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Thoughts on the Detroit Free Press Insurance Story (Part II) – Will a City of Detroit auto insurance plan work?

November 25, 2014 by Steven M. Gursten

Issues concerning initial capitalization, reserve funds, causes of increased auto insurance prices and other alternatives will need to be considered

Detroit insurance plan2

The Detroit Free Press ran an excellent story on Sunday about the city’s high auto insurance prices. I was interviewed as part of the story. Yesterday, I wrote why No Fault insurance is not to blame for the high cost of auto insurance in Detroit.

Now, the city and Major Duggan are looking into another alternative: A Detroit-sponsored auto insurance company.   But will it work?

Recently, the Detroit City Council unanimously approved a $75,000 study of “the feasibility of creating a city-sponsored insurance company” in order “to bring down auto insurance rates for Detroiters,” according to a November 18, 2014, City of Detroit press release.

Making auto insurance more affordable has been a high priority for Mayor Duggan since taking office, according to the press release, because the “high cost of auto insurance has been one of the key reasons residents have been leaving the city for years.”

It’s also an issue I feel strongly about. I’ve called this a civil rights issue for Detroit, and written about how people are treated unfairly because of credit-scoring and the draconian price they pay if they’re injured or cause an automobile accident but do not have No Fault insurance (they lose everything).

Although the study has yet to be undertaken, the feasibility of a Detroit-sponsored auto insurance company has already been the subject of debate.

In November 2013, the Detroit News mounted the following objections in an editorial entitled “Detroit has no business selling auto insurance”:

  • The city is “ill-equipped to sustain” the likely $10 million initial capitalization and the “tens of millions of dollars” “required to maintain a reserve fund to cover claims …”
  • “There’s no reason to believe a city-owned insurance provider could offer cheaper rates” given the high rate of auto thefts, the “higher” cost of medical care and the prevalence of “auto break-ins.”
  • “A municipal auto insurance company would inevitably be a drain on a city treasury that is already too small to pay for core services.”

In a March 2, 2014, article by Jay Greene of Crain’s Detroit Business, Caleb Buhs of the Michigan Department of Insurance and Financial Services (DIFS) described the following hurdles that any Detroit-sponsored auto insurance company would have to clear:

“Under state insurance regulations, new auto companies are required to file an application that shows they have funding and a solid business plan. Requirements include $7.5 million in minimum capital, access to additional capital based on a state solvency review, a business plan that shows adequate support staff, and systems to collect premiums, pay claims and provide customer service …”

Additionally, Detroit’s Corporation Counsel Melvin “Butch” Hollowell told Crain’s Detroit Business there were other options – beyond the creation of a city-sponsored insurance company – that were being considered:

  • “‘We could structure a relationship with an existing (auto insurer) like a preferred provider organization under a group policy for qualifying residents.’”
  • “For example … Detroit could act as a broker to bring a group of low-income citizen drivers to an auto insurer for lower costs.”
  • “Another option would be for the city to create an insurance company to cover drivers for comprehensive and collision coverage. Then it could collaborate with an auto insurer to cover motorists for personal injury protection and liability.”

There certainly are its share of doubters out there, and people betting against the city of Detroit.

But, with an estimated 60% of the city of Detroit now driving “naked” or uninsured based on the Sunday article by Reindl, what more is there to lose? The current system is already clearly broken, and thousands of uninsured Detroiters are already losing everything when they’re getting in car accidents every year. As long as the same legal protections remain in place that currently exists under the current No Fault Act, it seems worth a try.

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