The magnitude and growth in auto insurance premiums and claim costs in Michigan and other states are examined in this section to provide useful background on the nature and causes of affordability problems, including the average cost of coverage in Michigan compared to other states, the performance of Michigan's no-fault law, and the magnitude of claim costs in Detroit relative to statewide claim costs. Given competition in the Michigan auto insurance market (see Section V), the magnitude and growth in premiums will primarily reflect the magnitude and growth in the frequency and severity of claim costs, which are influenced by factors such as the rate of growth in the cost of medical treatment and auto repair parts, changes in the accident rate, and changes in legal rules governing liability for auto accidents.

Table 1

Average Premium and Growth in Average Premium for Private Passenger Automobile Insurance: 1982 vs. 1987

 

Average Premium 1987

 

 

 

Average Premium 1982

 

 

 

Percent Growth 1982-87

 

1.

New Jersey

$774

 

1.

New Jersey

$529

 

1.

Georgia

96%

2.

California

$717

 

2.

Massachusetts

$453

 

2.

Maryland

79%

3.

D.C.

$709

 

3.

D.C.

$434

 

3.

Delaware

75%

4.

Massachusetts

$655

 

4.

Louisiana

$423

 

4.

Alabama

74%

5.

Connecticut

$634

 

5.

California

$421

 

5.

Connecticut

72%

 

 

 

 

 

 

 

 

 

 

 

22.

Michigan

$486

 

19.

Michigan

$327

 

32.

Michigan

49%

 

 

 

 

 

 

 

 

 

 

 

47.

Idaho

$322

 

47.

Idaho

$217

 

47.

Wyoming

34%

48.

Iowa

$285

 

48.

Montana

$213

 

48.

North Dakota

28%

49.

South Dakota

$273

 

49.

North Carolina

$212

 

49.

Nebraska

25%

50.

Nebraska

$272

 

50.

North Dakota

$209

 

50.

Iowa

24%

51.

North Dakota

$268

 

51.

South Dakota

$192

 

51.

Alaska

22%

 

 

 

 

 

 

 

 

 

 

 

Countrywide

$514

 

Countrywide

$331

 

Countrywide

56%

Median State

$439

 

Median State

$286

 

Median State

51%


Sources: Insured car-years obtained from AIPSO FACTS 1987/88 and AIPSO, Circular RMC 89-14, April 14, 1989. Written premiums obtained from Insurance Factsand A.M. Best Co. Calculations by the author.


Table 1 shows the average private passenger auto premium (for all coverages combined) per insured vehicle for Michigan and selected additional states in 1982 and 1987 along with the percentage change between 1982 and 1987. [8] The average premium in Michigan was $486 in 1987 compared to a countrywide average of $514. Michigan's average premium ranked 22nd in 1987, down from 19th in 1982. The average premium in Michigan grew by 49 percent between 1982 and 1987 compared to a countrywide rate of 56 percent. Its growth rate was the 32nd highest in the nation.

Figure 1 shows the average premium per insured vehicle in Michigan for personal injury protection coverage, for residual liability coverage (which is denoted bodily injury liability in the figure), and for physical damage (comprehensive and collision) coverage during 1980-87. Figure 2 shows the average incurred loss per insured vehicle during the same period.[9] Values are shown only through 1987 because data on the number of insured vehicles are no, yet available for 1988.

In 1988, physical damage coverage accounted for 56 percent of total private passenger auto insurance premiums in Michigan. The average physical damage premium per vehicle grew by 63 percent from 1980 to 1987. The average loss grew by 67 percent. [10] Personal injury protection premiums represented 25 percent of total premiums in 1988. The average personal injury protection premium grew by 69 percent during 1980-87. The average loss grew by 263 percent. As is discussed later, much of this growth is attributable to increases in losses for the Michigan Catastrophic Claims Association, which provides coverage for all personal injury protection claims for medical and rehabilitation expenses in excess of $250,000 per injured person. [11] Residual liability premiums represented 20 percent of total premiums in 1988. Residual liability premiums and incurred losses (the vast majority of which are for bodily injury liability coverage) increased by 28 and 14 percent, respectively, during 1980-87. [12] After declining in 1985 and 1986, the average residual liability premium increased sharply in 1987. The issue of whether this growth was influenced by changes in the limitation on tort liability under the state's verbal threshold is discussed in Section IV.

Table 2

Frequency, Severity, and Average Cost of Paid Claims for Four Quarters Ending in June 1989: Michigan vs. Countrywide

 

Michigan

Countrywide

Coverage

Claim Frequency

Claim Severity

Average Cost Per Vehicle

Claim Frequency

Claim Severity

Average Cost Per Vehicle

l. Bodily Injury Liability

.28

$17,390

$47.97

1.28

$7,406

$94.60

2. Personal Injury Protection

1.26

$7,144

$89.90

1.87

$2,637

$49.35

3. Property Damage Liability

.62

$742

$4.61

4.10

$1,338

$54.91

4. Collision

12.78

$1,445

$184.97

8.03

$1,414

$113.66

5. Comprehensive

11.56

$571

$66.01

9.42

$584

$55.02

6. Property Protection

.76

$791

$5.98

--

--


Note: Claim frequency is number of paid claims per 100 insured vehicles. Claim severity is total paid claims divided by number of paid claims. Average cost per vehicle is total paid claims divided by number of insured vehicles. All values are averages of quarterly results for last two quarters of 1988 and first two quarters of 1989.

Source: Fast Track Monitoring System. Calculations by the author.


