Michigan's system of auto insurance regulation has several unique features. The Essential Insurance Act, which was enacted in 1979 and took effect on January 1, 1981, places significant limitations on underwriting and rate classificationby insurers.  All auto insurers must offer coverage (including personal injury protection, property protection, residual liability, comprehensive, and collision) to any "eligible person" who also meets their underwriting rules (which must be filed with the Insurance Bureau). Each person is eligible unless he or she has recently been convicted of insurance fraud or some serious motor vehicle violation, has been cancelled recently for non-payment of premium, or has accumulated more than six points for accidents and motor vehicle violations in the past three years.  Insurers do not have to offer coverage to ineligible persons or to eligible persons who do not meet their underwriting criteria. Allowable underwriting criteria (which must be uniformly applied) only include the factors that define an eligible person and several other factors that are specifically set forth in the law, such as use of the auto for commercial purposes, modifications to increase speed, or the points accumulated by another driver in the insured's household who accounts for 10 percent or more of the use of the insured vehicle.
Voluntary market rates are subject to a file-and-use rating law. Insurers need not obtain approval of rates prior to their use.  However, insurers may only employ rating criteria that are specified by law. The principal criteria allowed include age or driving experience, driver "primacy", average mileage, commuting mileage, type of use, vehicle characteristics, number of cars or licensed operators, and amount of insurance. Insurers also are required to establish merit rating plans that provide surcharges for substantially at-fault accidents and for motor vehicle violations. Rates cannot be based on the owner or driver's gender or marital status. The Essential Insurance Act also contained significant restrictions on the use of territorial rating. As is discussed in detail later in the paper, these restrictions proved to be unworkable and were substantially modified in 1986.
The Essential Insurance Act changed Michigan's involuntary market for auto insurance from an assigned risk plan to a joint underwriting association (the Michigan Automobile Insurance Placement Facility or MAIPF).  The law requires that the five largest auto insurers and up to five additional insurers operate as servicing carriers. Rates for the MAIPF are subject to prior approval by the insurance commissioner. As will be discussed later, the law places specific restrictions on MAIPF rates in higher-rated territories. MAIPF operating losses are assessed against all insurers in proportion to their voluntary market volume.
Only a small number of states impose significant restrictions on auto insurance underwriting and rate classification. Among these states, Michigan's system of regulation is distinctive in that it employs file-and-use regulation rather than prior approval for overall voluntary market rate levels. Other states with substantive limitations on underwriting and rate classification also employ a reinsurance facility or similar mechanism that permits insurers to pool the financial results of any insured with other insurers in the state.