First Posted: 1/15/2009
LUMBERTON - “For insurance companies, this is not a good thing. We will have to refund money we were hoping to bank on.”
That's how Tim Lucas of the North Carolina Rate Bureau summed up the June 25 Supreme Court ruling that upheld state Insurance Commissioner Jim Long's Dec. 14, 2001, order to reduce automobile insurance rates by 13 percent. The money in question is to be refunded to automobile insurance policyholders across North Carolina. And the total refund amount has been estimated as high as $440 million.
“The worst possible scenerio is $440 million, but it's not likely,” said Lucas, personal lines manager with the agency that represents North Carolina's 170 auto insurers.
But beyond the amount to be refunded is the administrative costs related to sending out the checks.
“It's going to be a big hit for them (insurance companies) because someone is going to have to write all those checks,” said J. David Walker, vice president of BB&T Insurance Service of Lumberton.
That will involve man-hours, resources and postage, Walker said. And some companies may be forced to acquire computer software to aid the process.
No one is sure how much the effort will cost insurers, said Ray Evans, NCRB manager. But it will be a significant sum.
“We've never really calculated what the cost is. But if you calculate postage for four million envelopes, that's more than a million dollars,” he said.
And money expended issuing the refund checks can not be claimed on company income tax returns or in any other way recouped from the state government, said Chrissy Pearson, a state Department of Insurance spokesman. Nor can the companies pass this cost on to future or current policyholders, by order of the Insurance Department.
“We consider that a normal cost of doing business,” Pearson said.
Compounding the problem and the costs will be the effort needed to deliver checks to people who have moved.
In some cases the policyholder will have moved and must be tracked down, Tim Lucas said. In other cases the checks will have to be mailed to the last known address. If the check is not accepted by the policyholder on the third try, the money will be placed in a state account for undeliverable funds called the escheats account.
The escheats account is controlled by the state Department of Treasurer. According to the department's Web site, there is no time limit for filing a claim for money placed in the account. Money in the account is invested, and the interest is used to support college scholarships and to help needy and worthy students attending state-supported colleges and universities.
Before any money from the refund issuance can get to the escheats account, the checks must be issued. And as of Friday, no date to begin issuing refunds had been set.
The insurance industry has 20 days from the June 25 Supreme Court ruling to file an appeal, Evans said. But the industry is unlikely to file an appeal. So it is likely Commissioner Long will announce a start date on or near July 16, Evans said.
How much will be refunded also was up in the air as of Friday.
The refunds will come from money collected by insurers on policies sold between April 1, 2002, and Jan. 27, 2003, and placed in escrow acounts, as dictated by state law. This collected money is equal to the difference between Long's 13 percent reduction and the 5 percent rate increase the insurance industry put into effect while Long's order was appealed.
“My best guess, after talking with different people, is about $200 million,” J. David Walker said.
Then there's the interest on that money insurers must also pay.
The interest rate is set by state law and is equal to the prime lending rate at the time Long's order was issued plus three interest rate points, Chrissy Pearson said.
The intestest rate should be about 7.33 percent, Evans said. And that rate is compounded yearly.
“Some of our policyholders are into their third year,” Evans said.
Using a rate of 7.5 percent, the yearly interest on $200 million is $15 million, Walker said.
“So if a company hadn't figured out how to earn 7.5 percent interest, it will come out of their pockets,” Walker said.
That is not the case, Evans said. The state Insurance Department conducts regular routine examinations of insurers, and part of that examination is making sure insurers have enough money set aside to cover the cost of potential refunds plus interest payments.
“It's hard to say what the refund checks will be because a lot of factors are involved,” Pearson said.
One of those factors is the rate discount offered some policyholders, the NCRB's Lucas said. Some policies would have been sold with discounts that place the cost of the policy lower than the 13 percent reduction mandated by Long.
“There's nothing to put into escrow, so there's nothing to refund,” Lucas said.
Which means not everyone with an automobile insurance policy will receive a refund, he said.