The Essential Insurance Act limited insurers to a maximum of twenty different territorial rates. It also required that the base rate in any territory be no less than 90 percent of the base rate in an immediately adjacent territory and that the smallest territorial base rate be no less than 45 percent of the highest territorial base rate. [46] The objective of these restrictions was to reduce differences in rates across territories. The restrictions were based on the assumption that an insurer would write roughly the same proportion of drivers in different territories so that any subsidy to high cost territories would be spread broadly by insurers among low cost areas. However, as claim costs increased in Detroit, serious market dislocations occurred. [47] Market concentration increased in Detroit, and insurers with large -volume in Detroit found it difficult to compete outstate with insurers that had a minimal presence in Detroit without experiencing large operating losses in Detroit. Absent change in the law, it is likely that the market would have become increasingly bifurcated over time between Detroit writers and outstate writers. [48]

The 1986 Reform Act. The legislature adopted a bill in 1985 that would have substantially reduced restrictions on territorial rating. Then Governor Blanchard vetoed this bill, which had been opposed by the Insurance Bureau for possibly allowing large rate increases in Detroit. A modified bill was enacted that took effect in early 1986. This law suspended the 45 and 90 percent constraints on territorial rating, allowed insurers to raise rates in Detroit to the average level of the top five insurers, and restricted annual rate increases in Detroit to four percent plus the percentage change in the Consumer Price Index. The law also allowed insurers to redefine territories in Detroit. A maximum of six territories in Detroit could be used, and the weighted-average rate of any new territories could not exceed the weighted-average of previous territories. The law also allowed insurers beginning in February 1988 to exercise a one-time election to limit annual rate increases in Detroit to the percentage increase outside of Detroit, as opposed to remaining subject to the percent change in the CPI plus 4 percent limit. According to a sunset provision, the Essential Insurance Act's restrictions on territorial rating will again apply in July, 1991 absent legislative action.

The 1986 Reform Act also contained a number of provisions designed to reduce auto thefts. An Automobile Theft Prevention Authority was established. Insurers were required to establish premium discount plans for the installation of auto theft prevention devices. Provisions were also included that required insurers to verify the existence of an auto under certain conditions, to require that thefts be reported to police in order for claims to be paid, and to allow insurers to impose a $500 deductible or a 10 percent co-payment if the auto was stolen while unattended with the keys in the vehicle. [49] These changes are likely to have reduced auto thefts. [50]

Territorial rating remains subject to considerable controversy in Michigan. The focus of the debate continues to be high rates in Detroit. The NAACP has threatened to sue insurers for unfair discrimination. Territorial boundaries are again being criticized as arbitrary and unfair. In addition, it is argued that high rates in Detroit primarily are caused by inadequate competition. A bill has been introduced in the legislature that would eliminate territorial rating and, if necessary, force insurers to write coverage in Detroit. [51]

The Insurance Bureau's 1989 Report. The Michigan Insurance Bureau recently released a report on the effects of the 1986 Reform Act. [52] The report argues that insurers with large market shares in Detroit did not become more competitive outside of Detroit after the law took effect. While it presents evidence that rates for a number of insurers increased more rapidly in the Detroit area than the remainder of the state since 1986, it does not consider the possibility that this result would be expected if the previous territorial restrictions had produced inadequate rates in Detroit (or that it possibly could be due to more rapid growth in expected claim costs for certain coverages in Detroit). It presents evidence that insurers increased their number of territorial base rates and that rate differences between territories often exceeded those that would have been permitted by the previous 45 and 90 percent rules. The report illustrates substantial diversity in territorial boundaries and rate factors across insurers, but it does not recognize that such diversity is consistent with competition and that it will tend to smooth premium differences between adjacent regions. Instead, the report argues that territorial rating is largely arbitrary and subjective.

The report argues that the Detroit market is not competitive because it is highly concentrated, because a number of geographical areas (as defined by U.S. postal zip codes) have very few insurance agents, and because 16 percent of Detroit exposures (most of which were eligible for coverage in the voluntary market) were insured in the MAIPF (also see note 54 infra). The discussion of market concentration does not consider that the large number of auto insurers in Michigan could readily expand their writings in Detroit if rates were excessive, [53] The report notes that Insurance Bureau data providing addresses of agents did not indicate whether they were for the agent's business or residence. It nonetheless interprets the addresses as though they all indicate place of business. The analysis will be distorted to the extent that any agents who gave residential addresses do not live in the same area that their businesses are located.

The report argues that the large market share of the MAIPF in Detroit does not reflect MAIPF rates that are competitive with the voluntary market. However, the data shown for a young male driver in the Detroit area indicate that MAIPF rates were competitive. [54] The fact that MAIPF rates may not be among the lowest for certain drivers in or outside of Detroit is not relevant to inferences about. whether drivers insured in the MAIPF received rates that were competitive in the voluntary market. The appropriate question to ask is how MAIPF rates compare to those in the voluntary market for Detroit drivers Actually insured in the MAIPF. The report did not pose or answer this question.

The 1989 report by the Insurance Bureau almost completely ignores that loss costs are higher in the Detroit area than in the remainder of the state. Exhibit 18 (p. 102) illustrates higher losses in Detroit, but the report argues that drivers in the Detroit area pay more than their fair share for coverage because the loss ratio (ratio of incurred losses to earned premiums) for all coverages in the Detroit area in 1987 was less than the statewide loss ratio (58.6 percent versus 64.1 percent). This comparison does not consider that the loss ratio that would allow insurers to break even from writing coverage will depend on numerous factors that could vary between Detroit and the rest of the state, such as differences in underwriting expenses associated with different marketing systems and differences in the mix of business between liability, personal injury protection, collision, and comprehensive coverage. [55] Even if this comparison were appropriate, it would not support rate reductions for the two regions in Detroit (inner and middle metro) with much higher premiums per vehicle in 1987 than the remaining regions shown for the Detroit area. These two regions had loss ratios that were approximately equal to the statewide loss ratio (see Exhibit 18, p. 102).

In order to address the perceived deficiencies in territorial rating, the report proposes that rating territories be (p. 112) "no smaller than a county or a Metropolitan Statistical Area, whichever is larger". In an attempt to prevent market dislocations that occurred under the prior restrictions on territorial rating, it also proposes an assigned risk procedure in which persons in the MAIPF that satisfied the Essential Insurance Act's eligibility rules would be assigned to (p. 113) "voluntary market insurers in inverse proportion to their presence in urban markets". Each insurer also would be required to have a statewide marketing plan and to have a toll free number to provide persons with rating information, to take applications, and to refer persons to agents. [56]

The Insurance Bureau's proposals would create significant cross-subsidies and is thus subject to the drawbacks that were discussed earlier. [57] As was the case in 1977, the Insurance Bureau largely attributes affordability problems to insurer underwriting and rate classification. The analysis and conclusions are inconsistent with the fact that rates are high in Detroit because claim costs are high. If subsidies to certain areas of Detroit are in the public interest, they should be able to withstand public scrutiny. The legislature should only undertake such action as a last resort after a full debate of the issues. If the motivation for subsidies is to reduce affordability problems, they should be targeted to intended recipients as accurately as possible, and they should be designed to minimize their impact on productive behavior, such as labor force participation. Premium increases, taxes, or fees necessary to finance subsidies should be clearly identified to the public. [58]