Insurance rates for cars and homes are unaffordable for far too many Michiganians. And the service received for the premiums paid is sub-standard far too often. These deficiencies in our insurance system hit Consumers particularly hard in this troubled economy where families are struggling to make ends meet. The Advocate will take the Consumer's side in examining the exact nature of the system we have here in Michigan, by highlighting the challenges we face, engaging with the public and key stakeholders, and making recommendations to the Governor for needed reforms.
The Office of the Michigan Automobile and Home Insurance Consumer Advocate ("the Advocate") was created by Governor Jennifer M. Granholm, by Executive Order 2008-2, to "lead an aggressive effort to find a solution to the skyrocketing cost of insurance as a key part of our overall strategy of protecting the consumer's pocketbook".
We begin with a simple question. In the area of car insurance, are we better off today than we were in 1973 when No Fault went into effect? At hearings before the Legislature, and in the highly charged public debate surrounding the issue, the backers of No Fault made some very specific promises. Proponents promised that if consumers gave up the option to have insurance, and if they gave up the right to sue, No Fault would improve service delivery, provide generous benefits, and REDUCE premiums. [Source: The Detroit News, August 9, 1973, p. 12-A; The Detroit Sunday News, September 30, 1973, p. 14-B]. No Fault proponents claimed that premium rates for Consumers would go down because less money would be spent on lawsuits to recover for accidents (reducing insurer's costs), and more people would purchase insurance policies, because of the mandatory participation requirement (increasing insurer's revenue).
In 1978, in the landmark case of Shavers v. Attorney General, the Michigan Supreme Court ruled that No Fault was unconstitutional because the law did not define “affordability” for the Consumer clearly enough. [Source: Shavers v. Attorney General, 402 Mich 554 (1978)]. Chief Justice G. Mennen Williams' opinion reasoned that because the Consumer’s participation in No Fault is mandatory, unless Consumers are guaranteed “fair and equitable” rates by the insurance companies, No Fault violates the Due Process Clause of the 14th Amendment of the state and federal constitutions. [Source: Shavers opinion at pp. 581, 599-600]. The Supreme Court’s order gave the Legislature 18 months to enact a definition of affordability in a way that protects the Consumer.
In response to the Supreme Court’s order, the Legislature, in 1979, adopted the Essential Insurance Act which turned the Supreme Court’s ruling on its head. Instead of defining affordability from the consumer’s point of view, as the Supreme Court ordered, the Insurance Industry and their lobbyists persuaded the Legislature to pass a law which defines “affordable” from the insurance industry’s point of view. More specifically, under No Fault, affordability is defined as insurers “reasonably competing” with one another. [Source: MCL Section 500.2101, “the Essential Insurance Act”]. So, if it can be established that insurers are competing against one another, the rate they come up with is, by definition “affordable”, regardless of whether the rates exceed the Consumer’s ability to pay.
This is not what was promised during the No Fault debate, and it is squarely at odds with the Supreme Court’s order. Furthermore, the Advocate does not believe that the public is aware of how this bait-and-switch unfolded in Lansing. The definition itself is worth examination.
the dictionary definition of "affordable" is:
“to be able to bear the cost of”
[Source: Merriam-Webster on-line dictionary]
The Michigan Supreme Court defines “affordable” as:
“fair and equitable”
[Source: Shavers v. Attorney General, p. 581]
Now take a look at how the Michigan Legislature defines “affordable:”
"All rates for automobile insurance… shall be
made in accordance with the following provisions:
(a) rates shall not be excessive, inadequate, or
unfairly discriminatory. A rate shall not be held to
be excessive unless the rate is unreasonably high
for the insurance coverage provided and a reasonable
degree of competition does not exist for the insurance
to which the rate is applicable… A determination
concerning the existence of a reasonable degree of
competition with respect to subsection (1)(a) shall take
into account a reasonable spectrum of relevant economic
tests, including the number of insurers actively engaged
in writing the insurance in question, the present avail-
ability of such insurance compared to its availability, in
comparable past periods, the underwriting return of that
insurance over a period of time sufficient to assure reliability
in relation to the risk associated with that insurance, and the
difficulty encountered by new insurers in entering the market
in order to compete for the writing of that insurance.
For the purpose of section 2109(1)(a) of the code, both of the
following provisions shall apply: (a) A rate is unreasonably
high for the insurance coverage provided if it is unreasonably
high in relation to anticipated losses or expenses, or both, or
to the uncertainty of loss for the insurance coverage provided,
(b) A determination regarding the existence of a reasonable
Degree of competition shall give due consideration to, at a
minimum, all the following: (i) The relevant market for the
coverage or the type of insurance to which the rate applies;
(ii) The number of insurers and the number of self-insurers
actively engaged in writing or providing the coverage or type
of insurance in the relevant market; (iii) The distribution of rates
and market shares for such insurers in the relevant market.
