Analysis of the D.R.I.V.E. Alternative on No-Fault Reform

Update: On May 24 the Michigan Legislature passed a no fault auto insurance reform compromise bill, by a vote of 94-15 in the House and 34-4 in the Senate. Gov. Gretchen is expected to sign the bipartisan compromise.

After criticizing the auto insurance reform plans introduced over the last couple weeks, Michigan House Democrats on Thursday released their proposed alternative, which they call D.R.I.V.E. It’s encouraging to see forward movement on this important problem: Michiganders, especially low-income families and Detroiters, need the Legislature to fix auto insurance so premiums are no longer unaffordable. Unfortunately, this plan is wholly unworkable and cannot deliver the savings it purports to.

Out-of-control medical costs are the driving factor behind Michigan’s out-of-control auto insurance premiums, and the D.R.I.V.E. plan either omits or makes worse the key measures necessary to bring accident-related medical costs in line with those of other states.

Headlining the plan is its requirement that insurers reduce their premiums by 40%. That sounds like a no-brainer and win for drivers. But other elements of the bill make these forced price reductions impossible – unless we are to believe that auto insurance companies are sitting on piles of cash. (They aren’t: Between 2005 and 2014, the Michigan auto insurance industry had average annual profits of -2.9%, according to Crain’s Detroit Business.)

Specifically, the plan includes a 12-fold increase in the minimum liability coverage drivers must purchase. This is coverage for at-fault drivers who are sued by injured victims. This would be five times the amount required in any other state in the nation. Having insurers provide a higher level of coverage while simultaneously reducing premiums by 40% defies basic economic logic.

Insurers who cannot achieve this rate reduction will not be allowed to sell insurance in this state, which will mean a whole herd of them close up shop here. In the end, this plan might make Michigan home to but a few auto insurance companies who are large enough to handle these severe price reduction requirements. This will hurt consumers by reducing choice and market competition.

There are two other ways that this proposal will increase the cost of auto insurance in Michigan. One is that it lowers the threshold that an injured person must meet in order to sue an at-fault driver. Recent Michigan Supreme Court decisions have already greatly weakened these thresholds, resulting in an explosion of auto lawsuits in Michigan. The D.R.I.V.E. plan would codify even lower ones. This will lead to even more lawsuits being filed as a result of accidents – great for trial attorneys, bad for drivers who have to pay premiums to cover these court costs.

To illustrate, let’s say you injured your thumb in an accident that someone else was deemed to be at fault. And say you love to golf and your injured thumb impacts your game and makes it harder for you to enjoy golf as you used to. Under this proposal, you would likely be eligible to sue the at-fault driver. All you’d have to demonstrate is that using your thumb to golf is a “body function of great value” to you and that it “influences” your ability to live your “normal manner of living.” As this hypothetical suggests, nearly every accident victim could be eligible to sue. This contradicts the basic theory of how a no-fault auto insurance system should function.

The other way this proposal would increase costs to Michigan’s auto insurance system is by explicitly permitting people to earn benefits even if their policy was found fraudulent. Specifically, someone covered under a fraudulent policy would still be eligible for benefits of the fraudulent policy so long as they were not a “participant” to the fraud. Additionally, if someone files a claim that is “in some respect fraudulent,” the proposal says that this fraudulent behavior does not void that person’s policy and the person who filed a fraudulent claim is still eligible for other benefits from other claims. This clearly reduces the possible penalty for filing a fraudulent claim and by doing so incentivizes fraudulent behavior.

The D.R.I.V.E. plan would also limit the factors that may be used to price out premiums to vehicle type, annual miles driven and driving record. Nothing else can be considered. By strictly limiting the factors that insurers may use and dictating how they must weigh these factors, this proposal would result in a massive increase in what’s called cross subsidization. This amounts to charging one group of consumers higher premiums in order to artificially reduce premiums charged to a different group of consumers.

An example might help clarify why this is problematic and unfair. Lacking experience, teenage drivers are, on average, more likely to get in car accidents. As a result, insurers charge higher premiums for insurance plans that cover teenagers. But under the plan’s restrictions of rating factors, insurers could no longer charge higher premiums for teenage drivers. This doesn’t magically make teenagers better drivers – it just means that insurers will have to charge all drivers a bit more to help cover the increased risk their exposed to by insuring teenager drivers.

The D.R.I.V.E. proposal does share some similarities with previously introduced plans in that it would establish an anti-fraud unit and require more transparency of the Michigan Catastrophic Claims Association. These are good ideas and could result in savings for drivers, eventually. But there’s no way that these efforts will produce savings that will overcome all the other ways the proposal will increase costs.

While moving forward quickly on auto insurance reform is important, the D.R.I.V.E. plan is fundamentally flawed. The chief problems with Michigan’s no-fault system is that it forces all drivers to buy expensive medical coverage, contains no fee schedules for medical services and has lax thresholds for who can sue at-fault drivers.

Allowing motorists the option to limit or forgo personal injury protection coverage and imposing a fee schedule on medical services related to auto accidents are the pathway to significant savings on auto insurance. Sadly, the D.R.I.V.E. plan only provides one PIP choice to drivers older than 62 and does not apply a fee schedule on auto insurance medical claims. As such, the plan’s structure cannot achieve its ambitious goal on premium reduction.