Causey: Moving to free-market insurance wouldn't cut rates

North Carolina Insurance Commissioner Mike Causey on Monday disputed a report that suggests moving more toward free-market automotive insurance could lower rates.

Causey, in his second term and the state's only Republican ever elected to the position, appeared before the Select Committee on Oversight and Reform in the House of Representatives to discuss a recent report with suggested reforms for the state's automotive insurance industry aimed at lowering rates.

The report by former Western Carolina University economics professor Jonathan Murphy focuses on the North Carolina Reinsurance Facility. It pools insurance risks that cannot be covered by typical policies, with premiums, losses and expenses shared by the 580 member companies in proportion to their state auto liability insurance writings.

"Many if not most people in the state are unaware of the reinsurance facility … let alone they're subsidizing it," said committee Chairman Harry Warren, R-Rowan.

Murphy, now a professor at Nicholls State University in Louisiana, found the roughly 25% of North Carolina drivers in the reinsurance facility is the highest percentage among states for the high-risk pool, which translates to higher insurance costs for both drivers in the facility and those with traditional plans.

He examined reforms implemented in South Carolina a quarter century ago, between 1997 and 2003, as examples of possible ways the state could slow premium increases, reduce the number of drivers in the reinsurance facility, and reduce premiums for many drivers.

The reforms centered on removing limits on the facility's rate increases, regulating the number and types of policies insurers can transfer to the facility, and increasing competition in the insurance market to drive down rates. Currently, insurers can cede any policy to the facility without limits.

Causey said his team found "a number of problems with the report" and outlined why he believes the state's prior approval system for car insurance rate increases, which requires negotiations between the insurance department and the North Carolina Rate Bureau that represents insurers, is more effective at holding down rates.

"We're consistently among the lowest average insurance rates in the nation," he said, noting that South Carolina is among the highest. "The report's recommendations, in my opinion, … will likely result in higher rates for North Carolina drivers."

Causey pointed to the current system producing a rate of uninsured drivers in North Carolina of 7.4% in 2019, compared to South Carolina's rate of 11%. He noted North Carolina's average premium rate increased by less than 1.5% per year between 2005 and 2021, while South Carolina rates grew by 2.61% annually over the same time frame.

"I just think … the system we have is working very well," Causey said.

Officials at the Insurance Department worked with lawmakers in an attempt to incrementally reduce the number of policies ceded by insurers to the facility in 2017, but fierce pushback from the industry killed that legislation, he said.

The insurance industry is divided on the reinsurance facility, Causey said, with some supporting something else and others that want to maintain the status quo. Department staff suggested insurance companies would oppose an end to the facility without more flexibility to set rates.

Lawmakers pointed to the facility's annual losses that can run into the hundreds of millions, and took issue with hidden charges for all North Carolina motorists to make up the difference. Others noted that some insurers are ceding all or most policies to the facility while collecting an administrative fee for processing, essentially creating a business model that shifts their risk to the state.

Rep. Allen Chesser, R-Nash, said the situation suggests the rate charged by the facility is "inadequate."

"It's being used as a subsidy," said Rep. George Cleveland, R-Onslow.

Causey suggested waiting five years after auto insurance reforms adopted by the General Assembly this year take effect in 2025 to make changes to how the state's insurance market operates. Lawmakers indicated they planned to pursue the matter further, requesting additional data from Causey and Murphy.

Warren said he still believes a more free-market approach could lower rates and indicated lawmakers may call on officials from the reinsurance facility to testify in the future.

"I think the discussion today actually raised more questions than answers," Warren said, adding he believes the current system is "unfair to good drivers." "I remain skeptical."

Auto insurance rates could increase by 4.5% on or after Dec. 1, and by the same percentage next year, under a settlement the Insurance Department inked with the rate bureau this year. The rate bureau initially requested a 28.4% increase.

Causey cited data showing an increasing number of car accidents and fatalities, fueled by distracted driving, as the main driver for the state's rate increases.

A study by U.S. News & World Report this year ranked North Carolina as the sixth-lowest state average for annual auto insurance costs, behind Ohio, Vermont, Wisconsin, Idaho and Maine.