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In recent weeks, political leaders have vented their anger at Michigan's auto insurers. State Sen. Martha Scott held a rally at the capital in Lansing to demand that drivers throughout the state pay higher rates to reduce rates in Detroit.
All matter of proposals to reshape the state's insurance system have begun to move through the state House of Representatives. If some of the more extreme proposals become law, Michigan could end up with a situation where residents in Detroit could find it impossible to buy auto insurance at any price.
Proposals that would make it nearly impossible to change auto insurance prices, mandate premium cuts and require people everywhere else in the state to provide subsidies to Detroit residents certainly have an understandable base of support. After all, Detroit residents pay a highest-in-the-country-by-far $5,100 per year for auto insurance. But the plans would simply drive insurers from the state.
It's happened elsewhere. Between the 1970s and 1990s, New Jersey and Massachusetts both experimented with similar efforts to control rates. Government action did temporarily hold rates down, but led insurers to flee. (In Massachusetts, nearly all nationally known auto insurers left town.)
And, over time, state residents ended up paying more for insurance because rates stayed high even as they fell elsewhere. If these states had it bad, however, Michigan could encounter even worse problems. Mandatory Detroit subsidies would easily double rates in the Upper Peninsula; the across-the-board premium cuts that state consumer advocate Butch Hollowell wants would send insurers fleeing the state. With less competition, Detroit's already high rates would soar over time.
To make Michigan auto insurance more affordable and less costly to provide, legislators need to remember how Michigan's auto insurance is different from policies in other states. First, Michigan drivers almost never have to go to court when they're injured in an auto accident. Instead of suing other drivers, Michigan residents file a claim against their own insurance company. Second, while policies in other states almost never provide more than $50,000 in medical benefits (private health insurance and public assistance picks up the rest), Michigan auto insurance provides uncapped medical benefits to those hurt in auto accidents.
This system has worked pretty well during the past 30 years. Because auto insurers don't have to pay court costs, the system doesn't even rank among the country's 10 most costly even though it provides far plusher benefits than any other. Claims tend to get paid more quickly, too.
But the system is getting more expensive every year. Michigan drivers get almost three times more medical benefits out of their auto insurance policies than those elsewhere in the country.
Even with rising medical costs, overall auto rates have fallen slightly during the past few years, largely because of industry competition and decreases in accident rates. Yet, the dismal state of Michigan's economy seems to have brought seething complaints to the surface. And some are warranted.
If some companies mislead consumers -- as politicians say they do -- they need to stop doing so. Given its strong connection with state government -- a legally mandated fund pays the biggest medical claims -- the insurance industry also needs to operate more openly. The state may well want to consider releasing lower-income residents from the obligation to buy expensive insurance policies particularly when they have health insurance. (Since Michigan residents file claims against their own auto insurance companies, an uninsured Michigan driver doesn't pose any risk to the public.)
Some of the public frustrations with Michigan's auto insurance system make sense. But if it entertains some of the more extreme proposals, Michigan could literally drive away the entire auto insurance industry.