Basic Background
Detroit drivers pay some of the highest car insurance premiums in the nation. Average yearly premiums are $2,550 across Michigan. The average for the nation is $907 (Mosley 2015). Residents of Detroit often pay considerably more than the state average for comparable coverage ($2,500-$5,000), and even experience substantially higher rates than the suburbs immediately surrounding the city.
It’s been a problem for many years and any attempts at the city or state level to address this issue have failed due, in large part, to the complexity of the issue and the size of the actors involved (insurance companies, hospitals, attorneys, advocacy groups, governments, etc.). The system of no-fault/unlimited personal injury protection was designed about 40 years ago with the intent of offering maximum protection to car accident victims and to prevent accident lawsuits from clogging up state courtrooms.
So why are the rates so high?
Michigan is one of 12 states in the nation that requires drivers to purchase no-fault insurance and the only state to require unlimited medical coverage, known as PIP. Other no-fault states require a minimum medical coverage. For example, New York requires a $50,000 minimum. New Jersey requires $250,0000. Michigan is unlimited.
This means even the most basic coverage in Michigan will cost more than in states that don’t require no-fault and which have caps on minimum medical coverage, because regardless of the cause of the accident, each driver’s insurance policy pays for the medical, rehabilitation, and funeral costs for drivers, as well as lost wages and needed in-home care resulting from an accident. This unlimited liability is potentially very costly for insurance companies, though it’s not truly “unlimited” for each insurance company.
A private, non-profit statewide entity called the Michigan Catastrophic Claims Association was created by the insurance companies to cover the medical costs of patient claims exceeding $545,000. This is funded through a mandatory fee added to the annual premiums of all Michigan drivers. The fee is currently $160 per vehicle. Because MCCA is a private company, it does not have to disclose how it determines the annual assessment figure. There have been legal challenges to this, but so far, it remains private.
On top of all this, there is currently no standardized fee schedule for medical services performed by hospitals and then billed to auto insurance policies or the MCCA. What this means is that there’s, for all intents and purposes, an unlimited pot of money at the end of the car accident rainbow in Michigan. Hospitals and personal injury lawyers have caught on to this system and have further contributed to the increased cost of insuring a driver in Detroit.
Detroit has almost twice as many personal injury claims filed as the rest of Michigan, and those claim amounts are nearly twice as high on average.
“The average auto insurance medical claim of over $45,000 is more than twice as high as in the next closest state (New Jersey $17,051) and four times the average costs for all states. The cost of our Personal Injury Protection (PIP) coverage has increased 230 percent over the past twelve years while costs for the rest of the country have only increased 25 percent”(Michigan Insurance Coalition 2013).
So if you get in an accident in Detroit, the conditions are ripe to exploit a generous system originally designed to take care of people. One way that system is exploited today is through encouragement to file personal injury claims, even in situations where one might not need to, because a reward is almost guaranteed. From there, the hospitals performing post-accident services can charge much more than if they were treating a Medicare patient or someone filing a worker’s comp claim because those types of insurance have standardized fee schedules. All of this fuels the insurance companies’ and MCCA’s (again, also a part of the industry) arguments for continuing to raise insurance costs for Detroit drivers.
Insurers operating in Michigan are also allowed to base rates on zip codes. This practice effectively amounts to redlining and is a significant contributor to the inordinate costs of insurance in the city, as well as the disparity between rates in the city and rates in the surrounding suburbs.
“The most egregiously unfair cases of zip code-based pricing may well be in Detroit, where residents pay an additional $1,200 for car insurance a year on average, as compared to car owners in the suburbs. As a result, half of Detroit drivers simply operate cars with no insurance – compared with roughly one in 10 Michiganders who did so. High rate premiums in Detroit are not simply the result of redlining. But redlining appears to exacerbate the city’s free rider problem.” (Fergus 2014)
How Rates are Determined
“Auto insurance prices can vary tremendously, based on the factors used by insurers to determine these rates. Some rating factors, like driving record, make a lot of sense in that the classification is based on a logical predicate: people who have driven poorly in the recent past will continue to drive poorly in the future and, hence, are more likely to file a claim. Moreover, data analysis confirms that this hypothesis is correct. Other rating factors, like credit scoring, do not have a logical or legitimate thesis underlying their use and are only supported by data that purports to show a correlation, but not a causal or even logical connection to a policyholder’s driving record” (Hunter, Feltner, and Heller, 2013).
