Michigan's No Fault auto insurance law was declared unconstitutional by the State Supreme Court, in the famous 1978 case, Shavers v. Attorney General. Writing for the majority of the Justices, Chief Justice G. Mennen Williams explained that the state cannot make the purchase of car insurance "compulsory" without a guarantee that rates will be affordable.  Otherwise, the auto No Fault law violates the Due Process clauses under the 14th Amendment of the Michigan and U.S. Constitutions.  Today, No Fault's affordability requirement, a central pillar of the auto No Fault law, when it went into effect on October 1,1973, is substantially out of compliance with the Shavers ruling.

G. Mennen Williams Chief Justice Michigan Supreme Court

The state's expert witness at the Auto Insurance Affordability Hearings conducted in November, 2008, testified that auto insurance in Michigan has become unaffordable for "[a] large and growing segment of [Michigan's] population." [Source: Bay City Auto Insurance Affordability Hearing, Testimony of Birney Birnbaum, Transcript, p. 30].   After the Affordability Hearing conducted in Grand Rapids, even the Insurance Institute of Michigan's Executive Director stated that auto insurance rates across Michigan are "[i]ncreasingly becoming unaffordable." [Source: Grand Rapids Press, November 11, 2008]. Therefore, our state requires its 7.04 million registered drivers, [Source: Michigan Department of Transportation ("MDOT")], to participate in an insurance system which is at war with the State Constitution.

This Annual Report, which is mandated by Executive Order 2008-2, the most comprehensive examination of Michigan's No Fault law ever conducted, asks and answers some tough questions, beginning with the following:

The No Fault system, in Michigan, needs a major overhaul.  This can be achieved by offering consumers more choices of coverage, while preserving No Fault's essential benefits, including full health care coverage, and strengthening industry oversight and accountability.

In reaching these conclusions, this Office has:

• Researched the origins of No Fault, and reviewed Michigan's insurance laws, to assess their effect  on consumers' pocketbooks
• Examined why Michigan's rates are among the highest in the United States
• Examined why insurance company profits are at record levels
• Prepared a "De-regulation Time-Line," which shows, year-by-year, how the insurance industry's rating practices have been steadily de-regulated
• Compiled a "50-State Best Practices Review," to determine what Michigan can learn from reforms that are working in other states, such as California, where successful, pro-consumer ballot initiatives and legislation, have led to markedly lower rates, consumer empowerment, and a healthy industry
• Conducted 4 state-wide "Auto Insurance Affordability Hearings," in Grand Rapids, Bay City, Detroit, and Marquette, to receive input from the public, consumer and industry experts, and other stakeholders
• Created a website for consumer education and engagement:  www.Michigan.gov/LowerRatesNow
• Filed a formal Complaint against Allstate, with the Michigan Office of Financial and Insurance Regulation ("OFIR"), for irregularities in its rating practices
  
• Met with key stakeholders from the insurance industry, the State Legislature, state regulators, national experts, and consumers across the state, for their input and advice
  

ABC's of No Fault

No Fault insurance means that it does not matter who is at fault in an accident.  Instead of suing "the other guy," a claim is filed with one's own insurer for damage to property or person.  No Fault has 3 main parts:

Even though they are not required to do so, Michigan drivers may elect to purchase additional coverage, such as collision or comprehensive insurance.

Collision Insurance:  this covers the cost of repairing or replacing the driver's car if it is damaged in an accident.

Comprehensive Insurance: this covers the cost of accidental damage to the car, other than in a collision, caused by, for example, hitting a deer, vandalism, fire, or theft.

The elective collision and comprehensive insurance coverages, together, comprise approximately 65 percent of the overall premium cost, by far the largest portion of the premium, while No Fault's mandatory health care coverage adds up to a comparatively small percentage of the overall premium cost, approximately 15 percent.

No Fault is not a free market system.  It is a captive system where consumers are not free to walk away from buying insurance.    All drivers in the State of Michigan must purchase the minimum No Fault coverage or face monetary civil infractions and criminal penalties of up to one year in jail. [Source: MCL 257.328(5)].  Prior to the adoption of the No Fault system, consumers had the right to opt out of auto insurance coverage, and still drive their vehicle, by paying $45 into the state's Uninsured Motorists Fund.

When Michigan adopted auto No Fault, it was already the law in six other states: Massachusetts (the nation's first No Fault state), Florida, Delaware, South Dakota, Oregon, and Illinois.   Sixteen states (including Michigan) adopted No Fault systems in the 1970's.  Since then, four of the sixteen: Colorado, Delaware, Oregon and Nevada, have repealed their No Fault laws, having concluded that their rates were just too expensive. The State of Minnesota's Legislature is now seriously debating legislation to repeal its auto No Fault law because of affordability concerns.

