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 are 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. Eighty percent of N.C. drivers, according to the same survey, oppose the idea of having good drivers pay more in order to help risky drivers pay less. Transparency and reforms are needed.
Risky drivers are more likely to have accidents and file claims, which pushes up everyone’s rates. They also contribute to fatal crashes, which may explain, in part, why North Carolina has somewhat higher fatalities per miles driven, compared with the U.S. average.
The state’s auto insurance rates are set by a government-run “rate bureau” that gathers industry 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. It also allows insurers to send their policies into a state-run risk pool and receive 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 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.
Legislation is being considered that would allow insurers to opt-out of the 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, if consumers decide to pick an insurer that offers good driving discounts, they can save.
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.
