Michigan's Auto Insurance Industry

In a 2010 RAND Corporation study, economist Paul Heaton found that, "[I]n 2007, average total auto insurance premiums in Michigan were 17 percent higher than those in the rest of the country ($928 versus $795)."[3] (This is the latest available data.) Michigan has consistently had some of the country's highest insurance rates, ranking among the top 15 states every year since 2003. Heaton cites an Insurance Research Council report that estimated that 17 percent of Michigan drivers failed to purchase mandatory auto insurance in 2007 — the ninth highest total in the United States.[4]

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Michigan's auto insurance market has several important characteristics, but two stand out. First, Michigan is one of 12 no-fault insurance states.[5] Under no-fault insurance schemes, drivers are limited in their ability to sue for recovery of non-economic losses, such as damages for pain and suffering. In return for this limitation, the driver's insurance company pays for economic losses, such as medical expenses and lost wages, regardless of who was at fault. The expectation was that by reducing the costly process of litigation, premiums would be lower than under the tort system, victims would be compensated more quickly, and fraud would be reduced.

Massachusetts enacted the nation's first no-fault insurance system in 1971, which met with considerable popularity in the beginning. Several states adopted no-fault systems in the 1970s, but then the bloom fell off the rose. In another 2010 RAND study examining the no-fault system, Heaton and co-authors James Anderson and Stephen Carroll found that no-fault states have higher premiums than tort law states, generally due to higher medical costs in no-fault states.[6]

A second major characteristic of Michigan's auto insurance industry is it is the only state that requires consumers to purchase unlimited personal injury protection (PIP), which provides extremely generous reimbursement benefits for medical costs and lost wages.

Anderson, Heaton, and Carroll ask why auto insurance costs more in Michigan. They found that property damage losses in Michigan are equal to, or lower than, those in other states, and that auto collisions in Michigan are less severe. They also found that consumer expenditures for all types of auto repairs are about what they are in other states. So there had to be another reason.

The authors developed a model that used 72 variables to capture claimant demographics, accident circumstances, and reported injuries, and found that it costs 57 percent more to settle a Michigan claim for personal injury than the same injury would cost in another state.[7] They also cite Fast Track data that show Michigan injury losses per insured vehicle were 40 percent higher than in the U.S. as a whole.

So why are injury costs so high in Michigan? The share of claimants who seek medical treatment after an accident was not appreciably higher in Michigan, but the mix of services was more costly. Michiganders are much more likely to use expensive treatments, such as hospital and emergency room services, X-rays, and CT scans, and to recover wage-loss payments. Anderson, Heaton, and Carroll conclude that this extensive use of medical services is a primary cause of Michigan's high premiums. A major reason for this high use of medical services is the unlimited PIP medical payments and generous wage-loss payments mandated under Michigan law.