Michigan has a plan to fix auto insurance. Could other states follow?

Maggie Overholt
Maggie Overholt

Michigan lawmakers passed auto insurance reform legislation recently that state Gov. Gretchen Whitmer has called “truly historic.” When it takes effect in July 2020, the new law is designed to lower car insurance prices by changing both the amount of insurance drivers are required to purchase and the way insurance companies are allowed to set rates.

This reform has been a long time coming. In 2019, Michiganders face yearly auto insurance premiums almost twice the national average and four times as high in Detroit. As a result, many drivers are hard-pressed to make their monthly payments, and in many cases forego auto insurance altogether. Lawmakers have struggled for years to find a solution as rates steadily rose.

This is an extreme case, to be sure, as Michigan’s unique auto insurance laws have been the main driver behind its high rates. But other states are feeling similar pains of their own. Issues with no-fault insurance and rate-setting practices (the two big factors that set Michigan Democrats and Republicans at odds for so long) have arisen nationwide in recent years — and reform in Michigan might just help shepherd in new regulations in other states.

The Cost of Auto Insurance in Michigan

As of 2019, Michiganders are paying more than $2,600 per year on average to insure their cars. That’s almost 83% more than the national average, according to insurance research and comparison site The Zebra.

$2,600 per year breaks down to about $216 each month. As a study by the University of Michigan found, this represents anywhere between 2% and 36% of Michiganders’ median monthly income in most ZIP codes — making car insurance “unaffordable” by definition in most of the state. (That’s according to the U.S. Treasury’s standard, which says car insurance should be no higher than 2% of a ZIP code’s median income.)

Things are even worse in the densely populated, often lower-income areas of large cities. Drivers in Detroit, for example, can shell out more than $5,400 per year for car insurance — almost four times as much as the national average of $1,400, according to The Zebra.

Car insurance is considered “unaffordable” in 97% of all Michigan ZIP codes, according to the U.S. Treasury.

Rates are so high that many people either opt not to drive — which can create a serious barrier to job opportunities and basic resources — or simply drive without insurance. In fact, Michigan has the fourth most uninsured drivers of any state, with one in every five motorists estimated to be on the road sans coverage.

That’s problematic for a few reasons. First, because Michigan is a no-fault state, meaning your own insurer must pay for your injuries and damages after a collision. Drivers without coverage must therefore foot their own medical bills and repairs after an accident. If they can’t do so, and don’t have health insurance to fall back on, those costs might end up being absorbed by the state through Medicare or Medicaid or go unpaid.

In addition, those caught driving without insurance could potentially face a fine between $200 and $500 and up to a year in prison, adding insult to injury for drivers that couldn’t afford car insurance in the first place but must drive as a necessity of their day-to-day life.

How Michigan’s Auto Insurance Rates Got So High

Car insurance rates are based on many different factors, but when it comes to Michigan’s sky-high premiums, one factor looms above the rest — and that’s PIP insurance.

Michigan is one of no-fault state that require all drivers to purchase PIP (personal injury protection). PIP covers medical bills, lost wages, damaged property, and other associated costs after an accident.

Here’s the kicker, though: Most states set minimum PIP requirements relatively low, with limits starting between $3,000 and $15,000 per person per accident. But in Michigan, PIP coverage is unlimited for all drivers.

That means your own insurance company must cover all medical costs stemming from an accident — even for a catastrophic injury that requires lifetime medical care or rehabilitation. In other words: A serious car accident in your 20s could have your auto insurer paying long-term care costs into your 80s or 90s.

While unlimited PIP is an invaluable safety net (“the gold standard in terms of medical care for drivers,” as Michigan Radio called it), it also puts a heavy financial burden on insurance companies. As of 2017, the average medical cost for auto-related injuries in Michigan was almost $40,000 per person — more than twice as much as the next most- expensive state (New Jersey), according to the Insurance Research Council. And when insurers have to pay more for claims, they charge more in premiums to make up for it.

Unlimited PIP requirements, inflated medical costs for auto accidents, and high rates of uninsured drivers and litigation contribute to Michigan’s singularly expensive auto insurance.

Of course, there’s never just one side to an insurance story. Though PIP is the most glaring reason for Michigan’s high rates, it’s not the only culprit.

