When the Michigan no-fault law was enacted in 1973, it was
recognized that certain people injured in automobile accidents would not be
covered by policies that provided the medical and wage loss coverage that
vehicle owners were required to purchase. If those injured people were not in
violation of the law, they would be compensated for economic losses. An example
of people in this group would include a pedestrian who did not own a vehicle,
who resided in a household with no insured vehicles owned by others, and who
was injured by an uninsured or a hit-and-run driver.
The mechanism for coverage for such people is the Michigan
Assigned Claims Facility (ACF), located within the Michigan Department of
State. The Facility assigns the claims to "servicing insurers" that pay the
medical costs and lost wages. There are currently 10 such insurers, who are reimbursed
for their loss payments, loss adjustment expenses (LAE), and interest from a
fund raised through assessments on the entire auto insurance industry and
legally self-insured businesses. (A self-insured business is a company that
acts as its own insurer by maintaining funds and managing its own claims.)
These assessments are prorated based on each insurer's share of the total state
premiums for no-fault and auto liability insurance and self-insured businesses'
total share of self-insured vehicles. The costs of these assessments are, of
course, passed on to the insurance customers in the form of higher premiums.
In the early years, these annual assessments were in the low
tens of millions of dollars, but they have increased dramatically in recent
years. In 1997 the assessment was for $37.7 million; by 2008 it had grown to
$145.6 million — a 286 percent increase. During the same period, the assessment
per Michigan vehicle grew from $6.04 to $20.66 — an increase of 242 percent, indicating
that any growth in the total vehicles in the state was at most a minor factor
in the increase in total losses, LAE, and interest reimbursed by the ACF.
During the same period, the total annual paid PIP losses for
all Michigan vehicles grew from $788.1 million to $1.7 billion, an increase of
119 percent. Since the increase in ACF assessments is 2.4 times that in PIP
claims payments, it is clear that something is going on with assigned claim
payments. If this difference had been identified earlier and if steps had been
taken to hold the increase in ACF assessments to the same rate as the growth in
overall PIP losses, the 2008 assessment would have been $82.6 million — $63
million, or approximately $8.94 per insured Michigan vehicle, less than it
turned out to be.
Unfortunately, the Facility, with only eight employees, one
claims examiner, and over 3,000 files to monitor, is not equipped to determine
what that "something" is. Health privacy concerns preclude insurance industry
experts from viewing the files. Individual servicing insurers could analyze
their own files, but none of the 10 has a sufficient share of total claims for
its own analysis to be applicable to all the servicing insurers. Further, since
the increase in payments might be, at least in part, the result of inadequate
servicing carrier performance, an investigation by those insurers might be
criticized as lacking objectivity.
However, there is a readily available source of expertise
that could be tapped. The Michigan Auto Insurance Placement Facility (MAIPF)
was established to provide auto insurance to applicants unable to obtain it in
the regular market, usually because they are perceived as unacceptably high
risks and are more like to have claims than the average driver. Managed by a board
consisting of seven auto insurer representatives, two agent representatives,
and two public representatives, it operates under the scrutiny of the insurance
commissioner, a representative of whom attends all meetings. The commissioner
approves the MAIPF plan of operation, its procedures, and its rates. The board
has committees of company employees with expertise in claims, accounting,
actuarial science, and underwriting.
Legislation has been proposed to transfer the administration
of the ACF to the MAIPF. The proposal is supported by the Secretary of State
and has been reviewed by the Office of Financial and Insurance Regulation,
which raised no objection. Once enacted, the MAIPF can begin a detailed study
of the claims experience of the ACF, identify the problem causing the unnatural
increase in losses, and implement a solution. Reductions in assessments and
insurance premiums should follow.