Issue

North Carolina in a Nutshell: the Current Environment

Stifling Competition. With over 100 auto insurers doing business in North Carolina, price competition should be fierce and consumers should have a lot of choice. The current, outdated system actually stifles competition. Unlike any other state in the nation, North Carolina requires insurers to jointly develop products and prices. This system impedes the marketplace.

Limiting Consumer Choice. Our system, that requires insurers to jointly develop products and prices, keeps the most innovative products and programs from the North Carolina consumer.

Unnecessary Cost and Bureaucratic Red Tape. Only after insurers first jointly develop products and prices may they then seek government approval to modify the standard products and prices. This duplicative process of joint development and then individual modification of rates is costly and time consuming. These unnecessary costs work their way into the product, and it’s the consumer who ultimately pays.

Forcing Subsidies and Unfair Rates. The North Carolina system heavily restricts the ability to match price to risk and protects higher risk drivers at the expense of lower risk drivers. These restrictions penalize lower risk drivers in two ways.

The most obvious penalty comes in the form of a secret surcharge. [See NCGS section 58-37-40(f).] The state effectively caps how much any driver must pay for insurance, yet requires that private insurers accept all insurance applicants. This means a private insurer must accept the business of all higher risk drivers, even if these higher risk drivers do not pay their fair share. The current system allows insurers to then transfer any driver to the state’s involuntary auto insurance market, the North Carolina Reinsurance Facility, which assumes the risk of insuring transferred drivers. A large involuntary market is a sign of an unhealthy system. North Carolina’s involuntary market is huge, by any measure. Take a look:

So why does a huge involuntary market matter? Because the state prevents the Reinsurance Facility from charging many of its drivers rates that fairly and accurately match risk. [See NCGS section 58-37-35.] The Reinsurance Facility operates at a loss as a result. Who pays for this loss? By law, the losses are passed on to all consumers through a secret surcharge added to their insurance premiums. This direct subsidy for higher risk drivers came to over $880 million from September, 2005 to September, 2010.

The second penalty is more subtle. Even in the voluntary market, because of the cap, some higher risk drivers may not pay a fair price. Insurers make up the difference by eliminating or reducing the discounts that lower risk drivers deserve. Secret subsidies and lost discounts are unfair to better drivers.

So now that we understand the problem, what is the solution? Click here to find out: Solution.

Source for Chart 1:  Lehrer, Eli; North Carolina’s Unfair Auto Insurance System, 2008.

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