Who's at Fault for the High Cost of No Fault?

The high cost of Michigan's no-fault auto insurance has become a perennial legislative issue. Allegations of price gouging, usually unsubstantiated, make headlines while a far more likely culprit goes relatively unnoticed.

Even when one disregards the high level of taxation to which the insurance industry is subjected, the additional cost built into an auto insurance policy in Michigan as a result of government's many other intrusions in the market is staggering. For instance, laws force insurance companies to sell drivers more insurance than even the companies believe they need. Companies are prohibited by other laws from assigning risk based entirely on where losses occur, forcing those who live in low-risk areas to subsidize those who live in high-risk areas. These edicts accomplish political goals that could have been paid for out of general revenues, but the Legislature has found it easier to hide them in the cost of insurance.

The Michigan Catastrophic Claims Association (MCCA) was created to pay for losses over $250,000 under Michigan's unlimited medical coverage provision (commonly referred to as PIP coverage). Michigan drivers must purchase PIP as part of every automobile insurance policy. PIP indemnifies insureds for lost wages and medical expenses arising from an auto accident. This coverage is a substitute for the indemnification typically sought by injured parties through the tort system. An unusual feature of the PIP coverage mandated in Michigan is that insureds have no choice in the amount that is purchased. Everyone must purchase coverage with no upper limit.

A troubling trend for Michigan automobile insurance costs is that the total value of PIP catastrophic claims, those exceeding $250,000, has risen sharply. Data from the MCCA indicate that the cost of paid claims has risen by over 1,500% between 1984 and 1994, while the number of claims reported rose by about 200%. The effect on the price of insurance in the state as a result of this deterioration in claims experience has been profound. The cost of PIP coverage was $3 in 1978. By 1988 it was up to $23.60. The cost in 1995 is $96.95.

As the data show, PIP coverage of catastrophic losses has grown to become one of the major components of the automobile insurance policy in Michigan. No other no-fault state in the country mandates unlimited PIP coverage. Data published by the American Insurance Association show that in 1993 the state with the next highest mandate was New Jersey, which required a limit of $250,000. Colorado was next at $200,000. All other states that mandate PIP coverage require a limit of $50,000 or less. Moreover, health insurance coverage purchased by individuals typically has a limit of one million dollars or less.

Supporters of unlimited medical coverage often ignore strong counter-arguments. First, the money that Michigan drivers spend on PIP may be better spent in other ways. Money that is spent on PIP cannot be spent on upgrading one's health insurance, which in addition to paying medical costs related to auto injuries also pays the costs related to other injuries and illnesses. Second, in part because the benefit is unlimited, waste and abuse are encouraged. The generous nature of unlimited benefits, which pay for expenses such as vehicle and home modification, nursing aides, and rehabilitation services, invites indulgence on the part of both the injured and health care providers-to the detriment of other insureds. And finally, the mandate deprives citizens of the right to choose the amount of coverage they feel is appropriate.

Michigan drivers are also forced to subsidize the cost of insurance sold through the Michigan Automobile Insurance Placement Facility (MAIPF). MAIPF provides automobile insurance to drivers unable to obtain insurance in the private market because they are high risks. MAIPF writes this insurance at a loss, which is then passed on to private insurance companies, who then charge it to customers as a cost of doing business.

AIPSO, the leading organization collecting information on the automobile high-risk plans in each of the states, reports that in 1992 MAIPF generated a loss equivalent to $2.64 per car insured in the private market. The loss exceeded $6.00 in 1993. MAIPF losses arise largely from PIP coverage. Automobile insurance reform that places a limit on PIP coverage would reduce losses created by MAIPF and ultimately lower the cost of automobile insurance for all drivers.

The MCCA and MAIPF requirements by the state are just two of the areas where the state has seen fit to hide costly social agendas in auto insurance policy. Reforms which allow Michigan drivers to select their own levels of coverage and not be required to subsidize other drivers are long overdue.

The hidden costs of government mandates reveal themselves in the increasing premiums we all pay for auto insurance. If consumers want lower rates, they should urge their representatives to stop second-guessing the market.