ACI in Charlotte Observer: NC Auto Insurance System is Price Fixing

There has been some disagreement on how North Carolina’s auto insurance regulations affect consumers.  Those favoring the current system say that it keeps auto insurance rates low, while opponents say that it is an arcane regulatory system that stifles competition and requires good drivers to pay a hidden tax so that riskier drivers can pay less.  The latter group also points to North Carolina as the only state in the country that does not offer good driver discounts.  This policy disagreement should be settled on facts, not rhetoric.

Did you know that your auto insurance policy contains a hidden fee that is used to keep rates lower for risky drivers?  According to an American Consumer Institute survey, the vast majority of North Carolinians have no idea they were paying more so that risky drivers can pay less.  How could they know?  State law actually prohibits insurance companies from disclosing these surcharges on consumer bills.  If that is not troubling enough, 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.  The fact is that consumers hate hidden fees.  Transparency and 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 somewhat higher fatalities per miles driven, compared to the U.S. average.   

The state’s auto insurance rates are set by a government-run “rate bureau” that gathers together auto insurance industry data and collusively shares these data for the purpose of setting industrywide prices.  It is price-fixing, but it’s perfectly legal and some insurance companies love it, because the process allows for nice profits, limits direct price competition and maintains market share for a few big insurers.  The current system also allows insurers to send their policies into a state-run risk pool and receive a nice profit for doing nothing more.  To be clear – some insurance companies do not have to insure a single driver in the state and they can still profit under the current system.  Now you know why many like things just the way they are.    

What about North Carolina rates being among the lowest rate in the country?  If you factor in the hidden fee and adjust for cost of living, North Carolina premiums move closer to the middle of the pack and they are over $270 more than in Virginia, where prices are set competitively.  In addition, there are other factors that keep rates down in North Carolina, such as lower population density, a tort system based on contributory negligence, and a lower percent of new vehicles on the road.  However, none of these factors are influenced by the current auto insurance regulatory regime.  So, those saying the current system “works” are simply being disingenuous, ignoring the empirical evidence, and not advocating policies that would benefit most consumers.  The fact is that the current regulatory system protects insurers, not consumers, and it urgently needs reform.

Legislation is being considered that would allow insurers to opt-out of bureau’s ratemaking, thereby permitting price competition and various good driver discount programs.  Under the proposed reforms, if consumers decide to stay with a company that offers the current rate bureau’s established price, they can continue to pay the regulated price.  Alternatively, under the proposed reform, if consumers decide to pick an insurer that offers good driving discounts, and they can save. 

While we do not endorse specific legislation, any steps outside of the current rate bureau system would heighten price competition and encourage the introduction of discount programs – both of which would save consumers money.  Whether consumers decide to switch or stay with their regulated state plan, the opportunity for choice would be pro-consumer. 

Whatever the final policy solution turns out to be, the fact is that North Carolinians abhor the idea of subsidizing risky drivers and they like choice.  I am sure most would like the opportunity to save on the same discount plans being offered elsewhere across the nation, something that the current regulatory system impedes.

Steve Pociask is president of the American Consumer Institute, Center for Citizen Research, an educational and research nonprofit policy institute based in Washington, DC.  For more information, visit www.theamericanconsumer.org.   This is the original version of the commentary.  An shorter, edited version was published and is available at the Charlotte Observer.

 

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