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Detroit Sen. Virgil Smith: The good, the bad and the ugly

Detroit Sen. Virgil Smith’s latest proposal would give Insurance Commissioner authority to stop auto insurance companies from charging ‘excessive’ rates

Sen. Virgil Smith

I wrote this blog post before today’s news, which allege Sen. Virgil Smith (D-Detroit) is a suspect in a domestic dispute outside his home, involving shots being fired into his girlfriend’s vehicle.

Smith is a key ally for Mayor Mike Duggan in his proposed “D-Insurance” plan to get cheaper insurance rates for Detroiters. I’ve written why I think Sen. Smith has terrible ideas for No Fault here and here.

But maybe all of his ideas aren’t completely terrible.

One good thing to come out of the No Fault reform debate and bills and amendments  is Sen. Smith’s proposal to empower the Michigan’s Insurance Commissioner to stop auto insurance companies from charging “excessive” auto insurance prices.

I’m going to get a little wonky here in this blog, but in a nutshell, this would plug an existing hole the size of the Grand Canyon that auto insurance companies have exploited to charge very high rates for auto insurance, with impunity and without any fear of repercussions from Michigan’s Insurance Commissioner.

First, here’s what happened: During the debate in the Senate over Sen. Joe Hune (R-Fowlerville)’s No Fault plan, Senate Bill 248, Sen. Smith proposed giving our state’s  Insurance Commissioner the power to stop “excessive” auto insurance prices.

The Senate agreed – and so has the Michigan House of Representatives’ Insurance Committee.

Here’s how Sen. Smith has proposed to empower the Insurance Commissioner to combat “excessive” auto insurance prices

This is what Sen. Virgil Smith proposed:

“A rate [for automobile insurance] must not be excessive. A rate is excessive if it is likely to produce a profit that is unreasonably high in relation to the risk involved or if the cost of the insurance is unreasonably high in relation to services rendered.”

(Source: Senate-approved version of Senate Bill 248 and the House Insurance Committee’s “House Substitute for Senate Bill No. 248”)

This is an excellent idea … especially coming from Sen. Smith, who up until now, has only proposed  auto insurance-related legislation that has  involved gutting No Fault legal protections and benefits for car accident victims.

Ironically, the cost of these past proposals by Sen. Smith would fall far harder on his own Detroit constituents, who depend more on No Fault if they’re seriously or catastrophically injured in a motor vehicle accident.

However, with his latest proposal, we have a pleasant departure from past bad acts by the good senator from Detroit. Specifically, with the power that Sen. Smith’s proposal bestows on the Insurance Commissioner, the Commissioner could get to work immediately on either:

  • Lowering Michigan auto insurance prices, which Sen. Smith has described to the Detroit Free Press as “some of the highest insurance rates in the nation.”
  • Or, if the Commissioner chooses to not lower prices, explaining to consumers why prices are not “excessive,” i.e., not “likely to produce a profit that is unreasonably high in relation to the risk involved” or not “unreasonably high in relation to services rendered.”

Getting rid of the ‘reasonable degree of competition’ requirement that insurers have been exploiting to jack up rates

In order to empower Michigan’s Insurance Commissioner to stop auto insurance companies from charging “excessive” auto insurance prices, Sen. Smith has proposed eliminating the “reasonable degree of competition” requirement, which is a part of the “excessiveness” analysis under existing law.

The Grand Canyon loophole I alluded to above is this  “reasonable degree of competition” requirement.  It creates an effectively insurmountable hurdle for any aggrieved auto insurance consumer, or Insurance Commissioner, to clear.  And it allows insurance companies in Michigan to charge very high auto insurance rates without needing to explain the basis behind the rates.

Not only is proof of a lack of competition complicated beyond belief – even by insurance and legal standards – but the facts will make it all but impossible.

Under Michigan’s Insurance Code, the Insurance Commissioner can stop auto insurance companies from charging “excessive” prices only if both of two following requirements are met:

  • “[T]he rate is unreasonably high for the insurance coverage provided …”; and,
  • “[A] reasonable degree of competition does not exist for the insurance” in the Michigan auto insurance marketplace. (MCL 500.2109(1)(a))

In his recent Detroit Free Press column, Sen. Smith describes very well the dilemma of overcoming the “reasonable degree of competition” requirement in order to show that auto insurance prices are “excessive”:

“[T]he only way a [Michigan] consumer can get relief from a high rate is if the insurance commissioner determines there is no competition where you live …”

Background on Michigan’s auto insurance market

The facts show that Michigan’s auto insurance marketplace is plenty competitive:

  • There are more than 700 auto insurance companies licensed to do business here.
  • The last time Michigan’s Insurance Commissioner studied the issue, it was concluded that Michigan’s auto insurance market was competitive.
  • Neither the current, nor the past, nor the future Michigan Insurance Commissioner (i.e., Director of the Department of Insurance and Financial Services (DIFS)) has said or otherwise suggested the market is not competitive.
  • Finally, 14 of the top 20 “largest auto insurance companies by market share” (as compiled by Insure.com) are already doing business in Michigan.

Competitiveness factors – Why auto insurance companies are charging us more

As if the facts above aren’t enough to show how difficult it would be to show that Michigan’s auto insurance market lacked a “reasonable degree of competition,” consider the following statutory and administrative factors that must be included in the analysis:

  • Statutory factors: “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 availability 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.” (MCL 500.2109(2))
  • Administrative factors: “A determination regarding the existence of a reasonable degree of competition shall give due consideration to, at a minimum, all of 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 ability 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.” (R. 500.1503(b))

For more about stopping “excessive” auto insurance prices, please check out my blog post, “The power to stop ‘excessive’ auto insurance prices.”

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