Currently, twelve states and one U.S. Territory have No Fault insurance:

No Fault Promises

The No Fault system in Michigan was originally sold to the public on the basis of three (3) main promises:

"[B]esides guaranteeing full out of
pocket reimbursement to all accident
victims, no fault insurance would result
in premium costs at least 15 percent
cheaper than drivers now pay."
-William S. Gibson
American Insurance Association
[Source: Detroit News, April 9, 1972]

In exchange for the promises that were made to the public, under No Fault:

• Consumers gave up the right to sue, except in the event of death or very serious injury, and
  
• Consumers were REQUIRED to purchase insurance.
  

When the No Fault law was debated and passed, Michiganians were led to believe that this was a fair deal.  But there was a twist.  Rates did not go down.  They went up.

No Fault Reality: Michigan's Rates are Highest in U.S.

In fact, rates went up from the very start.  Insurance companies argued that they had miscalculated costs, while Michigan policyholders were trapped into paying higher rates with no way out.  Since then, auto insurance premiums have increased steadily to the point where today, Michiganians pay some of the highest rates in America, at a time when they can least afford it. Michigan's state-wide annual average premium of $1,067 is just below New Jersey's $1,100 average annual statewide rate, the nation's most expensive. Michigan's $436 annual average collision premium (which is part of the overall premium) is the highest in the nation.  And the state's average urban premium of $5,072 is, by far, the country's priciest. [Sources: NAIC; Runzheimer International, 2006].  Michiganians pay the highest rates when economic factors such as Average Annual Median Household Income, Cost of Living, and Unemployment Rates, are factored in.

Auto insurance premiums in Michigan have increased by 69% since 1989, the fastest rate of increase in the United States.

Michigan Insurance Premiums up 69%


[Source: NAIC]

Michigan has the most expensive average Collision and Urban rates in America Collision Premiums

 
[Source: NAIC]

Urban Premiums
 
[Source: Runzheimer International, 2006 Report; Insure.com Nov 29, 2006]

The following is a list of the most recent rates filed with the state, by Michigan's leading auto insurers.  Combined, these companies represent well over 50 percent of the state's total auto insurance market. With one exception, AAA, these insurance companies have continued their long-standing pattern and practice of price hikes.

[Source: Office of Financial and Insurance Regulation ("OFIR"), State of Michigan; reflects percentage increase /decrease in rates and the date of the rate filing with OFIR].

Family budgets are tight and finite.  Accordingly, every dollar spent on "mandatory", unaffordable insurance, is a direct tax of a dollar on "discretionary" essentials like heat, rent, gas, groceries and prescription drugs.

    1. Michigan Car Crashes Down Dramatically

Between 1996 and 2006, auto accidents in Michigan declined by 54 percent, a total of 9,000 fewer serious crashes.  Transportation experts, and law enforcement officials, attribute the reduction in crashes to, among other things, (1) higher levels of seat belt use by Michigan drivers, (2) the effectiveness of laws such as Michigan's Graduated Drivers License requirement, (3) strategic highway safety plans, (4) Driving Under the Influence legislation, (5) Work Zone legislation, and (6) Child Passenger Safety legislation.  [Source: MDOT, American Association of State Highway and Transportation Officials Report].

   2. Policyholder Claims Down Significantly

The New York Times recently investigated insurance company rating practices, in relation to the significant decline in the number of miles being driven by motorists, because of the economy and the shock of higher gas prices. [Source: "Consumers Driving Less, But Hit Up for Higher Premiums," The New York Times, August 23, 2008, p. B-1]. The New York Times investigation found that even though the number of miles driven is supposed to be one of the most important premium rating characteristics, rates continue to climb.

The New York Times:

While gas prices have declined over the past few months, they are on their way back up, and energy economists project that they will rise again in the near future. This is reflected in Michigan's declining gas tax receipts. [Source: State of Michigan, Department of the Treasury, 2008.]

Major studies by the Consumer Federation of America, and by national expert Jay Angoff, have indicated that beyond fewer miles driven, there has been an overall downward trend in the number of claims being filed by consumers.  Moreover, there has been a marked reduction in the amount of claim dollars being paid out by companies to policyholders. [Source: Consumer Federation of America Report, July 29, 2008; "An Analysis of the Profitability and Performance of the Michigan Auto Insurance Market," Jay Angoff, Roger Brown & Associates, May 30, 2007, "Angoff Report".]

Insurance Company Profits: Highest in American History

The down-ward trends in the auto insurance industry are reductions in claims filed by policyholders, and reductions in claims being paid out to policyholders by insurance companies.  The upward trend is company profits.  The past 10 years have been the most profitable period in U.S. history for property and casualty insurers.

