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Fee on Drivers' Coverage Will Fall: Rate Cut Goes into Effect Oct. 1

Jul 19, 2007

By David Ranii, The News & Observer, Raleigh, N.C.

Jul. 20--An annual fee that is added to the auto liability insurance bill of every North Carolina driver is being cut substantially, partly because of fewer reported accidents.

The surcharge will be lowered from 9.8 percent to 2.76 percent -- or from $39 a year to $11 for the average liability policy, according to Ray Evans, general manager of the N.C. Reinsurance Facility.

The state Reinsurance Facility administers insurance coverage for high-risk drivers, such as inexperienced drivers and those who have insurance points against their licenses.

It also administers coverage for "clean-risk" drivers who insurance companies shift to the N.C. Reinsurance Facility for any reason, including if calculations suggest the rates that state regulators allow them to charge won't cover their risk.

The surcharge reduction is pegged in part to a lower anticipated shortfall in the cost of insuring clean-risk drivers, who make up about 70 percent of drivers in state Reinsurance Facility. When the premiums paid by clean-risk drivers -- whose rates are governed by the same caps that apply to most drivers -- aren't projected as sufficient to cover future claims, a surcharge is added.

Clean-risk drivers are reporting fewer accidents to their insurance companies, reducing anticipated claims.

The rate cut takes effect when policies are renewed beginning Oct. 1. It doesn't need to be approved by the state insurance commissioner.

The surcharge became a politically charged issue this year when Senate Majority Leader Tony Rand sponsored a measure that would have required insurers to disclose the amount of the surcharge in drivers' bills. Current law doesn't permit such a disclosure.

The surcharge disclosure bill was passed by the Senate and is pending in the state House.

Consumer advocates and Insurance Commissioner Jim Long say the bill is part of a broader attack on the way the state sets insurance rates.

Rand also sponsored a bill to overhaul how auto insurance rates are determined, but later switched gears and decided to create a study commission to examine the issue.

A lower surcharge doesn't eliminate the need for disclosure, said Joe Stewart, executive director of the Insurance Federation of North Carolina, which represents property and casualty insurers.

"The amount of the surcharge does vary from year to year," Stewart said. "The point is, the law does require that people have to pay it. And people have a right to know they are paying it."

Insurance Department spokeswoman Chrissy Pearson said the reduction in the surcharge demonstrates that those who complained that the state's rate system was broken were wrong. Pearson called the rate reduction "a needed adjustment."

Referring to officials at the Reinsurance Facility, she added: "For some time now, they have been operating with a healthy surplus. Our contention is that they have been charging too much."

The state's auto insurance rates are the fifth-lowest in the nation -- or sixth-lowest if the surcharge is included, according to the Insurance Department.

Evans said that with the benefit of 20/20 hindsight, the surcharge was too high. But, he said, it was based on sound projections at the time.

"You can say we overcharged," he said. "But we are going to turn around as quickly as we can and give it back."

The current surcharge was based on an anticipated shortfall of $249 million. But that proved to be overly pessimistic, creating a $70 million surplus.

Looking forward today based on the latest data, the facility projects that it would run up a $117 million deficit without a surcharge. But because of the $70 million surplus, it only needs to make up a net deficit of $47 million. "We're going to give back, if you will, the $70 million," Evans said.

About 24 percent of the state's cars are covered by the Reinsurance Facility. However, most clean-risk drivers whose policies have been shifted to the facility aren't aware of it, because they still pay their premiums to an insurance company. The facility includes only liability insurance, which state law requires drivers to have.

The insurance industry contends that the volume of policies shifted to the state facility shows that the current system for setting rates isn't working.

Last month, the reinsurance facility said it was cutting insurance rates for high-risk drivers by an average of 4.6 percent because of fewer accidents.

Still, Evans said it is too early to predict whether a rate reduction lies ahead for drivers who aren't considered high-risk.

Each February, the N.C. Rate Bureau, which represents the state's auto insurers and which also is headed by Evans, submits requests for rate changes that affect most drivers.

This year, rates held steady -- the Rate Bureau did not seek a premium increase. Rate requests that affect the majority of drivers must by approved by the state insurance commissioner.

Staff writer David Ranii can be reached at 829-4877 or david.ranii@newsobserver.com.

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Copyright (c) 2007, The News & Observer, Raleigh, N.C.

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