October 2018

Why Michigan Is in the Middle of a Car Insurance Crisis — and What Can Be Done

As rates top $6,000 per year, Michigan voters take their frustrations to the polls on November 6.

About

Car insurance costs have steadily increased in the U.S. in the past decade, but no state has felt the impact quite like Michigan, where drivers pay the highest rates in the country.

Car insurance rates are so high, in fact, that they’re among the top four issues in Michigan’s 2018 elections, and an issue regulators and lawmakers across the country are keeping a vigilant eye on.

The Zebra’s report explores:

  • The costs: Current and historical auto insurance pricing data, including variances across state, city, and even zip code
  • The causes: The complicated reasons behind Michigan’s high rates, and how explotation and fraud are exacerbating the issue
  • What's next: What solutions have been proposed, which lawmakers are championing them in Michigan and beyond, and how those potential reforms could impact Michigan drivers — for better or worse

 


The Problem

Michigan Residents Pay 83% More for Car Insurance Than the Rest of the U.S.

Few drivers get excited about paying their auto insurance premiums, but in Michigan, renewals hit like a punch in the gut. Drivers there pay an average of $2,610 each year for car insurance — 83% higher than the national average rate of $1,427. In some areas of the state, annual premiums exceed $6,000 and account for more than 20% of residents’ annual income.

 
CAR INSURANCE RATES BY STATE
 StateAnnual Car Insurance Premium
1.Michigan$2,610
2.Louisiana$2,225
3.Kentucky$2,050
4.Rhode Island$2,004
5.Florida$1,878
6.Texas$1,810
7.Nevada$1,802
8.Mississippi$1,800
9.California$1,713
10.Delaware$1,700
11.New Jersey$1,679
12.Montana$1,615
13.New York$1,582
14.Connecticut$1,544
15.Oklahoma$1,542
16.Washington, DC$1,464
17.Arkansas$1,458
18.Colorado$1,435
19.Pennsylvania$1,433
20.Kansas$1,427
21.Georgia$1,388
22.West Virginia$1,378
23.Oregon$1,377
24.South Carolina$1,361
25.Alabama$1,358
26.Wyoming$1,338
27.Missouri$1,334
28.New Mexico$1,331
29.Tennessee$1,315
30.South Dakota$1,268
31.Minnesota$1,258
32.Arizona$1,247
33.Maryland$1,240
34.North Dakota$1,230
35.Massachusetts$1,201
36.Nebraska$1,184
37.Washington$1,160
38.Alaska$1,152
39.Indiana$1,133
40.Illinois$1,120
41.Utah$1,112
42.New Hampshire$1,083
43.Hawaii$1,079
44.Wisconsin$1,040
45.Ohio$1,037
46.Vermont$1,027
47.Idaho$1,018
48.Iowa$1,015
49.Maine$927
50.Virginia$901
51.North Carolina$865

 

Insurance rates in the states surrounding Michigan are significantly lower — even though the states experience similar weather, rates of vehicle theft, and other impacting factors.

Michigan Rates Comparison to Neighboring States

 


Key Findings

Why Are Michigan Car Insurance Rates So High?

  • Unlimited Medical Coverage

    Reason 1

    Michigan requires drivers to buy incredibly high levels of car insurance coverage — notably Personal Injury Protection (PIP) insurance with unlimited, lifetime medical coverage for injuries.

  • Lawsuits and False Claims

    Reason 2

    Michigan guarantees many benefits to injured drivers, but those benefits attract fraud, litigation, and massive health care bills.

  • Insurance rate increases

    Reason 3

    Insurance companies raise rates to account for those additional costs, and the problem is compounded when drivers drop insurance coverage because they can’t afford it.

  • space

Reason 1

Michigan Requires Unlimited Medical Coverage

Each state in the U.S. is responsible for regulating insurance and determining coverage requirements for drivers. Michigan’s particular coverage requires that residents purchase an unlimited amount of Personal Injury Protection (PIP) coverage, which pays for their own medical expenses in a crash.

 

  • Personal Injury Protection (PIP)

    Personal Injury Protection (PIP)

    Covers medical expenses for you and your passengers after an accident

  • space

 

Only about a dozen states require drivers to have additional PIP coverage, and not one besides Michigan requires drivers to have unlimited PIP coverage.

This isn’t how insurance has always worked in Michigan...

How Did Michigan Get Here?

Up until 1973, Michigan car insurance operated on what’s known as a tort system.

 

  • Tort, or At-fault Insurance

    At-fault (Tort) Insurance

    Driver who causes a crash is responsible for paying damages to an injured party, including medical bills and lost wages. Drivers buy liability insurance to help cover those costs.

  • space

 

But as crash-related lawsuits flooded courts in the late 1960s, law professors Jeffrey O’Connell and Robert Keeton led a national movement to overhaul tort car insurance. It cost too much, took too long, and tended to over-compensate victims of minor car crashes while under-compensating those with more serious claims.

They published a book in 1965 developing the groundwork for a new model of car insurance known as “no-fault insurance.”

 

  • No-fault Insurance

    No-fault Insurance

    Each injured driver files a claim with own insurance company after a crash – regardless of whose fault it was.

  • space

 

In a “no-fault” system, drivers give up the ability to sue another party in civil court for larger “pain and suffering” payouts (except in cases of severe injury or death), but they don’t have to wait for a lengthy lawsuit settlement to be reimbursed for medical expenses and lost wages.

O’Connell and Keeton believed this would make insurance more efficient and cheaper while speeding up compensation to accident victims.

The idea caught on, and Michigan was one of 16 states to adopt no-fault car insurance between 1971 and 1975.

 

A Critical Difference

Most states limit how much PIP coverage they require drivers to buy. For example, outside of Michigan, the highest requirement for medical coverage is $250,000 (New Jersey).

 

MINIMUM CAR INSURANCE COVERAGE REQUIREMENTS IN NO-FAULT STATES
 

Personal Injury Protection (PIP)

Property Damage (PD)Bodily Injury (BI)

Uninsured Motorist (UM)

Fraud Authority?Medical Fee Schedule?Prohibited Rating Factors?Average Premium
MIUnlimited, Lifetime$10K$20K/
$40K
OptionalYesNoNo$2,610
FL$10K$10KOptionalOptionalYesYesNo$1,878
NY$50K$10K$25K/
$50K
$25K/
$50K
YesYesYes$1,582
HI$10K$10K$20K/
$40K
OptionalYesYesYes$1,079
KS$4,500/
person
$25K$25K/
$50K
$25K/
$50K
YesNoNo$1,427
KY$10K*$25K$25K/
$50K
OptionalYesYesNo$2,050
MA$8K/
person
$5K$20K/
$40K
$20K/
$40K
YesNoYes$1,201
MN$40K/
person
$10K$30K/
$60K
$25K/
$50K
YesNoYes$1,258
NJ$15K, $250K*$5K$15K/
$30K
OptionalYesYesNo$1,679
PA$5K*$5K$15K/
$30K
OptionalYesYesNo$1,433
UT$3K$15K$25K/
$65K
OptionalYesYesNo$1,112
ND$30K$25K$25K/
$50K
$25K/
$50K
YesNoNo$1,230

 

Footnotes:
*Kansas requires $4,500 each for medical and rehabilitation.
*Kentucky and Pennsylvania are no-fault "choice" states, where drivers can opt for full-tort car insurance.
*New Jersey's $250,000 medical minimum applies only to specific serious injuries.
PIP "Add-on" States: Arkansas, Delaware, Washington D.C., Maryland, Oregon, South Dakota, Texas, Wisconsin, South Carolina, Washington. 

 

Michigan’s requirement, on the other hand, guarantees injured drivers unparalleled protections: unlimited, lifetime medical coverage for injuries and rehabilitation, up to three years of lost wages benefits, and more.

In other words, Michigan’s car insurance coverage is arguably the best in the country.

Stories shared by those who have survived horrific car crashes are a powerful testament to the benefits of Michigan’s no-fault insurance.

Everyone on the road has a chance of being catastrophically injured in a car accident.

In 2006, Detroit mother Claudette Williams was driving her 5-year-old daughter, Kacie, to a gymnastics competition when she hit a patch of black ice on the road and crashed. Kacie was thrown from the vehicle and suffered severe injuries. Doctors warned Claudette that if Kacie survived, her brain function would be significantly reduced.

The experience was life-changing for both the mother and daughter, but Claudette’s state-mandated car insurance ensured that Kacie had immediate access to medical care and specialized, long-term therapy to support her recovery.

Kacie is now a high school graduate who’s getting ready for college.

Claudette wonders how different their lives could have been if they didn’t have such extensive car insurance coverage. She shared her story with Detroit news stations this year as a counterpoint to arguments that Michigan should dramatically overhaul its insurance requirements.

Stories like this give Michiganders pause when they see their exorbitant car insurance premiums. Few Michigan drivers want to lose that quality-of-life guarantee should they or their loved ones suffer the worst in an auto crash.

But they’re frustrated that rates have reached such critical levels that some residents are paying more for car insurance than rent.

So how did something designed to help people become a cost crisis?

 


Reason 2

Michigan’s High Coverage Limits Invite Legal Battles, Exploitation, and Fraud

 

1. Car insurance lawsuits have skyrocketed in Michigan.

No-fault insurance was designed to keep car insurance claims out of the legal system. That hasn’t happened.

Personal injury lawsuits in Michigan have exploded 130% in the past decade. A 2017 Detroit Free-Press investigation found that a staggering two-thirds of all lawsuits filed in the state are now battles between drivers and their own insurance companies over no-fault insurance payouts.

Attorneys blame the insurance companies, suggesting they wouldn’t file suits on behalf of drivers if insurers didn’t withhold payments for covered expenses. Insurers counter that the lawyers take advantage of the system to their own benefit — typically pocketing one-third of what a driver is compensated.

This litigation also extends to battles between insurers and medical providers over reimbursements. While the majority of these suits end with a settlement, the cost of litigation drives up insurance premiums.

 

Personal injury lawsuits in Michigan have exploded 130% in the past decade.

 

 

2. Michigan’s no-fault medical costs have no ceiling.

Healthcare has gotten more expensive in the U.S., but medical claims from car crashes are especially prone to price inflation. Johns Hopkins University researchers found that in Florida — a no-fault state that requires just $10,000 in PIP coverage — auto insurers pay 2.8 to 3.8 times what Medicare pays for the same hospital services, while private health insurers pay 1.9 to 2.5 times the Medicare rate.

Why is this happening? The researchers point to bargaining power. Big health insurers and government programs like Medicaid cover a lot of patients, and that gives them leverage to negotiate better rates with health care providers. Auto insurers cover only people hurt in car crashes, which is a much smaller group by comparison.

These cost differences show up even though Florida has a medical fee schedule for auto insurance that sets limits on how much medical providers can charge for services.

Michigan has no such limits, so it's even more suceptible to price disputes and flucuations. One study found that while Medicare would reimburse $500 or less for an MRI, auto insurers were paying in excess of $3,000 for the same procedure in Detroit.

Michigan’s average cost per auto accident injury claim in 2013 was $75,600, according to an investigation by Crain’s Detroit Business. New Jersey, the second highest state, averaged $13,630 per injury claim.

 

Study: Medicare pays $500 for an MRI while auto insurers pay $3,000+.

 

 

3. No-fault is a sitting duck for exploitation and abuse.              

Michigan drivers and lawmakers often point to fraud and misuse as major contributors to the state’s car insurance crisis. The FBI estimates that families in the U.S. pay $400 to $700 per year to cover the cost of fraud in (non-health) insurance. Some recent examples of this illicit activity:

  • One man was caught making a fraudulent claim for in-home care and other injury benefits following a car crash when he showed up as a fighter in a mixed martial arts cage match, according to the Detroit Free-Press.
  • An insurer paid a home health provider more than $100,000 for a crash victim’s 24-hour in-home care, but later discovered the woman grocery shopping and driving unattended. Court filings revealed that the woman’s health aides earned only $14,400 of that money while caring for her, and the rest went to “overhead” costs.
  • A man who became a paraplegic in a 1993 crash told local media that his lawyer had been taking $3,000 per month — a third of his benefits — for years in payment for filing his insurance paperwork. The man cut the lawyer off when he learned he could file the paperwork on his own. This practice isn’t illegal, but many attorneys in Michigan find it unethical.

 


Reason 3

Insurers Raise Rates to Account for Costly Losses

At the simplest level, insurers in Michigan have raised rates to account for these skyrocketing medical and legal costs.

Auto insurance is a competitive market, and rates need to be attractively priced for insurers to find and keep customers. But insurers also need to charge enough to cover their own expected losses — how much they might owe for car repairs, medical bills, property damage, etc.

Government regulators are required by state law to make sure auto insurers’ profits aren’t excessive.

Where are Michigan’s government watchdogs?

Some Michigan lawmakers and stakeholders, especially those who support keeping no-fault insurance, worry that the state is too lax about regulating auto insurers. They point to the fact that state regulators rejected zero personal auto insurance rate changes between 2012 and 2016. (Regulators issued 199 objections in that time, which they say insurers adequately answered.) Michigan is also the only state in the U.S. for which the National Association of Insurance Commissioners can’t accurately track profitability for personal auto liability, because the numbers are skewed by the Michigan Catastrophic Claims Association (MCCA).

What’s the MCCA?

While Michigan requires drivers to buy insurance with unlimited, lifetime medical benefits, insurers don’t actually pay unlimited, lifetime medical expenses. In 1978, the state created the Michigan Catastrophic Claims Association (MCCA) to reimburse insurers once a claim surpasses a set amount (currently $555,000 per claim). The funds come from a per-vehicle fee ($192 for 2018-2019, up 13% from $170 in 2017-2018) paid by insurers who pass the cost along to all drivers. Though it was created by the state, the MCCA operates as a private, non-profit predominantly made up of insurance companies. It said the most recent fee increase accounts for higher-than-expected claims costs and a fund deficit.

Courts have held that MCCA is not subject to Michigan public records laws, leading to criticisms of the association’s public accountability and transparency. The MCCA has said it releases adequate information, and that it has an independent auditor review its financial statements annually.

How Car Insurance Stalls Michigan’s Economic Engine

All of these additional costs for medical bills, litigation, and criminal activity filter through the system and Michigan drivers end up with the bill. Michiganders are paying on average 4.75% of their incomes for car insurance, compared to the national average of 2.37%. In Detroit, where the cost of car insurance averages $5,414, that number jumps to almost 20%. Even a professional making $60,000 in the Motor City would need to fork over 9% of their income.

It’s not just a pocketbook issue for families; a huge roadblock when it comes to retaining talented employees and attracting new businesses.

Michigan has diversified and added jobs since the Great Recession, but economic experts at a recent panel discussion hosted by the Detroit Economic Club highlighted the need for Michigan to create technology jobs and lead the development of autonomous vehicles.

To do that, it’ll need to compete with other states where the financial impact of car insurance is far less painful.

The Vicious Cycle of Uninsured Drivers

While regulators have deemed Michigan’s auto insurance rates to be actuarially justified, the high costs alone create a problem that further snowballs rate increases: uninsured drivers.

Michigan ranks fourth in the nation for uninsured drivers, according to the Insurance Research Council.

More than 20% of the state’s drivers aren’t covered, risking criminal penalties and a dangerous lack of financial protection.

