Michigan's auto insurance no-fault law is in jeopardy. The threat comes not from "excessive" rates or "exorbitant" profits which so-called consumer advocates and trail lawyers falsely allege characterize the system. Michigan actually delivers higher benefits for a lower cost, and controls rate increases better, than most other states.
Rather, our model system is threatened by a decision made by state government in 1985, when the law governing the use of territories in auto insurance rating was changed. Until then, there was an arbitrary connection between rates in Detroit and those in the suburbs and the remainder of the state. When rates in Detroit went up, the law required rates in the suburbs and in many rural areas to go up.
Following the reforms, each area was permitted to generate its own rate level, the only exception being Detroit, whose annual increases were capped at the increase in the Consumer Price Index plus four percentage points. However, as a condition of signing the reform bill (he had vetoed and earlier one), Governor Blanchard insisted that these reforms were to "sunset," that is, expire, on June 30, 1991.
Presumably, the reforms would then be evaluated and a decision made whether to return to the old system, to continue the reforms, or to substitute a new scheme. Unfortunately, these expectations have not been met. In early 1991, recognizing the lack of time to address the issue by June 30, the legislature extended the sunset until December 31, 1991.
In December, additional considerations having nothing to do with territorial rating were inserted into the discussion: arbitrary, mandated rate reductions; rate reductions tied to cost reforms; increased consumer choice in the amount and type of coverage they are required to purchase. These efforts all took place against a background struggle over territorial rating: should there be an increase or a decrease in the amount of additional premiums paid by non-urban consumers?
The result was legislative gridlock; the sunset was extended until March 31, 1992, and rates were frozen at then-current levels.
The territorial issue created great anxieties in the minds of most legislators, because they could not know the effect of a sunset upon their constituents. Would rates increase, decrease or stay the same? The answer depends on the location of the legislator's district and also varies according to the company with whom a particular customer is insured. Whether there would be an outcry in any legislator's district depends in part upon what proportion of his constituents are insured with each company.
This anxiety continues, and with less than two weeks until the March 31, sunset, the same legislative gridlock continues. Numerous proposals have been put forth. Some would substitute bureaucratic regulation of rates for the discipline of the competitive marketplace. Many would actually increase the costs insurance pays, but would attempt to disguise such increases by forcing insurance companies to do business at a loss.
Responsible reforms which would tie premium reductions to cost reductions are also pending. However, it appears that another impasse is likely, and there is talk of another sunset extension, so the no-fault law is still threatened by the possibility of thoughtless, last-minute changes.
This would be unfortunate, because data prepared by the National Association of Insurance Commissioners clearly show that Michigan's average auto insurance premiums have consistently been below the national average ($20 per car less the national average, and ranking 19th among all states and the District of Columbia, in 1990). Further, the rate of increase in premiums has been dramatically lower than nationally (7.9% from 1987-1990, compared to a national average of 17.9%, ranking 49th among all states and the District of Columbia).
Continued extensions of the sunset would be foolhardy, since they threaten to destroy what is an effective system (although it could, of course, be improved) by periodically forcing the legislature to put itself through a political meat grinder. Complete elimination of the sunset (that is, continuation of the present system of territorial rating) is the proper approach. It will not make automobile insurance issues go away. The legislature still needs to address the high cost of mandatory unlimited medical coverage and the possibility of allowing consumers to choose lower limits. It needs to address the increasing cost of tort liability; current law allows persons with minor injuries and persons who were the principal cause of an accident to recover "pain and suffering."
These issues can and will be addressed, but in an effective way only if free from artificial deadlines. The sunset, already extended twice without results, has not worked to force a reconsideration of our auto insurance system. Those interest groups and legislators who thought they could use the sunset to leverage changes in other parts of the law have been unable to do so.
A repeal of the sunset would eliminate the danger, and from a political
point of view can be more easily explained than an extension. In either case, legislators must explain to their constituents why no reforms have taken place, but if the sunset is repealed, they have the philosophical high ground: Repeal saves the best no-fault system in the country from what will, sooner or later, be hasty, ill-advised and potentially disastrous changes.