NC Auto Insurance System: Good for Insurers, Bad for Consumers

Published April 4, 2013

North Carolina’s automobile insurance system makes it literally impossible for insurers to lose money. Not only is the commissioner required to assure they earn a reasonable rate of return, but insurers set their rates collectively through a legally mandated but privately run organization, the North Carolina Rate Bureau.

Under the law, they have the right to “cede” any policies they feel won’t make money to a special reinsurance facility that’s subsidized through the “clean risk surcharge.” Although it’s not visible to consumers, the rate bureau system also serves to reduce other methods that insurers might use to compete with each other by distinguishing risky drivers from less-risky ones.

The overall results are pretty good for the insurance business (which is why some insurers, including the state’s largest, defend the current system) but bad for consumers.

Little Choice

North Carolina’s system makes it difficult—and undesirable—for insurers to offer innovative new products in the state. Because it imposes a one-size-fits-all system for auto insurance, consumers in the state can’t choose many insurance products that are widely available elsewhere. North Carolinians can see these products described in the litany of national television ads for auto insurance, a market that in most states is highly competitive. In recent years, insurers have rolled out policies with deductibles that drop the longer you avoid an accident, discounts for drivers with good credit, regular rebate checks, deep discounts to those who provide real-time driving data to their insurer, and many other features.

Taken as a whole, North Carolina’s auto insurance rates are relatively low, but that’s because rates in North Carolina are typical of those in surrounding states. According to data compiled by the Web site, North Carolina and the states it borders have rates several hundred dollars below the national average.

According to, average six-month rates in North Carolina ($511) and South Carolina ($554) are virtually the same. So are rates in Tennessee ($614) and Virginia ($648). Rates change from year to year. While North Carolina had lower rates than its neighbors in 2012, it had the second-highest rates of that group of states in 2011. Quite simply, there’s no evidence that North Carolina’s system provides cheaper average rates than systems in other nearby states.

Backward Rate-Setting

North Carolina’s auto insurance system imposes a special tax called a “clean risk surcharge” that helps subsidize rates for high-risk drivers. As a result of this surcharge and other government red tape, the least risky drivers—who tend to be older and female—pay far more than they do for auto insurance in similar states. On the other hand, risky drivers pay less than they do elsewhere. This is the opposite of how insurance is supposed to work.

More than a fifth of North Carolina drivers cannot find a private insurer willing to write them liability coverage. All 50 states and the District of Columbia maintain “residual” insurance markets for drivers who cannot find automobile insurance from a private carrier. In most states, these markets are extremely small and are mostly made up of repeat drunk drivers and others with truly awful driving records. Because of burdensome regulations, however, North Carolina has more drivers in its residual market than all other states combined. In fact, 81 percent of all drivers in residual markets in the United States live in North Carolina. This shows the system isn’t working the way it should.

State regulation does not keep auto insurance rates in North Carolina lower than those in other states. No matter what regulators do, so long as a market is competitive, average premiums collected for automobile insurance will tend to roughly equal the cost of doing business. Over any given 10-year period, in fact, property and casualty insurers as a whole will collect in premiums about what they pay out in claims and expenses; they make their profits primarily by investing premium dollars.

Lower Than Average

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. Moreover, insurers who find they cannot justify offering collision or comprehensive physical damage coverage to particular drivers at the rates set by the Rate Bureau will typically ask those consumers to sign a Consent to Rate Form, which allows the company to charge higher rates.

Whatever their merits—or demerits—reform proposals currently before the legislature would not result in significant short-term rate increases for any drivers. Insurers would compete more vigorously for the least risky drivers, and this might eat into some of the profits the current system guarantees them. But even risky drivers who currently receive subsidies from everyone else—so called “clean risks”—would not see massive rate increases. The insurance commissioner would retain the power to deny rates that are excessive, insufficient or discriminatory. The only difference would be that, when an insurance company requests a rate increase of less than 12 percent, the commissioner would have to demonstrate a reason to challenge that request.

R.J. Lehmann ([email protected]) is a senior fellow, public affairs director and co-founder of R Street Institute. Alan Smith ([email protected]) is co-founder, Midwest director, and a senior fellow for the R Street Institute. Used with permission of the John Locke Foundation.

Internet Info

“N.C.’s Auto Insurance System,” John Locke Foundation: