Study blames medical claims for high auto insurance rates in Michigan

A new study into the high cost of auto insurance in Michigan points the finger at no-fault insurance and blames the system for soaring medical claims and an explosion in accident-related lawsuits.

But at least one consumer advocate faults the report for not scrutinizing insurance companies and their role in setting the prices that motorists actually pay for coverage.

The study, released this month by the national Insurance Research Council, an insurance industry-funded group, says that the frequency of auto accidents and motor vehicle fatalities in Michigan are below nationwide averages. Yet Michiganders still pay some of the highest auto insurance premiums in the country. 

The study primarily attributes the situation to the very large medical-related claims under Michigan's no-fault insurance system, which allows for potentially unlimited lifetime medical and in-home assistance benefits for crash victims.

The average size of those claims, known as personal injury protection (PIP) claims, was $33,437 in 2017, or more than double that in the next highest no-fault state, according to the group's study of claims data.

The median claim was $4,319, which was below that of several other no-fault states. The median means that half of all claims were bigger and half were smaller.

Michigan is one of 12 states with no-fault insurance and the only one without
monetary caps on personal injury protection benefits. Injured motorists in states without no-fault typically rely on regular health insurance after accidents, which is nearly always less generous in benefits than Michigan's no-fault.

“Obviously having unlimited benefits creates some extremely large claims,” Victoria Kilgore, director of research for the Insurance Research Council, told Lansing lawmakers at an April 10 hearing before the Senate Insurance and Banking Committee.

Other reasons cited in the report for Michigan's high auto insurance costs:

• No fee schedule: There are no state government-set price controls for medical services covered by no-fault insurance. Other no-fault states have such controls, known as fee schedules, to rein in costs and reduce incentives for fraud.
• More attorney involvement: The percentage of no-fault claimants with attorneys rose to 18% in 2017 from 13% in 2013. The Insurance Research Council says that greater attorney involvement in auto injury cases is often associated with higher insurance costs.
• Lots of lawsuits: Auto accident-related lawsuits in Michigan courts jumped to 49% of all civil cases in 2017, up from 21% in 2002. Many cases now involve patients or medical providers suing auto insurers over no-fault benefits.
• Loosened lawsuit threshold: The frequency of "pain and suffering" bodily injury claims increased about 7% a year in Michigan from 2010 through 2017, even as the frequency of such claims nationwide held relatively stable. The increase followed a 2010 Michigan Supreme Court decision, McCormick v. Carrier, that lowered legal hurdles for successful liability lawsuits against opposing drivers in a crash. (The higher hurdles stemmed from a 2004 case.)

The study did not mention insurance companies' use of controversial non-driving factors when setting premiums, such as drivers' ZIP codes and a version of their credit scores, which critics say unfairly penalize people in high-poverty cities like Detroit.

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David Corum, vice president of the Insurance Research Council, said that credit scoring and other customer rating factors are pricing issues that aren't connected to the underlying cost of insurance, which was the study's focus.

Even if Michigan were to prohibit insurers from using ZIP codes and credit scores, such a move wouldn't lower the cost of auto insurance in the state — only redistribute costs to different motorists, according to David Snyder, a vice president with the American Property Casualty Insurance Association, also an industry group.

"If you want to reduce overall costs in Michigan, you need to address the underlying factors that insurance pays for," Snyder said. “Regardless of what you do with rating factors, those costs are still going to be there and are still going to be paid by somebody."

But for consumer advocate Doug Heller, a consultant on insurance matters for Michigan's Coalition Protecting Auto No Fault, the report's major flaw was its lack of scrutiny toward auto insurers' practices.

"One of the things I read in this report is a total lack of attention to any of the cost drivers in Michigan that are associated with the insurance companies," he said. "And that is a problem because if you want to really get at what makes insurance expensive in Michigan, you have to lay it all out on the table." 

Heller contends that rating factors such as credit scoring are connected to the underlying cost of insurance because they adversely impact lower-income residents, who then can't afford to buy auto insurance, resulting in fewer people who are paying into insurance pools.

"When you price people out of the market because of who they are — not how they drive — you've shrunk the pool. And that itself is a cost-driver," he said.

The report also failed to mention state regulators' light-touch policies for reviewing auto insurers' rates to determine whether they are fairly or excessively priced, Heller said.

"There is a difference between how much it costs these companies to sell insurance, and how much they are charging," Heller said. “The problem is we don’t know what the gap between the actual cost and the premiums the companies charge really is because no one is holding the insurers to account." 

The report did not examine the Michigan Catastrophic Claims Association, which sets the annual per vehicle fee that Michigan drivers pay to reimburse insurance companies for all individual medical claims that exceed $580,000. The fee is set to increase by $28 July 1 to $220 per vehicle.

In 2017, 28% of all the medical-related no-fault insurance payouts went to claims exceeding $250,000, the study said. Those claims belonged to just 3% of all claimants.

ContactJC Reindl at313-222-6631 or jcreindl@freepress.com. Follow him on Twitter @jcreindl. Read more on business and sign up for our business newsletter.