Michigan Needs Auto Insurance Reform

There aren’t many facts that are universally accepted in Lansing. But a leading candidate for such a distinction might be the fact that auto insurance in Michigan is just too expensive. A growing number of policymakers and voters are waking up to the idea that maybe there’s something wrong with this state’s auto insurance laws. To help matters out, the Mackinac Center recently published a new report that describes in detail what’s wrong with the way Michigan regulates auto insurance, and it provides recommendations to reduce costs for all Michigan drivers.

As is true of many problems besetting complex systems, Michigan’s auto insurance woes don’t have a simple root cause. There are lots of moving parts that all interact to influence the cost and effectiveness of insurance. The aim of this new report is, as simply as possible, to identify and explain what causes the problems and suggest how to fix them.

Broadly speaking, there are two approaches states can take to auto insurance. They can rely on a “tort system,” which lets accident victims sue at-fault drivers for the injuries they sustained. Alternatively, states can use a “no-fault system,” which mandates all drivers purchase a certain level of insurance so that they are covered if they are involved in an accident, no matter who was at fault. Michigan opted for the no-fault system in the early ‘70s, because, it was thought, the tort system was too expensive and slow. No-fault promised to deliver speedier benefits at a reduced cost.

The Center’s new study shows that after almost five decades, the no-fault experiment has failed. Michigan’s auto insurance premiums are among the highest in the nation. An exact number is hard to pin down, but several different attempts by different organizations all conclude that the average rate in Michigan is at or near the top of the rankings. A second shortcoming is that Michigan’s system is not more efficient; drivers file lawsuits here as commonly as they do in states without a no-fault system.

The report identifies reasons for these problems. Most notable is the state’s mandate that all drivers purchase unlimited “personal injury protection.” This feature of insurance policies means that accident victims are guaranteed an unlimited amount of insurance benefits for the rest of their life. No other state in the nation does this, and it is a key driver of Michigan’s costly premiums.

Another reason is the lack of “fee schedules” for medical services paid for by auto insurers. Other health insurance systems — private insurers, Medicaid and Medicare, most notably – establish specific prices they’ll use to reimburse medical providers for certain services. No such fee schedules exist for auto insurers. As a result, medical providers can essentially charge auto insurers any price they please.

Another problem identified in this new report is the renewed use of tort. Through a series of court decisions, Michigan has effectively reopened the tort system for auto accident victims. So drivers pay for no-fault benefits while also paying for access to courts. This combination contributes to the costliness of insurance premiums.

The report recommends reforms to directly confront what has broken Michigan’s approach to auto insurance. Namely, the state should stop requiring everyone to purchase unlimited insurance benefits, create a fee schedule for auto insurance reimbursements and restrict access to the tort system for damages related to auto accidents.

There’s genuine interest in the Legislature in reducing auto insurance premiums. But many special interests benefit from the current system — at the expense of the rest of us, of course. By clearly articulating the problems and solutions, this report will, we hope, help convince more lawmakers that the policies governing auto insurance need serious reform.