There are 4 main factors which, when combined, make for a perfect storm of premium squeeze in our state.

Over the past 15 years, the property and casualty insurance industry’s net profits have risen dramatically, with 2004, 2005, and 2006 setting all-time records. The industry’s $63.7 billion profit in 2006 was the highest in U.S. history. In fact, profits in 2006 were almost double those in 2005, and 2005 was itself a record-setting year. This is the insurance industry’s “Golden Age.”

To achieve this super profitability, insurers are over-reserving. This means that companies set aside much more than is needed to be paid out in actual claims. Consumer analysts have suggested that for the past 10 years, over-reserving is an intentional strategy employed by the insurance companies to support price increases. Reserves are based upon projections of what will be paid out to a policyholder, and when the projections are off (i.e. too much has been reserved, “overstated”), the company banks the money (underwriting income,) invests the money (investment income), and then pockets the money. Money that by all rights should be rebated to policyholders, or at the very least, re-invested to keep premiums low.

In other states, attorneys general, insurance commissioners, and consumer groups have filed class action lawsuits and undertaken regulatory enforcement actions against insurance companies to require that these over-charges be refunded to policyholders.

Claims are down, in Michigan and nationwide. The fewer dollars paid out to cover claims, the more money insurers make. Studies show that Michigan’s top 3 insurers, State Farm, Allstate, and AAA (the 3 make up 45% of the total market) saw significant reductions in claims paid out from 2002 through 2006. This should mean that rates would decline. They did not. They increased over that period. [Source: Angoff Study].

Gradually, but steadily, Michigan has pulled out of the insurance regulation business. Now, our state has arguably the weakest laws in America for overseeing the insurance industry. Consider the following:

• Michigan is a “File and Use” state which means that as soon as insurance companies file rate increases with the state, those increases go into effect immediately. There is no hearing. There is no pre-approval review.
• The Insurance Code prohibits the Insurance Commissioner from rejecting rate increases unless he can prove that the companies are not competing against one another. This is virtually impossible to prove because of the way the Legislature defined “affordable.”

Michigan’s No Fault system is a captive system, not a free market system. Consumers have no choice but to purchase car insurance under threat of criminal prosecution. This means that the volume of business available to insurers is greater. In free market states, insurers must price their products more competitively since Consumers have the right to opt out of the system. In Michigan, Consumers are more vulnerable to higher prices in the artificially controlled No Fault market. Studies show that No Fault states consistently have the highest premium rates.