There has been a great deal of heated discussion regarding auto insurance reform during the past several years.  The insurance industry is divided and parties are trying to make their case to legislators in the General Assembly.  It can’t be denied that the average premium for drivers is ranked as one of the lower in the nation and the market is not in a state of crisis (residential property insurance on the other hand is on the verge of a crisis, but that is a topic for another day).  It also can’t be denied that our regulatory system is unique nationally and the use of a rate bureau model is dated.

This approach worked in the 1980’s, before advances in technology, risk assessment and online resources.   Who could have imagined back then that we would one day have usage based insurance (UBI) options that give the driver the ability to install a device that monitors driver habits in real time and allows discounts if we drive carefully?  Technology now enables insurers to more accurately price risk on individual characteristics and reward less risky behavior. This is fairer than charging average rates based on large indiscriminate groupings.

Some insurers have thrived under the current rate bureau system and would like to keep it this way, while others want to move towards a model much more common in other states.  We do not need to completely dismantle the current system, but it does seem reasonable to modify the system so that it makes it easier for insurers to operate and offer discount programs and enhancements commonly used in other states. 

As it stands currently, the states with simpler, more modern systems are the first to receive new programs and North Carolina is left for last, or not even bothered with at all. Insurers could be given the opportunity to opt out of the current rate bureau system, provided that the Commissioner still has the option to review and approve new programs.  This should lead to additional benefits for consumers as insurers have more flexibility and incentives to compete. 

I’ve taught Insurance and Personal Finance courses for two decades in a variety of states.  The last twelve years have been at Appalachian State University.  Each semester I assign a project in which the students are required to obtain a quote for their auto insurance.  They are given a list of standard coverage amounts and told to be ready to discuss their quote by next class.  I do not tell them where to get their quote or how to do it; they have to figure that out on their own.  They are also not allowed to get their parents to help.  The students are consistently able to complete this assignment and typically have the same general comments each semester.  They are surprised how easy it is to get a quote online, over the phone, or by visiting an agent.  They also ask about commercials they have seen on TV and wonder why they couldn’t enroll in certain programs. “I have good grades, why doesn’t my insurer offer the good student discount in North Carolina?” Students are very interested in UBI (apparently Flo in the Progressive Snap Shot commercials really makes an impression).  Last semester a student lamented that he was being rated as an “average” 19 year driver, but he truly felt he was a better driver than the typical 19 year old, and wanted program that offers discounts to reward his responsible behavior.

There is a lot of information and opinion being thrown around regarding our auto insurance system.  I believe that the consumer is best served by allowing the Commissioner to have authority to review and deny rate changes when appropriate.  Standard forms with consistent policy language should continue and also be subject to the Commissioner approval.  There is concern that insurers may try to raise rates, and this could certainly happen for higher risk drivers. However, if an insurer attempts to raise rates to an unfair level, they will quickly price themselves out of market as consumers shop around for the best deal. 

I believe many consumers would be better served by revising our system and giving insurers the option to operate as they do in most other states.  This would encourage insurers to market additional discount programs and unleash competitive products that would benefit consumers. 

David C. Marlett, Chair of the Department of Finance, Banking and Insurance at Appalachian State University, and a senior fellow at the American Consumer Institute.  The piece is available online at the Charlotte Observer.