North Carolina Policyholders Confronted With ‘Consent to Rate’

Published August 23, 2013

WFMY-TV in Greensboro, N.C. reports on a common problem facing North Carolina consumers: the arrival of letters from one’s home insurer or auto insurer requesting to raise rates above levels approved by the state, with the implicit threat of dropped coverage for those who don’t consent:

“[Insurance Commissioner Wayne] Goodwin adds the maximum rate is really just a guideline since insurance companies aren’t required to provide you coverage. He says North Carolina lawmakers tend to stay away from regulations.

“‘There are very limited instances when laws impair contracts between parties.’

“And know this, if you do give permission for this increase, you also give your insurance company permission to keep raising your rates every year. How much? State law allows companies to raise rates by 250 percent. No. That is not a [typo]—250 percent.”

Last With Pure Bureau System

Though the story focuses primarily on changes in home insurance rates, it is directly relevant to reforms my colleague Alan Smith and I proposed for North Carolina’s auto insurance system earlier this year. North Carolina is the last state using a pure “rate bureau” system for both home and auto insurance. The North Carolina Rate Bureau is a legally mandated but privately run cartel through which insurers collectively set both rates and the terms and conditions of coverage for personal lines insurance products.

The rates are then submitted to the insurance department, which either approves them or recommends reductions or (in theory, if not often in reality) increases. Insurers are allowed to deviate downward in price, but not to exceed the rate cap.

At least, that’s how the system works in theory. As this story makes clear, the reality is a bit more complicated. Should an insurer determine that a given risk doesn’t fit the standard profile, it will generally send the consumer a “Consent to Rate” form, which permits the company to charge in excess of the Rate Bureau’s recommendations. Refusing to consent is generally a one-way ticket, in the auto insurance market, to the Reinsurance Facility, and in the homeowners market, to the FAIR Plan or Beach Plan.

Proposal for Innovation

Our proposal would have allowed auto insurers to opt out of the Rate Bureau system altogether, permitting them to craft their own products and set their own rates. This would open the door for many of the innovative products rolled out in recent years in the auto insurance market—accident forgiveness, persistency discounts, usage-based rates—to be introduced in North Carolina. The commissioner would retain authority to disapprove rates, but if a given increase were less than 15 percent, he or she would have to show cause for not allowing it.

The proposal was, unfortunately, knocked down by the General Assembly. Goodwin came out against it with the (quite unfair, in our opinion) charge that it would rob him of the authority to review rates. To be frank, if there is a problem with the proposal, it’s actually the precise opposite: as currently constituted, his department has neither the manpower nor the actuarial expertise that would be needed to review dozens of individual rates for a variety of competing insurance products. Should reform ever come to North Carolina, that’s an issue that would have to be addressed.

Boon to the Biggest

But the biggest source of opposition actually came from elements of the industry itself, namely those companies with the largest share of the auto insurance market. And this most recent story is a perfect illustration of why. Thanks to the widespread practice of Consent to Rate, the companies with the largest market share already have almost unlimited pricing freedom for problematic risks. Thanks to the standardization of products, they never have to worry about innovative new offerings that might upset their market dominance. And thanks to a statutory guarantee that the industry must earn a profit, they literally can’t lose money.

When those are the contents of your apple cart, it’s not hard to see why you’d fight tooth-and-nail against any proposal to upend it.

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