Auto Insurance in South Carolina
February 1997
SUMMARY (PDF)
Members of the General Assembly, who were concerned about rising insurance recoupment fees paid by South Carolina motorists, asked us to conduct an audit of the South Carolina Reinsurance Facility. This audit addresses laws, policies, and practices in place since the facility’s creation in 1974.
The reinsurance facility provides insurance for drivers in the residual market. Across the United States, the residual market generally consists of drivers who would have difficulty getting an insurance company to sell them a policy voluntarily, such as inexperienced drivers and those with bad driving records. However, through excessive regulation, South Carolina has greatly expanded the number of drivers in its residual market and has reduced competition among insurance companies.
We found that South Carolina has a large number of policies in its reinsurance facility. Payments for the accidents and injuries caused by drivers in the reinsurance facility are subsidized by drivers who are not in the facility. In addition, management practices of the facility have contributed to its high losses and high recoupment fees. We also found that the highway patrol and local law enforcement agencies have not enforced some state laws intended to deter uninsured drivers.
Why South Carolina’s Reinsurance Facility is Large and Why It Loses Money
In 1993, more than 42% (925,380) of South Carolina’s policies were in the residual market. Georgia had less than 1% of its policies in the residual market while the national average was about 4%. South Carolina had more policies in its residual market than the cumulative total of California, Florida, Maryland, Ohio, and 39 other states.
The reinsurance facility is large mainly because state law, regulation, and policy have prevented insurance companies from charging premiums that are sufficient to pay the losses and expenses projected from many drivers. In addition, some agents, as authorized by state law, have been designated to cede (transfer) all of their policies to the facility. The General Assembly and the department of insurance have begun to institute reforms that will reduce the size of the facility but more could be done.
The reinsurance facility loses money each year because premiums on policies ceded are inadequate to pay for losses and expenses. To cover these shortfalls, South Carolina motorists paid the facility approximately $1.25 billion in recoupment fees from 1988 to 1996.
The amount of recoupment collected has not been sufficient to pay for losses of the reinsurance facility. For example, in FY 93-94, the facility needed $233 million to pay for all losses and expenses, but had collected only $195 million as of June 1996.
There are other laws and practices that contribute to high recoupment fees. For example, insurance agents are paid a 10% to 12% commission on the recoupment fees that they collect. Prohibiting agents from earning commissions on recoupment would reduce recoupment fees by more than $14 million annually. In addition, some motorists use illegal procedures to reduce their premium and recoupment fees.
How Management of the Reinsurance Facility Has Contributed to its High Losses
The reinsurance facility has contracts with three insurance companies to investigate and pay the claims of policies sold by agents designated to sell insurance exclusively for the reinsurance facility. The contracts, however, reward the companies for maximizing the dollar amount of the claims they pay.
The reinsurance facility authorized payment of $1 million on an ineligible claim. The facility paid the claim so that the company would not incur a "substantial hardship".
The reinsurance facility has not penalized insurance companies or required them to reimburse the facility for undercharging drivers ceded (transferred) to the facility.
Since 1974, 170 insurance agents have been designated to sell insurance policies exclusively for the reinsurance facility. The policies sold by these agents have contributed substantially to the facility’s losses. Designated agents were originally intended to have temporary, one-year appointments.
Ways to Improve Enforcement of Insurance Laws and Improve Traffic Safety
South Carolina has one of the highest highway death rates in the nation. Chapter 4 describes legislative changes which could improve traffic safety and lead to lower insurance premiums.
At least 10% (285,000) of South Carolina’s motorists drive without liability insurance. Each year these drivers illegally avoid paying at least $10.9 million in recoupment fees. As a result higher premiums and recoupment fees must be charged to motorists who comply with insurance laws.
The highway patrol and local law enforcement agencies have not enforced some laws that require motorists to prove they have liability insurance. In addition, law enforcement agencies have not always confiscated the automobiles of drivers found either driving under the influence or driving under suspension for the fourth time.
The state’s program for seizing the license plates of uninsured automobiles could be improved.
More severe penalties for drivers who repeatedly drive uninsured or drive under the influence could improve traffic safety.
A "graduated" licensing system, which would require young drivers to demonstrate adequate driving skills before obtaining a driver’s license, could improve traffic safety.
Additional methods to reduce the number of motorists who drive while intoxicated could improve highway safety.