As we mentioned above, the high cost of auto insurance in Michigan forces about one in five drivers to go without coverage. For insurers, this increases the overall “risk” of providing insurance in the state, and presents another reason to raise rates.

That price hike is compounded still further for low-income drivers. Going uninsured for a time (whether by choice or because someone simply can’t afford it) lands drivers in a higher “risk class,” so they’ll end up paying a lot more when they do reapply for coverage.

Michigan’s unlimited PIP law has also led to above-average incidences of insurance litigation in the state. Although no-fault laws were originally intended to reduce time and money spent in court — and actually lower insurance costs as a result — Michigan’s law has largely had the opposite effect. Without a cap on PIP benefits, or fee schedules that dictate how much health care providers can charge for auto-related claims, parties involved often end up suing to extract the maximum possible payout from insurance companies.

“People are hiring personal injury attorneys to fight for [them] … to get the maximum amount of benefits for their medical claims, long-term care, and for lost wages,” Chad Livengood of Crain’s Detroit Business told Minnesota Radio. He claimed about one third of all civil litigation cases in Michigan are auto insurance-related.

There’s also been speculation that unbounded payout potential has led to higher rates of insurance fraud in Michigan than elsewhere (though that can be hard to show definitely). Regardless, the combination of unlimited PIP coverage, uninsured drivers, high medical costs, and frequent litigation is enough to push insurance rates beyond a reasonable level.

Michigan’s Plan to Lower Auto Insurance Rates

After years of indecision (and a 2018 gubernatorial race where insurance prices were a top issue for voters) Michigan lawmakers reached an agreement last Friday about how to move forward with auto insurance reform. The final legislation includes key components from earlier, Republican-backed bills passed in the Senate and House as well as the Democratic party’s original reform platform (D.R.I.V.E.).

Michigan auto insurance reform-2
Gov. Gretchen Whitmer, Democrat (above) worked with party leaders from the Republican-led legislature to come to an agreement about auto insurance reform last week. Image: Getty

Until last week, lawmakers in Michigan struggled to settle on reform legislation because they were approaching it from two different angles. The Republican-led legislature sought to reduce prices by letting drivers choose lower levels of PIP coverage or opt out of it entirely. Gov. Whitmer and the Democratic party preferred a plan that would require insurers to reduce costs across the board and regulate rate-setting practices more strictly. The end product of last week’s talks was a compromise between both perspectives.

When it takes effect in July 2020, the new law will eliminate Michigan’s mandatory unlimited PIP requirement for all drivers, like Republicans pushed for, replacing it with a tiered PIP system. Drivers will still have access to unlimited coverage, but they’ll also have a choice of $500,000, $250,000, or $50,000 in coverage, with PIP savings ranging from 10% to 45% depending on the level of coverage selected. Seniors and people with Medicare or qualifying health insurance will be able to opt out of PIP completely.

In addition, Michigan insurers will no longer be allowed to use certain non-driving factors to set rates. Things like gender, marital status, credit score, and occupation will be eliminated from the underwriting process in favor of rates that depend more heavily on an individual’s driving record. This was a key provision for Gov. Whitmer and Democrats, who advocate that non-driving factors are discriminatory and take a heavier toll on low-income drivers.

Michigan’s new regulations will mandate a 10–100% reduction in PIP costs for eight years, ban insurers from using certain non-driving factors to set rates, and cap the amount that health care providers can upcharge auto insurers for accident-related costs.

The other big change will be a new fee schedule for medical providers. Starting in July 2021, this would limit medical providers “from charging auto insurers more than 240 percent of what they would charge Medicare for the same services,” the Insurance Journal wrote this week. The idea here is that lowering post-accident payouts for insurers will mean further reduced rates for drivers.

So, how much will Michiganders actually save on their premiums? It’s hard to say, exactly. The price cuts between 10% and 100% for PIP are guaranteed for eight years. Rate-setting regulations will be in place for good, but, as the Insurance Journal reports, price changes related to the new underwriting processes “are yet to be determined.”

In other words: Michigan’s new auto insurance legislation seems promising at face value, but it could take years to see how much rates drop for the majority of drivers, and whether those savings will stick in the long run.

