Imagine you live in a town where anyone who dines out is required to buy a $200 bottle of champagne with their meal. That sounds crazy, but it is essentially what is happening to insurers in Michigan, where they are required to offer consumers only the costliest type of auto insurance policy.
This regulatory regime — combined with a declining economy, high unemployment and incentives for policy holders to claim as much on their insurance as possible — has helped make Michigan the nation’s second-most expensive state for auto insurance, according to a 2010 Insure.com study (second only to Louisiana). Detroit has the nation’s highest insurance premiums.
With many Michigan cities facing budget crises and residents fleeing the state at a rate of 15,000-20,000 people a year, politicians in the state are frantically drafting proposals to control premium rates. Most of the proposed solutions simply limit how much insurers can charge.
That is similar to forcing restaurants to sell all customers that $200 bottle of champagne but only charge $20 for it.
Not only will that fail to reduce insurance costs, but it will most likely drive companies out of the state, putting Michigan on a crash course with disaster.
Any real solution to the high cost of car insurance in Michigan must address the causes behind the high cost of writing insurance in the state.
In just about every state, except New Hampshire, drivers are legally required to have basic auto insurance.
Michigan drivers must purchase unlimited personal injury protection (PIP) insurance. This means that no matter how high the bills rise for a crash victim and regardless of who was at fault, that person’s insurance company is required to pay for his or her medical bills, rehabilitation, lost wages and associated costs resulting from the accident for the rest of that person’s life! The results are disastrous.
First, insurance premiums in Michigan have continued to rise even as accident rates have dropped in recent years. Claims filed are 292 percent costlier now than they were in 1994. Unlimited liability and regulations incentivize insurance companies to pad claims. Second, Michigan’s insurance regulation scheme discourages insurers from limiting the cost of the claim. Here’s how it works.
Accident victims would seek to maximize insurance payouts. The Michigan Catastrophic Claims Association (MCCA) pays for claims on behalf of insurers if the payout rises above a stated threshold (currently $460,000). The association gets the money to pay for these claims by assessing all the insurance companies in the state — an assessment that is then passed on to every driver in the state.
Every driver in Michigan, on top of paying for the most expensive type of policy, must also pay an extra $143 to cover the costs of other people’s accidents. This drastically reduces insurers’ incentive to either limit costs or investigate claims once they approach or pass that threshold.
The easiest solution is to allow drivers to remove the requirement to purchase PIP. It should be up to individuals to determine if and how much insurance they need. Additionally, those with health insurance already have PIP anyway, why make them purchase the same service twice?
Increasing Michigan consumers’ ability to choose the amount of coverage that best suits them will not only decrease the cost of insurance in the state, but may set a pattern for the kinds of additional reforms the state needs to revive its economy and attract new residents, whose dining choice may be as varied as their backgrounds.
Minton is director of Insurance Studies Competitive Enterprise Institute.