Market shares may be measured either by premiums or exposures;
(iv) Past and prospective trends in the availability of coverage and
coverage options for insurance of that type in the relevant market;
(v) Profits attributable to insurance of that type in relation to the
profitability of other types of insurance, to the uncertainty of loss
for that and other types of insurance, and to the amount of capital
and surplus funds available to support premium writings for that
and other types of insurance; (vi) The availability and potential for
firms to enter and exit the relevant market and for financial capital
and surplus funds to be allocated to, and to be removed from, the
relevant market.”
[Source: MCL 2109(1)(a); R 500.1503]
This confusing 401- word definition of “affordable” was significantly shaped by the insurance industry and its lobbyists. It is so riddled with loopholes and exceptions that expert actuaries argue about what it means. The Advocate's view is that it was written this way to intentionally confuse. 401 words. Abraham Lincoln’s entire Gettysburg Address was 272 words. If you can’t say what you mean in a couple of clear sentences, then either you don’t know what you’re talking about, or you’re trying to pull a fast one over on somebody.
Today we are living with the painful consequences of that definition: skyrocketing rates.
Instead of rate reductions – as was promised – rates in Michigan are among the highest in America.
[Source: 2007 Auto Insurance Database, National Association of Insurance Commissioners. *2005 is the most recent statistical year available]
When the rates are adjusted for the comparative economic climate among the states, Michigan's rates are at the very top.
[Source: U.S. Census Bureau]
[Source: U.S. Bureau of Labor Statistics]
Furthermore, the statistical trends are truly alarming. Since 1989, Michigan’s average rates have increased a whopping 69%. We are already paying rates that are unaffordable, and the data indicates that rates will only continue to rise.
[Source: National Association of Insurance Commissioners]
Michigan has the most expensive rate in America for the Collision portion of the premium.
[Source: National Association of Insurance Commissioners]
Michigan has the most expensive urban premium in the United States
Top 5 Most Expensive Cities
[Source: Runzheimer International, 2006 Report; Insure.com Nov 29,2006 ]
All of this is being borne by the Consumer when per capita income is down, unemployment is up, credit is hard to come by, and gas prices are over $4 a gallon. In some places, the car insurance premium is higher than the car note. Consumers pay it, while sacrificing on things like food, prescriptions, mortgage payments, and tuition.
Or, they’ll cheat. Unaffordable insurance causes people to drive without insurance. Nearly 20% of drivers in our state drive without insurance, which is 5 points higher than the national rate. [Source: Insurance Research Council, June 28, 2006 press release] The estimates for urban areas are much higher. People may use the address of a friend or relative who lives in an area with lower rates. Or, citizens may purchase a 30-day insurance certificate from a “corner” insurance retailer, allowing them to purchase annual license plate renewal tags. Then they drive for 11 months, without coverage, hoping there is no accident.
This is done at great risk to the individual ($200 fine and up to a year in jail) and to the public at-large. Almost no one wants to live with this kind of risk and uncertainty hanging over their head. The vast majority want to comply. They want to be responsible. They want insurance to be there when they need it. But sky high rates are out of reach for far too many of us. The cheating is symptomatic of a disease. It reflects a system that is seriously ill.
So, the rates Michiganians pay are the most costly in America, with the trends indicating that these rates will continue to climb at a steep rate.
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The Office of the Michigan Automobile and Home Insurance Consumer Advocate ("the Advocate") was created by Governor Jennifer M. Granholm, by Executive Order 2008-2, to "lead an aggressive effort to find a solution to the skyrocketing cost of insurance as a key part of our overall strategy of protecting the consumer's pocketbook".
In 1978, in the landmark case of Shavers v. Attorney General, the Michigan Supreme Court ruled that No Fault was unconstitutional because the law did not define “affordability” for the Consumer clearly enough. [Source: Shavers v. Attorney General, 402 Mich 554 (1978)]. Chief Justice G. Mennen Williams' opinion reasoned that because the Consumer’s participation in No Fault is mandatory, unless Consumers are guaranteed “fair and equitable” rates by the insurance companies, No Fault violates the Due Process Clause of the 14th Amendment of the state and federal constitutions. [Source: Shavers opinion at pp. 581, 599-600]. The Supreme Court’s order gave the Legislature 18 months to enact a definition of affordability in a way that protects the Consumer.
