Magnitude and Growth in Premiums and Losses

December 1, 1989 | Facebook Twitter Email Print Font size:

Note:  Values are percentage changes between 4-quarter averages ending June 1989 and June 1985.

Source: Fast Track Monitoring System.

Table 3 indicates that auto liability paid claim cost frequency, severity, and average cost per vehicle in Michigan grew at a slower rate between 1985 and 1989 than in the rest of the country. As is discussed in Section IV, however, bodily injury claim frequency has begun to increase since 1986 following a period of declining frequency in 1985 and 1986. The growth of personal injury protection claim severity in Michigan is much greater than the growth in countrywide personal injury protection severity. As a result, the growth in the average cost of personal injury protection claims was about the same as the countrywide growth rate despite the fact that personal injury protection claim frequency declined in Michigan and grew by 10 percent countrywide since 1985. Again, the larger value for severity in Michigan reflects its greater level of personal injury protection benefits.

The average cost of comprehensive claims in Michigan has decreased since 1985 despite a small increase in frequency. The major cause of this decline is likely to have been a reduction in auto thefts during the past several years (see below). Since auto thefts have higher severity than other comprehensive claims, the reduction in severity since 1985 is consistent with a reduction in the proportion of comprehensive claims represented by theft claims.

Table 4

Five-Year Relative Frequency, Severity, and Average Cost of Paid Claims: Detroit vs. Statewide
(mid-1983 through mid-1988)





Average Cost per Vehicle


Bodily Injury Liability




Personal Injury Protection




Broadened Collision








Note: 5-year values for Detroit divided by 5-year values statewide, in percent.

Source: ISO and NAII, Factors Affecting Urban Auto Insurance Costs

In general, auto insurance claim costs and thus premiums are significantly higher in large urban areas than in smaller cities and rural areas. Table 4 shows ratios (in percent) of paid claim frequency, severity, and average cost per vehicle in Detroit to statewide results for the period 1983-88. As can be seen, claim frequency, severity, and average cost per vehicle are uniformly higher in Detroit than for the entire state. [17] The ratios of Detroit severity to statewide severity are much smaller than those for frequency, except for comprehensive coverage, in which case the much higher severity in Detroit is most likely attributable to the higher vehicle theft rate. As a result of much greater frequency and severity, the average cost per vehicle of comprehensive claims in Detroit is two and a half times the statewide average.

The results shown in Table 4 were obtained from a study of claim costs in 18 large cities that was conducted by the Insurance Services Office (ISO) and the National Association of Independent Insurers (NAII). Of these 18 cities, Detroit's ratio for the average cost per vehicle of comprehensive claims was the fifth largest during 1983-88 (behind New York, Newark, Boston, and Philadelphia). [18] The ratio of thefts per 100,000 population in Detroit to that for the entire state was the third largest of the 18 cities studied by the ISO and NAII (behind Newark and Boston). In 1987, the motor vehicle theft rate in Detroit was 2,732 per 100,000 population compared to a statewide rate of 752 per 100,000. The 1987 theft rate in Detroit was much lower than the 1985 rate of 3,452 per 100,000 population, and the ratio of the theft rate in Detroit to the statewide theft rate declined from 417 percent in 1985 to 363 percent in 1987. [19] Since the ISO/NAII analysis was based on aggregate data for i983-88, the ratios for comprehensive coverage shown in Table 4 are likely to overstate the difference that existed at the end of this period.

In addition to the higher premiums in Detroit for comprehensive and other forms of coverage due to higher claim frequency and severity, affordability problems in Detroit are aggravated by the low per capita income of many residents. [20] As a result, the affordability problem in Detroit is acute for many motorists, regardless of the fact that the statewide average premium in Michigan and average premium growth are lower than countrywide.

SKU: S1989-05