly likely that many are teenage males who may have clean driving records, but as a group are more prone to tickets and accidents. Since the government-controlled rate-setting process does not allow insurance companies to use age as a factor, the 18-year-old who drives a red sports car pays a rate that does not reflect his risk of an accident. (Drivers with multiple tickets or serious accidents regardless of age also end up in the government-mandated risk pool, but, on balance, they do pay rates that reflect their risks.)

While average rates in North Carolina are in line with other states in the Southeast, good drivers are still paying more than they should. The reforms suggested in this paper would simplify the current bureaucratic and secretive system and lower rates for many, if not most, drivers in the state.