What have others done around the country? (California’s Prop 103, enacted in 1988.)
California has the most robust consumer protections built into its regulations. A weighted tier system is used where the first rating factor, driving record, contributes most heavily to the insurance rate. Each factor after that contributes, but to a lesser degree. The top three factors are: driving record, annual miles driven, and years of driving experience. This has resulted in substantial savings for California drivers and minimized the effect of unfair rating factors such as marital status or zip code on insurance rates. Hawaii and California have also passed legislation banning the use of credit score to determine auto insurance rates.
Despite being the most regulated state for auto insurance, California insurance company average profits over the past 20 years have been 12.1%, compared with 8.5% annual average across the country (Hunter, Feltner, Heller, 2013). So not only is it the best state for drivers to purchase insurance. It’s also a very profitable state for insurance companies to operate.
This blog is just a high-level review and as such cannot cover the level of detail necessary to truly tackle this issue. However, the 2013 Consumer Federation of America report referenced throughout provides a more in-depth analysis as to why the California system has been so successful.
What about legislative changes? What has been done here in Michigan?
In 2016, Speaker Tom Leonard introduced a bill to establish a statewide fee schedule governing all medical providers to be reimbursed at the same rates as Medicare or Worker’s Comp rates. This would take care of the wide discrepancies in medical billing, reducing claim amounts and driving down insurance prices over time. The bill passed in the House, but died in the Senate.
Also in 2016, Detroit’s Mayor Mike Duggan introduced the “D-Insurance” bill that focused specifically on issues facing Detroiters. The bill reduced the mandatory medical coverage from “unlimited” to $250,000. If claims exceeded that amount, the individuals’ medical insurance would take over. The Mayor’s team had the plan analyzed by an actuary who determined this would result in approximately a 30% reduction in premiums for Detroiters. The bill had the support of Governor Snyder, the insurance industry, the NAACP, and the Council of Baptist Pastors. It was passed by the Senate Insurance Committee in 2016, but died on the Senate floor. Chief opposition to the bill came from medical providers and trial attorneys.
Conclusion
As someone who grew up in Wisconsin, the state with the nation’s third most affordable car insurance, the situation in Michigan, and in Detroit specifically, absolutely baffles me. With the recent failure of the Regional Transit Authority bill, Michigan, and especially metro Detroit, is going to have deal with the car insurance problem. If there’s no comprehensive, affordable, public transit system, then the movement of people relies on personal transportation, i.e. cars. If you own a car, you are legally obligated to purchase car insurance. When the cost of that insurance is higher than the cost of the car itself, the system is broken.
Primary Sources Referenced
Crumm, Charles. “The Puzzle of Reforming Michigan No-Fault Auto Insurance.” Macomb Daily. August 01, 2015. http://www.macombdaily.com/article/MD/20150801/NEWS/150809988
Fergus, Devin. “Are Auto Insurance Companies Redlining Poor, Urban Drivers?” The Guardian. July 21, 2014. https://www.theguardian.com/commentisfree/2014/jul/21/auto-insurance-red-lining-poor-urban-drivers
Hunter, J. Robert, Feltner, Tom, and Douglas Heller. “What Works: A Review of Auto Insurance Rate Regulation in America and How Best Practices Save Billions of Dollars.” Consumer Federation of America. November 2013. http://www.consumerwatchdog.org/resources/whatworks_nov2013_hunter-feltner-heller.pdf
Kristof, Kathy. “Car Insurance: Are You in a High-Cost Zip Code?” CBS News. June 12, 2012. http://www.cbsnews.com/news/car-insurance-are-you-in-a-high-cost-zip-code/
“The Case for Reforming No-Fault Insurance .” Michigan Insurance Coalition. March 22, 2013. http://michiganinsurancecoalition.com/2013/03/22/the-case-for-reforming-no-fault-insurance/
Mosley, Roosevelt C. “D-Insurance: City of Detroit Insurance Company Feasibility Study.” Pinnacle Actuarial Resources, Inc. June 08, 2015. http://www.detroitmi.gov/Portals/0/docs/News/D-Insurance%20Feasibility%20Study_%20Final%20Report.pdf