Record Insurance Industry Profits
 
[Source: A.M. Best, ISO, Insurance Information Institute]

"For the three leading Michigan auto insurers-State Farm, Allstate, and AAA-both liability and physical damage coverage has been highly profitable over the last five years.  [A]AA, [m]ore than doubled its profits in five years, from $50.9 million in 2002 to $104.2 million in 2006."

Source: "An Analysis of the Profitability and Performance of the Michigan Auto Insurance Market," 2007 ("Angoff Report"). Angoff served as the state's expert
witness at the Auto Insurance Affordability Hearing in Detroit].

Laissez Faire: the De-regulation of Michigan's Auto Insurance Industry

A national culture of "let them do as they please" de-regulation, beginning in the 1980's, gave the banking, finance, and insurance industries a free hand to make and then break their own rules.  At the Auto Insurance Affordability hearing in Bay City, the state's expert testified that, "The current system of lax regulatory oversight and deregulation, does not provide meaningful or sufficient consumer protection.  In the same way that deregulation led to abusive mortgage lending and the financial crisis, the deregulation of auto insurance has led to market failures and a lack of affordability for a large number of consumers." [Source:  Bay City Auto Insurance Affordability Hearing, Transcript, p. 24].

Here in Michigan, the de-regulation of the auto insurance industry has been steady, and unrelenting, and decidedly not to the consumers' advantage.  Here are just a few examples of what it has come to:

• Companies can and do give themselves a pay raise (rate increase), as often as they like, without the prior approval of the Insurance Commissioner.
• The Insurance Commissioner cannot deny a company's rate increase unless the Commissioner can prove the un-provable: that insurance companies are not competing against one another.
• On paper, the Insurance Commissioner has the authority under the Insurance Code to order refunds for consumers who have been over-charged by companies.  In reality, companies use a loophole to file their rates under a different section of the Insurance Code where the Commissioner's refund authority does not apply.
  
  

Disguised as a "discount," credit scoring is the insurance companies' practice of using a policyholder's record of paying household bills, as a significant factor in the policyholder's premium cost.  This Office strongly opposes Credit Scoring because it has nothing whatever to do with how the policyholder operates his or her vehicle.  In Michigan, the practice was introduced in 1996 as an obscure loophole in the Insurance Code. Public Act 514 allows companies to use one's credit history, occupation, level of education, and a host of other non-driving-related factors, in determining rates. When a policyholder applies for coverage, the company obtains this information (e.g. bill paying record, job, education), and based upon that information assigns the applicant to one of several "discount risk pools."  The company places the applicant in a preferred risk pool, where the best rates are offered, if the applicant has a high credit score, lofty job status, and/or a higher level of education.

The industry's position is that Credit Scoring is an accurate barometer of who is more likely or less likely to file a claim at some point in the future.  However, national experts have testified that, in reality, Credit Scoring is, at its core, just a proxy for income. [Source: Testimony of Eric S. Poe, COO, CURE Auto Insurance, May 21, 2008, U.S. House of Representatives, Subcommittee on Oversight and Investigations, House Committee on Financial Services].

For example, under Credit Scoring, a factory worker in Kent County who did not complete high school, will pay a premium rate that is two or three times more than a physician in Oakland County, with the same driving record.

Credit Scoring is based on the following disturbing premise:  insurance companies believe that they have the right to use any policyholder attribute, in determining rates, as long as its actuaries can find a way to justify it statistically.

The insurance companies' premise begs some uncomfortable questions.  What if the insurance company's actuary produces statistics which show that green-eyed policyholders are less likely to file a claim than blue-eyed policyholders?  What if the actuary concludes that based on his statistics, Methodists should be in a preferred risk pool over Catholics?  Does the company have a free hand to make the decision of where to draw the line?  Do they acknowledge that there are any lines?  Where does it end?

Rates should be based on the eight straight-forward rating criteria set forth in the Insurance Code, which focus on one's driving record:

Average number of Miles Driven, weekly or annually

Vehicle Use (e.g. business, farm, pleasure)

Vehicle Type and Safety Features

Commuting Mileage (daily or weekly)

Number of Cars Insured (per household)

Amount of Insurance Purchased

[Source: MCL 500.2111].

Each Michigan auto insurer pays a surcharge, currently $104, per earned car year, to the Michigan Catastrophic Claims Association ("MCCA"), to cover the most serious types of injuries.  Insurers pass this $104 on to their policyholders (as part of the premium), and are fully reimbursed, by the MCCA, for all claims exceeding $440,000.

These health care benefits are literally a life line for injured drivers.  Out of a total state population of 10.12 million, today there are approximately one million (1,075,000) Michiganians who have no health care coverage.  Nationally, the uninsured figure is nearly 46 million. [Source: www.census.gov/prod/2008pubs/p60-235.pdf].  Health care expenses can add up in a hurry.  At the Auto Insurance Affordability hearing in Grand Rapids, testimony was presented by Dr. Robert Kreitsch, a nationally prominent physician who specializes in treating patients with catastrophic injuries.  He reported the following.