Table 2 presents information on the level of frequency, severity, and average cost per vehicle of paid claims in Michigan and countrywide for the year ending June 1989. [13] Table 3 presents analogous information on the growth in paid claim costs since 1985. As can be seen in Table 2, the frequency of paid claims for bodily injury liability is much lower in Michigan than countrywide, and the severity of paid claims is much higher. Both differences reflect the operation of Michigan's restrictions on tort liability. Claims for minor injuries are removed from the tort system. As a result, the average paid claim cost per vehicle also is much lower in Michigan. [14]

The severity and average cost per vehicle of personal injury protection paid claims are much higher in Michigan than countrywide. [15] The major reason for these differences is that Michigan's personal injury protection benefits are much more comprehensive than those in most other states with no-fault. The relationship between personal injury protection benefit levels in Michigan and the affordability of coverage is discussed in Section IV. The Michigan system of no-fault property damage leads to much smaller claims for property damage and correspondingly higher claims for collision coverage than countrywide. [16] For comprehensive coverage, Michigan's claim frequency and average cost per vehicle are higher than the countrywide results.

Table 3

Percentage Growth in February, Severity, and Average Cost of Paid Claims During 1985-89: Michigan vs. Countrywide

 

Michigan

Countrywide

Coverage

Claim Frequency

Claim Severity

Average Cost Per Vehicle

Claim Frequency

Claim Severity

Average Cost Per Vehicle

l. Bodily Injury Liability

4.2%

24.5%

29.9%

17.8%

35.8%

59.8%

2. Personal Injury Protection

-5.3%

57.0%

48.5%

10.2%

33.5%

47.1%

3. Property Damage Liability

14.8%

9.9%

26.6%

-5.3%

37.5%

30.8%

4. Collision

-4.3%

38.0%

32.1%

-6.8%

35.3%

26.2%

5. Comprehensive

2.8%

-15.5%

-13.0%

8.2%

19.9%

29.9%

6. Property Protection

-23.2%

35.0%

3.1%

--

--

Note:  Values are percentage changes between 4-quarter averages ending June 1989 and June 1985.

Source: Fast Track Monitoring System.


Table 3 indicates that auto liability paid claim cost frequency, severity, and average cost per vehicle in Michigan grew at a slower rate between 1985 and 1989 than in the rest of the country. As is discussed in Section IV, however, bodily injury claim frequency has begun to increase since 1986 following a period of declining frequency in 1985 and 1986. The growth of personal injury protection claim severity in Michigan is much greater than the growth in countrywide personal injury protection severity. As a result, the growth in the average cost of personal injury protection claims was about the same as the countrywide growth rate despite the fact that personal injury protection claim frequency declined in Michigan and grew by 10 percent countrywide since 1985. Again, the larger value for severity in Michigan reflects its greater level of personal injury protection benefits.

The average cost of comprehensive claims in Michigan has decreased since 1985 despite a small increase in frequency. The major cause of this decline is likely to have been a reduction in auto thefts during the past several years (see below). Since auto thefts have higher severity than other comprehensive claims, the reduction in severity since 1985 is consistent with a reduction in the proportion of comprehensive claims represented by theft claims.

Table 4

Five-Year Relative Frequency, Severity, and Average Cost of Paid Claims: Detroit vs. Statewide
(mid-1983 through mid-1988)

 

Coverage

Frequency

Severity

Average Cost per Vehicle

 

Bodily Injury Liability

138%

103%

142%

Personal Injury Protection

144%

113%

163%

Broadened Collision

128%

107%

138%

Comprehensive

150%

165%

248%


Note: 5-year values for Detroit divided by 5-year values statewide, in percent.

Source: ISO and NAII, Factors Affecting Urban Auto Insurance Costs

In general, auto insurance claim costs and thus premiums are significantly higher in large urban areas than in smaller cities and rural areas. Table 4 shows ratios (in percent) of paid claim frequency, severity, and average cost per vehicle in Detroit to statewide results for the period 1983-88. As can be seen, claim frequency, severity, and average cost per vehicle are uniformly higher in Detroit than for the entire state. [17] The ratios of Detroit severity to statewide severity are much smaller than those for frequency, except for comprehensive coverage, in which case the much higher severity in Detroit is most likely attributable to the higher vehicle theft rate. As a result of much greater frequency and severity, the average cost per vehicle of comprehensive claims in Detroit is two and a half times the statewide average.

The results shown in Table 4 were obtained from a study of claim costs in 18 large cities that was conducted by the Insurance Services Office (ISO) and the National Association of Independent Insurers (NAII). Of these 18 cities, Detroit's ratio for the average cost per vehicle of comprehensive claims was the fifth largest during 1983-88 (behind New York, Newark, Boston, and Philadelphia). [18] The ratio of thefts per 100,000 population in Detroit to that for the entire state was the third largest of the 18 cities studied by the ISO and NAII (behind Newark and Boston). In 1987, the motor vehicle theft rate in Detroit was 2,732 per 100,000 population compared to a statewide rate of 752 per 100,000. The 1987 theft rate in Detroit was much lower than the 1985 rate of 3,452 per 100,000 population, and the ratio of the theft rate in Detroit to the statewide theft rate declined from 417 percent in 1985 to 363 percent in 1987. [19] Since the ISO/NAII analysis was based on aggregate data for i983-88, the ratios for comprehensive coverage shown in Table 4 are likely to overstate the difference that existed at the end of this period.

In addition to the higher premiums in Detroit for comprehensive and other forms of coverage due to higher claim frequency and severity, affordability problems in Detroit are aggravated by the low per capita income of many residents. [20] As a result, the affordability problem in Detroit is acute for many motorists, regardless of the fact that the statewide average premium in Michigan and average premium growth are lower than countrywide.