Michigan Isn’t the Only State Feeling Insurance Pains

Though Michigan’s new auto insurance law will affect its residents most directly, they won’t be the only ones waiting to see how pricing changes play out. This reform could have implications that address auto insurance concerns all across the U.S.

For example, Michigan isn’t the only state that has experienced PIP-related fallout since no-fault laws were originally instituted. Of the 18 states that passed no-fault laws in the early ‘70’s, four repealed them within two decades.

As Pew Research put it in 2016: “By the early 1990s, insurance premiums had increased, drivers were suing their insurers over coverage benefits, and fraud had become rampant. Some states found themselves in the position Michigan is in now. They altered their no-fault laws or dropped them.”

The outcry has been loudest in Florida, New Jersey, and New York, as insurance analyst Craig Casazza wrote for Forbes in 2016. Like Michigan, these states have experienced higher auto insurance rates thanks to their PIP laws. They’ve also seen similar fallouts; Medical costs after an accident are second-highest in New Jersey, and Florida has the uninsured drivers of any state, at just over 26%.

Still, many drivers reject the idea of a cold-turkey break from PIP insurance. For those that have benefited from the protection PIP offers — especially in Michigan, where coverage is unlimited — it’s incredibly valuable, and more easily accessed than traditional liability insurance. PIP can also offer post-accident fallbacks like disability insurance and reimbursement for lost wages, which not all health care plans do.

Some states have already repealed no-fault laws, and many, like Michigan, have pushed to ban non-driving-related factors like gender, marital status, and credit score from rate-setting.

Then there’s the question of non-driving rating factors, on which Michigan Democrats centered their reform campaign.

To give a little background: Auto insurance companies use a wide variety of driver data to set rates, from driving records to address, gender, credit score, marital status, education level, and more. Insurers consider these factors as they’ve been shown to correlate to “risk level” in some way or another.

For example, a 2007 study from the U.S. Federal Trade Commission found that credit scores correlate to both the number and cost of claims filed by customers, and are therefore “effective predictors of risk under automobile policies.” Similar results have surfaced around factors like ZIP code, gender, and marital status.

However, Michigan Democrats, among others, have pointed to the possible discrimination that can stem from such rating practices. Gender is an obvious one; it seems unfair to be rated on a factor that’s totally out of your control, which is why seven states have already banned gender-based insurance pricing, as the Washington Post reported in February.

But other pricing considerations are more nuanced. Demographic factors like education level, address, and credit score might correlate with driver risk, and thus potential cost to insurers — however, it’s difficult to quantify how much those factors are influenced by outside socioeconomic factors, and whether using them to set rates put an unfair pricing burden on lower-income drivers.

That’s why Michigan and other states, like Maryland, have vied for ratings systems that depend more heavily on residents’ driving records to set rates, as the Post reported last year. How safely a driver operates is one thing that’s fully under their control.

Auto Insurance Reform In Michigan Could Pave the Way for Others

Michigan’s auto insurance industry was more broken than most, but it’s not the only state where drivers are looking for new and better options. With auto insurance rates and medical costs continually on the rise, and lawmakers questioning insurers’ rating practices, it’s only a matter of time before the insurance industry starts to shift on a wider scale.

Of course, change doesn’t always have to happen on an institutional level. Some insurance companies have already begun to shake things up by taking business online and harnessing new technology to offer cheaper rates. These “digital insurers” tend to set prices based on driving record or mileage — making them more attractive to drivers who have a good record, but might be deemed “higher risk” due to factors like age or ZIP code.

But digital insurers are still few and far between. And beyond that, insurance as a whole is a heavily regulated industry. Things like PIP laws, fee schedules for medical coverage, and rating practices won’t change across the board until lawmakers can agree on the right course of action.

If Michigan’s new legislation has a positive and lasting effect on auto insurance prices, it could set an example for other states currently contending with similar PIP and rate-setting issues.

Further Reading on Consumer Insurance Trends

About the Authors

Maggie Overholt

Maggie Overholt Contributor

Maggie is a former lead insurance editor at Reviews.com. She's written more than 70 insurance articles covering homeowners, auto, life, motorcycle, travel, and more.