Before the North Carolina

Joint Legislative Study Committee on Automobile Insurance

Statement of Steve Pociask

President of the American Consumer Institute, Center for Citizen Research

January 25, 2012

Raleigh, North Carolina

Today I will talk about a number of problems with the current regulatory system in North Carolina, including the existence of hidden fees and the lack of price competition – both of which lead to higher consumer prices.  Let’s look at the facts.

An American Consumer Institute survey found that 64% of North Carolina drivers did not know that they pay a surcharge on their auto insurance bill so that risky drivers can pay less.  How could they know?  After all, state law prohibits insurance companies from disclosing these surcharges on consumer bills.  Also troubling, according to the same survey, 80% of drivers in the state oppose the idea of having good drivers pay more in order to help risky drivers pay less.  In other words, North Carolinians object to the idea of subsidizing risky drivers, which explains why some want to keep these surcharges a secret, and one reason why reforms are needed.

Encouraging risky drivers to get behind the wheel is not without adverse consequences.  These drivers are more likely to have accidents and file claims for losses, which pushes up everyone’s auto rates.  It also contributes to fatal crashes, which may explain, in part, why North Carolina has higher fatalities per miles driven, compared to the U.S. average.   

The biggest opposition to fixing the current regulatory system is that that reform would somehow be anti-consumer and will help insurance companies enrich themselves.  Think again.  Another big secret is that the state’s system of auto insurance regulation works like a system of cartel, and it is costly.  Rates are set by an industry rate bureau that gathers together auto insurance companies (think collusion), shares cost data and sets an industry price.  It is price-fixing, but it’s perfectly legal and the largest insurance companies love it, because the process allows for nice profits, limits direct price competition and protects market share.  Without price competition, consumers always pay more.

Some claim that North Carolina has among the lowest insurance rates in the country.  Actually – and here’s another secret – it doesn’t.  If you factor in the hidden fee, the mix or urban/rural driving and adjust for cost-of-living, North Carolina is more expensive than most states.  That is the cost of encouraging risky driving.   

The current regulations are anti-consumer – they protect insurance competitors instead of encouraging price competition.  Let’s end the secrets, require government transparency, lower the size of the residual market and encourage price competition for the benefit of consumers.