The problem is even more acute in Detroit, where police estimate 60% of drivers are uninsured.

Michigan ranks fourth in the nation for uninsured drivers, according to the Insurance Research Council.

More than 20% of the state’s drivers aren’t covered, risking criminal penalties and a dangerous lack of financial protection.

The problem is even more acute in Detroit, where police estimate 60% of drivers are uninsured.

 

When drivers can’t afford insurance in Michigan, they go without or they seek minimal-coverage policies in order to buy a car — and then quickly let the coverage lapse. This adds costs in two ways:

  • People who drop coverage pay more. Insurance companies have mathematical risk formulas that show that drivers who drop their coverage — even for a day — are higher risk, so they typically charge those drivers more. While this usually benefits insured drivers by encouraging everyone to maintain continuous coverage, it makes things worse for people who already can’t afford to pay.
  • Uninsured drivers raise rates for everyone. Insurers also account for the number of uninsured drives on the road in an area when setting rates. The more uninsured drivers, the greater the risk of insured drivers filing claims, so everyone in that area pays more for their premiums.

The high number of uninsured drivers perpetuates the affordability crisis in Michigan, especially in Detroit. Local lawmakers realize that getting these drivers back on insurance will make rates more affordable for everyone. But rates have to be more affordable before those drivers can buy back into the system.

So what can be done?

 


Elections 2018

Michiganders Could Vote to Upend Car Insurance This November

After years of stalemate, Michiganders are still grappling with what to do about car insurance. The most recent attempt at a legislative overhaul — which would have reduced mandatory PIP coverage to $250,000 — failed in 2017 after fierce debate. A narrower effort in 2018 to lower PIP for senior citizens has yet to be voted on by Michigan’s House of Representatives. 

But the calculus will change on Nov. 6 when Michigan residents vote on a new governor and 148 seats in the state legislature. The results could mean big differences in how the state approaches insurance reform.

 

Michigan Governor Candidates

 

Proposed Fixes: What They Actually Mean

 

1. Limit the “unlimited” medical benefit

The most hotly contested part of no-fault insurance in Michigan is the unlimited, lifetime medical requirement.

Supporters of limiting the benefit, including Detroit Mayor Mike Duggan (D) and House Speaker Tom Leonard (R), say the benefit costs too much to be a state requirement, and that it duplicates coverage already provided by health insurance. A bipartisan plan proposed (and rejected) by state lawmakers 2017 would have reduced mandatory coverage requirements to $250,000 — on par with New Jersey, the state with the second-highest PIP requirement — in exchange for a 20% reduction in rates for the average driver.

Opponents, including lawyers, medical providers, and disability advocates with The Coalition Protecting Auto No-Fault, fiercely defend the unlimited medical benefit as a critical safetynet for people who have been catastrophically injured. They worry that if PIP is capped, medical bills could quickly overrun coverage, leaving families financially devastated and forcing injured people to rely on far more limited services through Medicare or Medicaid. Michigan’s nonpartisan House Fiscal Agency told lawmakers that the 2017 proposal would have added $150 million per year to Medicaid within a decade of the change.

 

2. Create a medical fee schedule

Michigan law requires insurers to pay whatever is “reasonably necessary” to treat crash victims. Disputes over what’s covered and how much it’ll cost often land in court.

Perhaps that’s why there’s broad support among lawmakers, medical providers, insurers, and groups like The Coalition Protecting Auto No-Fault for a fee schedule that would standardize medical reimbursements. For example, New Jersey limits the cost of a standard brain MRI to $823 to $876 depending on what part of the state you’re in. The cost in the Detroit area, depending on which facility you visit, can range from $500 to $5,000.

While these groups agree that a fee schedule could help control costs and meaningfully impact insurance premiums, disagreements have emerged over what that fee schedule should look like. Disability advocates and medical providers want to make sure it doesn’t limit patients’ access to specialized care. 

