Some of us have heard claims that North Carolina, compared to other states, has the lowest auto insurance rates in the country. However, few know that the data supporting these claims cover only consumers with spotless driving records who drive brand new cars. The reality is that these consumers are few and far between. If we consider what consumers are actually paying in North Carolina, the claims of low premiums become more illusion than fact, which highlights why some regulatory reform is needed.
Take for example drivers charged with bad driving points, including those drivers who may have had a spotless record for many years. North Carolina law requires drivers charged with a ticket or an accident to be hit with big premium increases – by one estimate, making the North Carolina the fourth state highest in the country. In other words, when it comes to consumer costs, the State’s reportedly low auto premiums are not what they are advertised to be.
The reason is due to the State’s point rating system – called the Safe Driver Incentive Plan (SDIP). State law requires auto insurance companies to increase auto premium by a predetermined percent when drivers are charged with bad driving points. For example, if a driver receives one bad driving point, their auto insurance premiums must increase by 30%. When more points are charged, the premium increase is much larger. Insurers do not have a choice in the matter; they are required to impose these increases. It’s the law.
So what is so wrong with that? North Carolina’s SDIP system ends up imposing much higher premium increases than what most insurers in other states would have charged. That is because most other states allow insurers to set rates competitively based on risk and expected loss. However, there is no price competition allowed in North Carolina, which makes the SDIP law unfair, costly and unnecessarily punitive.
For example, a charge of “illegal passing” would cost a driver two driving points in North Carolina and result in a mandatory 45% increase in your premiums. In comparison, the average U.S. driver sees a mere 14% increase for the same violation. Similarly, a ticket for speeding 76 in a 65 mile an hour zone would translate into four driving points in North Carolina and an 80% increase in a driver’s rates, but average only 11% in other states.
The same is true for accidents. An at-fault accident with damages greater than $3,000 would cost a North Carolina driver three driving points and result in a 60% increase. Outside of North Carolina, an accident would lead to a lower increase (in the range of 10% to 40%, depending on the insurer and other factors), and sometimes no increase at all. This is because insurers in other states sometimes waive premium increases to longtime customers with otherwise safe driving records by offering such programs as the Progressive’s Snap Shot program, Allstate’s Accident Forgiveness program and State Farm’s Steer Clear program. However, instead of offering these “forgiveness” programs to North Carolinian drivers, insurers impose excessively punitive increases in driver premiums as prescribed by the SDIP law.
The good news is that the State General Assembly has introduced House Bill 497 (sponsored by Representatives Collins, Burr, Boles and Bumgardner), a bill that would permit insurers to opt-out of mandatory SDIP rate increases. The bill would allow more flexible pricing and encourage insurers to compete for drivers who may have only experienced minor driving violations.
North Carolina is the only U.S. state that uses a rating bureau and insurance commissioner to set rates. While the price fixing scheme produces hypothetically low rates for perfect drivers, when accounting for differences in cost-of-living and tort law (i.e., contributory negligence), as well as adding in the auto surcharge (a hidden fee) that consumer’s pay in addition to their auto premiums, North Carolina’s premiums are not that different from the U.S. average. However, once we include the extraordinary high costs from the SDIP system – which produces among the highest premium increases of any state in the U.S. – consumers are paying more and these increases not being counted in auto insurance statistics or surveys.
The SDIP system can lead to skyrocketing costs for consumers that have little bearing on future driving risk. The reality is that, when it comes to auto insurance rates in the state, few people actually pay what is advertised. It is time to allow insurers to opt-out of SDIP, encourage competition and lower premiums for drivers.
The American Consumer Institute is an educational and research organization focused on consumer policy issues. It is our belief that House Bill 497 (SDIP Opt-Out) can end these punitive rate increases and put North Carolina’s insurance price increases more in line with other states. For this reason, we see HB 497 as a pro-consumer bill and we strongly support it.