Economic Outlook - June 2008
“The North Carolina automobile-insurance system is — no holds barred — the very worst in the country,” says Eli Lehrer, senior fellow at the Competitive Enterprise Institute, a Washington, D.C.-based nonprofit that touts free markets and limited government. Overall, its property-and-casualty insurance regulation ranked just above last-place Massachusetts, according to a recent study he did for CEI and The Heartland Institute. And Massachusetts changed its system in April — for the better, he says — so it probably has leapfrogged North Carolina.
BNC: The very worst in the country?
Lehrer: Yeah. North Carolina is, de facto, the only state where the government tells auto insurers what to charge directly. Massachusetts did that until April 1 of this year, but Massachusetts dropped the system. So the home of Ted Kennedy now has a relatively free-market auto-insurance system. The home of Jesse Helms has the last remaining state-mandated price controls in the country.
Why does that make North Carolina the worst?
Rate regulation on insurance is intrinsically unfair. Rate regulation serves as a form of wealth redistribution. When you are controlling insurance prices, you are redistributing wealth based on risk behavior. What’s the political ideology that says people who take more risks shouldn’t have to pay for them?
Don't all states regulate insurance rates to some extent?
Yes. But only North Carolina places a cap on rates and controls all rates. So there’s very little flexibility in that system. No other state has a residual market as large as North Carolina’s — almost a quarter of the state.
What's a residual market?
It’s a pool set up by the government for people not covered voluntarily by private insurers. They’re generally considered to be higher-risk drivers. They’re people who every other state finds a way to cover in the voluntary market. Most residual markets involve coalitions of private companies required to write insurance at rates determined by a political process. The private market is not granted adequate rates for them, so they have to be written through this involuntary market.
Why is that bad?
Good drivers are being forced to pay more than they should. Bad drivers are paying less than they should. Probably 30 states had similar systems 30 years ago. North Carolina, as of April 1, is the only one left.
North Carolina legislators have discussed a bill that would give insurers more flexibility in setting rates for high-risk drivers.
That would be a step in the right direction. Ultimately, North Carolina should move toward a system where the market sets rates, and the government protects people from force and fraud. That’s what produces the best rates, encourages the safest driving and is the fairest to everybody.
I didn’t see any cost comparisons in your rankings. They seem to be based on the idea that the free market is right and regulation is wrong.
That isn’t entirely it. I wanted to look at cost, but you have to adjust for a lot of risk factors. In theory, you could go to a system that got the economically correct amount of premium from everybody but did it by assessing everybody equally. For some things, like health insurance, that might be an OK system. I don’t think it’s the way to go with auto insurance, where it’s very much within people’s control how well they drive.
Tar Heel drivers spend, on average, less for insurance than drivers in all but five states.
Yes. But North Carolina drivers pay reasonably little because it’s a safe place to drive. Also, they’re probably being subsidized indirectly by people in other states. It may be making the roads more dangerous.
When bad drivers are assessed premiums that are too low, they drive more. And they cause more deaths. That’s what’s happened in several Canadian provinces that have systems similar to North Carolina’s.
You admit in your study that states with “bad” laws might allow companies to charge nearly ideal market prices. Is that true here?
I haven’t looked at that question yet. This is a study about laws, not about the individuals administering them or the way they’re administered. Some states that rank high in the study are places where the insurance departments are known for being unfriendly to consumers and industry. Some states that rank low may have very well-run operations. This is an assessment of how much the market is allowed to work. Can companies provide products, and can consumers get the products they need?
What about the other part of the study — homeowners insurance?
It’s about average. The problem with North Carolina is not homeowners insurance. It’s auto insurance. The auto market in North Carolina is a mess and needs to change.
Drivers aren’t going to care if their costs are low.
That’s true. That’s probably the reason why it’s stayed the way it is for so long. But I think rates would go lower for good drivers than they are now. They’d go up for bad drivers. Also, research found that when rates are generally rising, the rates in states that heavily regulate rates will stay down. When they’re generally falling, rates in those states won’t fall as fast as they do elsewhere.
What other changes are necessary in the way North Carolina regulates property-and-casualty insurance?
Do some of the things South Carolina did. It had a similar situation 15 years ago. Move toward phasing out this enormous residual market. There are a variety of ways to do it. You’d get the most consumer choice, the prices that best reflect the risk and the most creative product mix.