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In what has started to become a fairly regular occurrence, new proposals for reform of the current Michigan No-Fault automobile insurance system (also known as Personal Injury Protection or PIP for short) have once again surfaced in the state legislature. Just in the last few weeks, both the Michigan State Senate and State House advanced bills that contained many potentially significant changes to the way injuries occurring from automobile accidents are handled by insurance. The May 7, 2019, version of Senate Bill 1 (SB-1) included proposed provisions for:
various limits on Personal Injury Protection coverage,
restrictions on how much medical providers can charge insurers when care is provided to policyholders,
addressing oversight of utilization of such medical treatments by third parties,
increased focus on fighting fraud within the insurance system, and
restructuring how significant (catastrophic) injury claims are funded within the state.
House Bill 4397 (HB-4397) contained many of the same provisions as SB-1, as well as various restrictions on which rating factors insurers can use in Michigan and requirements on rate decreases for PIP coverage. The governor of Michigan, Gretchen Whitmer, said that while she would consider expanded PIP options in her state, she had concerns over allowing insureds to not purchase any PIP coverage due to potential cost shifting elsewhere (e.g., Medicaid). She also expressed concern with some of the factors that insurers can use to price auto insurance in the state (i.e., “non-driving factors” such as credit, homeownership, or education). Just a few weeks later in late May, a revised bill was advanced that passed both the House and the Senate. On May 30, the No-Fault reform bill was signed into law by the governor.
The history of No-Fault auto insurance in the United States dates back to the late 1960s. With concerns around the inefficiencies and costs of the system in place around that time, No-Fault was enacted in numerous states starting in the 1970s. The concept behind No-Fault is a good one in theory. In the No-Fault system, an individual gives up some amount of his/her right to sue in the case of an auto accident. In return, the claimant is able to recover for injuries from their own insurer. The idea is that this will allow for quicker payments to the injured party, fewer inefficiencies within the system, fewer lawsuits, and ultimately reduced costs, to the benefit of all insurance consumers. Unfortunately, for various reasons, what seems like it should work in theory has not come to fruition in some states.
There are several different versions of No-Fault. Currently, about one-third of the states have No-Fault laws that restrict the right of an injured party to sue and/or require insureds to purchase PIP coverage. Thresholds to allow a lawsuit within the No-Fault system can be monetary (the amount of injury payments must exceed a certain amount) or verbal (the injury must meet the defined requirements of seriousness). Different states employ different types of thresholds and have different levels of monetary or verbal thresholds as well. So, in actuality, each No-Fault state is different. Also, some states have made changes to their No-Fault laws. Over the past several decades, Colorado, Connecticut, Georgia, and Nevada have repealed their No-Fault laws and switched back to a tort system. In addition, Pennsylvania has repealed and re-enacted No-Fault over time, and Florida has also made numerous changes to their law.
So why is No-Fault reform such a big issue in Michigan? Well, in short, it’s all about the money. According to insure.com, Michigan has the highest average automobile insurance rates in the country, topping out at over $2,600 per year currently. That doesn’t even specifically address the automobile insurance costs in the city of Detroit, which are approximately double that amount on average. Part of the issue is that, while solid in theory, the No-Fault system can be (and has been) a target of significant amounts of fraud. This is especially true if there are few or no controls around fee structures that medical providers can charge or groups that are specifically charged with monitoring and acting on the fraud that can occur. Even then, it can be of somewhat questionable benefit as to how much cost savings such attempted focus on fraud can even provide.
Michigan clearly suffers from these issues. But what really sets Michigan apart is that there are unlimited benefits provided by state law from PIP coverage. Roll all of these ingredients together and you’ve got a recipe for costs that can spiral out of control. And, in the end, it’s the insured consumer that bears the brunt. I say “insured” since, due in part to the high average cost of insurance, an estimated 20% of the driving public in Michigan is uninsured, which is one of the highest rates in the nation.
So where does Michigan go from here? Now that the bill has been signed into law, which has an effective date of July 1, 2020, it will be interesting to see how the public will react. Will many insured consumers opt for lower amounts of (or no) PIP coverage, or will they continue on with unlimited benefits and the higher associated premiums? Will expected cost savings from the changes materialize as expected or will new challenges arise? How will restrictions on characteristics allowed for rating impact prices or availability, if at all? It certainly does not seem like this issue will go away anytime soon. For the residents of Michigan, it’s a story they’ve experienced before. At Pinnacle, we have been and will remain very close to this issue given the significant level of importance.
Greg Frankowiak is a Senior Consulting Actuary with Pinnacle Actuarial Resources, Inc. in Bloomington, Illinois and has over 20 years of property and casualty actuarial experience. Greg has extensive experience in predictive analytics for both pricing and underwriting, product management and strategy development, underwriting/operations, ratemaking for private passenger automobile and homeowners insurance, as well as regulatory and filing support and business intelligence. He is a Fellow of the Casualty Actuarial Society, a Member of the American Academy of Actuaries and a member of the CAS Ratemaking Committee.
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