"Many of our survivors are three to six weeks in an ICU.
That can be a quarter of a million dollars right there.
And spinal cord injuries and brain injuries do not recover like broken
bones or punctured lungs or torn arteries.  The surgeons do tremendous
jobs these days. Many people survive that would not have survived
when I started my medical training. The trauma systems, the technology,
the expertise, tremendous teams. But after you get out of the ICU, that's
just the beginning."

[Source: Grand Rapids Auto Insurance Affordability Hearing, Transcript, p. 44-45].

The Harvard University Medical and Law Schools conducted a joint study of health care related bankruptcies.  It found that bills from un-covered health care expenses are the leading cause of family bankruptcies in the United States. The researchers found that over 75% of those forced into "medical bill bankruptcy" actually had insurance at the start of the illness.  Furthermore, the majority of the bankruptcies involved middle class households.  Of the filers, 56 percent owned a home.  The same percentage had attended college. The principal author of the study, Harvard Medical School Professor David Himmelstein, stated "Unless you're Bill Gates you're just one serious illness away from bankruptcy.  Most of the medically bankrupt were average Americans who happened to get sick."
[Source: "Illness and Injury as Contributors to Bankruptcy," Health Affairs Journal, February 2, 2005; http://www.consumeraffairs.com/news04/2005/bankruptcy_study.html].

Therefore, at a time when Michigan families are facing mounting economic challenges, the health care benefits provided under Michigan No Fault are a source of life-saving comfort, and an aspect of the No Fault system that is not only working well, but is a nationally distinguished model.

And for all of these vital benefits, Michigan's No Fault health care coverage has been remarkably cost effective.  Health care benefits make up only about 15 percent of a policyholder's total premium cost, compared to 65 percent for comprehensive and collision.  The big money in auto insurance policies is in repairing or replacing a vehicle.  Furthermore, Michigan's expenditures for No Fault health care coverage ranks right in the middle of the national pack, 22nd out of the 50 states, overall. [Source: NAIC].  And the annual assessment for catastrophic claims has held steady.  Today's $104 assessment is the same today as it was 18 years ago. 

Public testimony at the Auto Insurance Affordability Hearings made it crystal clear to this Office, that no one expects to be in a serious car accident.  But accidents do happen. Often in the blink of an eye.  And the overwhelming testimony at all 4 hearings was that the health care benefits under No Fault have been vital for Michigan families.  This Office has concluded that as a clear cut policy choice, Michigan should fight to protect No Fault's health care coverage for its families.

Lessons from 50-State and District of Columbia Best Practices Review

This Office has worked with each of the 49 other states, and the District of Columbia, to prepare a comprehensive study of national best practices and reforms that are working to protect consumers in other parts of the country.  For example, consumers can challenge unfair company rate hikes under Texas' progressive Consumer Protection Act.  West Virginia has a strong law which prohibits companies from raising the rates of not-at-fault policyholders who submit claims. The State of Arizona has one of the strongest non-cancellation laws in the U.S.  And Arizona appears to be the only state providing a grace period for auto insurance premium payments.

But of all the states, California stands out as being the most vigorously pro-consumer state, when it comes to auto insurance.

Fed up with soaring auto insurance premiums, California voters put "Proposition 103" on the ballot in 1988.  Among other things, it provided:

• Insurers must justify any rate changes prior to imposing higher rates
• A refund of $1.2 billion to consumers to compensate for overcharging during the 1980's
• Standards for price gouging
• A 20% rate roll back
• Company rating data can be reviewed by consumers
• Consumers are allowed to challenge rate increase filings

Despite intensive opposition from the insurance industry during the campaign, Proposition 103 passed.  Afterward, the industry filed a flood of lawsuits to resist implementation of the ballot proposal.  But the reforms were left largely intact by the courts, and in the 15 years since Proposition 103 went into effect, California's average annual premium rates actually decreased by 7%, while rates nationally have increased by 47%.  By comparison, Michigan's rates have increased by 69% during that period of time.  Between 1989 and 2004, California went from the second most expensive state for auto liability premiums in the U.S., to 21st.  [Sources: State of California Department of Insurance; Consumer Federation of America; NAIC].

And notwithstanding dire admonitions from insurance companies that they would cease to do business in California, it turns out that the stability resulting from Proposition 103's pro-consumer reforms have also been good for business. More insurance companies are now operating in California, and are earning a higher profit margin there, compared to the national average. [Source: Companies earn an 11.1% profit margin in California vs. 8.5% national average;  www.consumerwatchdog.org; State of California Department of Insurance].

I.  A Plan to Protect Michigan Consumers

The philosophy behind the recommendations contained in this Annual Report falls into two (2) categories: