Organization and Operations
The North Carolina Reinsurance Facility became operational on October 9, 1973 as the result of legislation that was enacted that year. The Facility replaced an automobile assigned risk plan which had been in operation since 1947 and which had become very large in market share because of North Carolina's compulsory automobile liability insurance law, because of a chronically depressed rate level tied to a rating law requiring all companies to use the same rates for automobile liability insurance and because there was no assigned risk automobile rate differential to make the plan noncompetitive.
In 1958, the first year of compulsory automobile liability insurance in North Carolina, 9% of the non-fleet private passenger automobiles were insured through the Assigned Risk Plan, up from only 3% the previous year. The Plan's market share grew steadily to the point that 29% of the non-fleet private passenger automobiles were insured through the Plan during the year ended June 30, 1973. Since inception, the Facility's share has averaged 25% of the NC market.
The Reinsurance Facility is a mechanism for pooling of insurance risks who cannot obtain coverage by ordinary methods. Premiums, losses, and expenses are shared by the member companies in proportion to their respective North Carolina automobile liability insurance writings. Under the Facility law, licensed and writing carriers and agents must accept and insure any eligible applicant for coverages and limits which may be ceded to the Facility. The Facility accepts cession of bodily injury and property damage liability, medical payments, uninsured and combined uninsured/underinsured motorists coverages. Automobile physical damage coverages are not eligible for cession. Any eligible risk which a company elects not to retain for its own account may be ceded to the Facility. There is currently no cession limitation on the number of risks an insurance company may cede to the Facility. The law originally provided that no company could cede more than 50% of all of its automobile liability insurance business in the State.
Each ceding company must submit to the Facility a monthly detailed report of premiums and paid losses for policies ceded to the Facility, a Monthly Recoupment Report summarizing Facility surcharges on both ceded and non-ceded policies, and a Monthly Summary Report from which the company receives credit for its predetermined expense allowances to cover acquisition, underwriting and claim adjustment expenses. Each ceding company also submits a quarterly report of losses on ceded policies that have been reported but have not yet been settled. These detail reports are also entered into the computer masterfile.
After the monthly accounting reports are received from the ceding companies and balanced, there is a monthly cash settlement with the ceding companies. Companies whose written premiums and recoupment surcharges due the Facility exceeded the total of their paid losses plus expense allowances and other credits must pay the balances to the Facility. Companies whose written premiums and recoupment surcharges due the Facility were less than the total of their paid losses and other credits collect the deficit from the Facility.
The Facility prepares and distributes the financial reports and company participation reports necessary for the companies to prepare their annual statements so as to reflect their participation in the Facility as reinsurers. Facility losses are shared by the member companies in proportion to their respective automobile liability insurance writings. Facility losses are recovered through recoupment surcharges and the recovery is shared by member companies in the same proportion as they shared in the losses.
Significant Legislative Changes
The 1977 Legislature established requirements that the Facility make its own rates and develop its own rating plans. Rates are required to be calculated insofar as possible to produce neither a profit nor a loss. The changes in the law were designed to make the Facility self-supporting, and of course the law changes provided for higher rates for Facility business.
To insure that the Facility operates at neither a loss nor a profit the Legislature provided for recoupment of Facility losses by pro-rata assessment of member companies and for recoupment of any pro-rata assessment paid by member companies by way of an identifiable surcharge on policies issued by the carrier.
The 1979 Legislature amended the Reinsurance Facility law to establish a "clean risk" category. The amendment to the law provides that rates for "clean risks" should not exceed the rates charged "clean risks" who are not reinsured in the Facility. "Clean risks" insureds in the Facility are charged the voluntary manual rates established by the North Carolina Rate Bureau. Rates for other than "clean risks" ceded to the Facility are established by the Facility. At the present time the rates for non-fleet private passenger automobiles filed by the Facility are, on average, 35% higher than voluntary rates. The law as written provides further that the difference between the actual rate charged and the actuarially sound and self-supporting rate for "clean risks" reinsured in the Facility may be recouped.
The recoupment surcharges on private passenger risks authorized under the changes in the law in 1979 were applicable only under policies to which Safe Driver Insurance Plan points had been assigned.
As a result of the enactment of House Bill 1158 during 1987, a new concept was implemented effective July 1, 1988 with respect to recovering the Facility's non-fleet private passenger automobile operating losses. With respect to non-fleet private passenger automobile losses, the law provides for introduction of the allocation procedures over a seven-year period.
Effective July 1, 1995 these procedures completely replaced the recoupment procedures. The allocation surcharges apply under all policies covering non-fleet private passenger automobiles, including those policies to which recoupment surcharges apply.
As a result of the enactment of House Bill 296 during 1999, all surcharges are once again referred to as "recoupment" surcharges. The new "recoupment" surcharges apply under all policies covering non-fleet private passenger automobiles and replace the allocation procedures.
Cession To The Facility
There appears to be a common misconception that an insurance company somehow benefits from placing business in the Facility. First, there is no financial benefit to any company in ceding a profitable risk to the Facility. Any opportunity for making a profit on that risk is forfeited by the company once it is ceded. The only profit a company can make is on that business that it retains on its own books through the voluntary market.
The accident or conviction record of a driver is only one tool that is needed in evaluating the loss potential of any risk; other factors both objective and subjective are necessary. Each company determines its own underwriting criteria.
If a company wants to cede a policy to the Facility it must file a cession notice identifying the case individually by name, policy number, effective and expiration dates. . The cession notice data are then entered into a computerized masterfile.
An individual company's ceding expense allowance is established annually on the basis of the company's actual expense allowance, subject to a maximum allowance determined on the basis of all carrier data as established by the Board of Governors.
The claims expense allowance is the same for all companies and is established each year on the basis of all carrier data by the Board of Governors.
All companies licensed to write and writing automobile liability insurance in the State are required to become members of the Reinsurance Facility. The Facility currently has over 450 member companies.
Rules and Procedures
Specific rules dealing with all areas of concern of the Reinsurance Facility have been drawn up and incorporated, along with the law and the Facility's Plan of Operation, in a manual commonly referred to as the Standard Practice Manual.
The North Carolina Rate Bureau's Personal Automobile Manual is utilized in connection with non-fleet private passenger automobile risks ceded to the Facility. The Reinsurance Facility's Commercial Automobile Manual of Rules and Rates is utilized in connection with commercial business ceded to the Facility.
Member companies of the Facility are responsible for properly and promptly disposing of all claims in accordance with the terms of the contracts of insurance subject to the limits of liability provided thereby. Claim adjustment practices and procedures of each member company are required to correspond with those followed for non-facility business.
To insure compliance with the above requirements, the Facility Compliance Staff conducts continuous quality control audits during the year, utilizing the Claim Quality Review Program, developed by the Claims Committee. In addition, the Staff may conduct field audits of member companies when deemed necessary or requested by the Board of Governors or Claims Committee, and may if necessary, activate the Claims Quality Control Committee, consisting of claims personnel of seven member companies, to supplement the efforts of the Facility's Staff. Such claim audit activities are designed to insure that member companies are in compliance with established claim adjustment practices and procedures in handling claims on ceded risks as required by the Rules of Operation of the Facility, and any areas of claim performance considered sub-standard are brought to the attention of the ceding company for remedial action.
The Facility Compliance Staff also audits reports and procedures for compliance with Facility rules.In addition, the Staff is involved in the annual audit of the Facility's financial statements by independent auditors, and on a day-to-day basis a review of reports, error lists, cession notices and correspondence. Any problem areas noted by the Staff are brought to the attention of member companies for remedial action.
The Facility's formal investment program was implemented in 1978 in response to needs created when the Facility law was changed materially in 1977 to provide that "all investment income from the premium on business reinsured by the Facility shall be retained by or paid over to the Facility."
The Investment committe is comprised of member companies. The Committee meets twice each year and oversees the Facility's investment program which is managed by a professional investment firm under Investment Guidelines developed by the Committee and approved by the Board of Governors.
Responsibility for management is vested in a fifteen-member Board of Governors. There are twelve voting members; seven member insurance companies; five agents appointed by the Insurance Commissioner; two nonvoting public members appointed by the Governor; and the Insurance Commissioner who is a member of the Board ex-officio without vote.
In addition to the Board of Governors, the Facility has several standing committees which act in an advisory capacity to the Board. Additionally, there are several Task Forces in place to address specific issues.
The Facility maintains a full-time Staff at its offiice in Raleigh, NC.