 

3. Prohibit insurers from using certain information when setting rates

A number of Michigan lawmakers and reform advocates have raised concerns about what information insurers use to set car insurance rates.

Some factors — including gender, marital status, occupation, education, and credit score — are controversial, and not just in Michigan. In late 2017, New York joined California and a number of other states in prohibiting education and occupation as rating factors after state regulators found them to be unfair. Regulators in many other states still allow such non-driving factors, because they help insurers mathematically predict the likelihood of drivers filing a claim.

The fairness of these rating factors is debated because they can impact premiums as much or more than how someone drives. For example, Michigan is second in the country for credit score impact, with a 24% difference in average premiums between credit score tiers. 

However, prohibiting any single factor does not necessarily reduce rates overall. In fact, Detroit Mayor Mike Duggan told Michigan legislators in 2017 that banning credit as rating factor would reduce premium costs by only 3%. That’s because eliminating rating factors doesn’t reduce the cost of medical claims and legal fights. Insurers would likely charge about the same overall amount; they’d just distribute it differently.

Michigan car insurance rates also vary widely based on zip code (due to the likelihood certain claims will be filed in that zip code). If zip code were prohibited as a rating factor, rates would likely become more uniform, with some drivers in expensive areas paying less and drivers in more affordable areas paying more. 

If these cost shifts make insurance affordable for drivers who are currently uninsured, the reduction of uninsured drivers on the road Michigan could help reduce rates for everyone.

 

4. Create an anti-fraud authority

This broadly supported reform recently came to fruition. On Sept. 11, 2018, Michigan Gov. Rick Snyder announced an executive order to create an anti-fraud authority within Michigan’s Department of Insurance and Financial Services. This order did not come with more funding for personnel, but it did authorize investigators to background check insurance agents, maintain records of fraud claims, and coordinate with local police in criminal investigations.

If elected, governor candidate Bill Schuette promises to beef up the office with additional resources and police powers. More fraud policing is unlikely to have an immediate impact on insurance rates, state officials believe it will help in the long run.    

 

5. Ditch no-fault car insurance for a tort system

Detroit Mayor Mike Duggan’s latest effort to help drivers in the Motor City is a lawsuit aimed at blowing up Michigan’s no-fault law by having it declared unconstitutional. He reasons that the state can’t force people to buy insurance they just can’t afford, and the ongoing crisis is holding the city and the state back economically.

If it’s successful, Michigan wouldn’t be the first state to ditch no-fault insurance. Colorado made the move in 2003 after repeatedly failing to get opposing sides to agree on no-fault insurance reforms. Insurance premiums quickly dropped (as expected with the reduction in required coverage), but in the years since, Colorado’s premiums have climbed again, making Colorado third in the nation for rising car insurance rates. 

Michigan’s no-fault advocates are quick to point to Colorado as proof that simply eliminating no-fault insurance isn’t a silver bullet to sustainable lower rates. They offer doubts that the potential savings will be worth giving up the substantial benefits.

Those who oppose the no-fault system, however, point to neighboring tort states like Ohio where drivers pay half as much with few complaints about their insurance (even if they get less coverage).

 


Takeaways

What Can Michiganders Do?

While legislative solutions are needed to fix the Michigan car insurance affordability problem, drivers can help control their own costs with these tips.

  • Get — and keep — car insurance

    Get — and keep — car insurance

    Drivers who build a history of continuous coverage indicate to insurers that they are responsible, lower-risk drivers, so they earn lower rates. If you’re able to buy insurance, be sure not to let it lapse — even for a day.

  • Add uninsured motorist coverage

    Add uninsured motorist coverage

    This affordable add-on coverage helps financially protect insured drivers if they’re in a crash with someone who is uninsured. It’s especially important in places like Michigan where there are a high number of uninsured drivers.

  • Shop around

    Shop around for coverage

    Insurers aren’t all the same when it comes to calculating rates and offering discounts. Comparison shopping before you buy or renew your policy will help ensure you’re getting the best rate and the coverage you need.

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