When the Michigan no-fault law was enacted in 1973, it was recognized that certain people injured in automobile accidents would not be covered by policies that provided the medical and wage loss coverage that vehicle owners were required to purchase. If those injured people were not in violation of the law, they would be compensated for economic losses. An example of people in this group would include a pedestrian who did not own a vehicle, who resided in a household with no insured vehicles owned by others, and who was injured by an uninsured or a hit-and-run driver.
The mechanism for coverage for such people is the Michigan Assigned Claims Facility (ACF), located within the Michigan Department of State. The Facility assigns the claims to "servicing insurers" that pay the medical costs and lost wages. There are currently 10 such insurers, who are reimbursed for their loss payments, loss adjustment expenses (LAE), and interest from a fund raised through assessments on the entire auto insurance industry and legally self-insured businesses. (A self-insured business is a company that acts as its own insurer by maintaining funds and managing its own claims.) These assessments are prorated based on each insurer's share of the total state premiums for no-fault and auto liability insurance and self-insured businesses' total share of self-insured vehicles. The costs of these assessments are, of course, passed on to the insurance customers in the form of higher premiums.
In the early years, these annual assessments were in the low tens of millions of dollars, but they have increased dramatically in recent years. In 1997 the assessment was for $37.7 million; by 2008 it had grown to $145.6 million — a 286 percent increase. During the same period, the assessment per Michigan vehicle grew from $6.04 to $20.66 — an increase of 242 percent, indicating that any growth in the total vehicles in the state was at most a minor factor in the increase in total losses, LAE, and interest reimbursed by the ACF.
During the same period, the total annual paid PIP losses for all Michigan vehicles grew from $788.1 million to $1.7 billion, an increase of 119 percent. Since the increase in ACF assessments is 2.4 times that in PIP claims payments, it is clear that something is going on with assigned claim payments. If this difference had been identified earlier and if steps had been taken to hold the increase in ACF assessments to the same rate as the growth in overall PIP losses, the 2008 assessment would have been $82.6 million — $63 million, or approximately $8.94 per insured Michigan vehicle, less than it turned out to be.
Unfortunately, the Facility, with only eight employees, one claims examiner, and over 3,000 files to monitor, is not equipped to determine what that "something" is. Health privacy concerns preclude insurance industry experts from viewing the files. Individual servicing insurers could analyze their own files, but none of the 10 has a sufficient share of total claims for its own analysis to be applicable to all the servicing insurers. Further, since the increase in payments might be, at least in part, the result of inadequate servicing carrier performance, an investigation by those insurers might be criticized as lacking objectivity.
However, there is a readily available source of expertise that could be tapped. The Michigan Auto Insurance Placement Facility (MAIPF) was established to provide auto insurance to applicants unable to obtain it in the regular market, usually because they are perceived as unacceptably high risks and are more like to have claims than the average driver. Managed by a board consisting of seven auto insurer representatives, two agent representatives, and two public representatives, it operates under the scrutiny of the insurance commissioner, a representative of whom attends all meetings. The commissioner approves the MAIPF plan of operation, its procedures, and its rates. The board has committees of company employees with expertise in claims, accounting, actuarial science, and underwriting.
Legislation has been proposed to transfer the administration of the ACF to the MAIPF. The proposal is supported by the Secretary of State and has been reviewed by the Office of Financial and Insurance Regulation, which raised no objection. Once enacted, the MAIPF can begin a detailed study of the claims experience of the ACF, identify the problem causing the unnatural increase in losses, and implement a solution. Reductions in assessments and insurance premiums should follow.