House Bill 5524 proposes to give insurance commissioner real power to regulate ‘excessive’ prices
Does Michigan’s Insurance Commissioner have the power under the Insurance Code to stop auto insurance companies from charging “excessive” prices for auto insurance?
An argument can be made that he or she has the power to do so.
But, in the real world? Not a chance.
Rep. Scott Dianda (D-Calumet, MI) hopes to change that with a bill to put real power into the Insurance Commissioner’s hands.
Under Michigan law, 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))
However, because the second requirement is effectively impossible to prove, the Insurance Commissioner’s power to regulate “excessive” prices – no matter how “unreasonably high” they are – is effectively nonexistent.
Under House Bill 5524, Rep. Dianda proposes to make the Insurance Commissioner’s power real by removing the insurmountable “reasonable degree of competition” requirement from the “excessive” price analysis.
Rep. Dianda explained why his proposals in HB 5524 were warranted:
“We need to ensure that insurance customers aren’t getting gouged …”
For more, take a look at my blog post, “Will the Democrats’ insurance reform plan make car insurance more affordable?”
Under the existing Insurance Code, the Insurance Commissioner (aka the Director of the Michigan Department of Insurance and Financial Services (DIFS)) can regulate auto insurance prices only if they’re determined to be “excessive.” (MCL 500.2109)
And, as noted above and in the Insurance Code, a “rate shall not be held to be excessive unless the rate is unreasonably high for the insurance coverage provided and “a reasonable degree of competition does not exist for the insurance” in Michigan’s auto insurance marketplace. (MCL 500.2109(1)(a))
‘Reasonable degree of competition’
So, you ask, why is it “effectively impossible” to prove that “a reasonable degree of competition does not exist” in the Michigan auto insurance marketplace? Well, for starters, consider the factors that go into the “reasonable degree of competition” 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))
Now, consider the fact that it’s never been proven – and likely never will be – that Michigan’s auto insurance marketplace lacks “a reasonable degree of competition.”
Impossible to prove
There are four good reasons I’ve concluded the lack of a “reasonable degree of competition” requirement is effectively impossible to show:
1. As I noted above, in the 43 years the law has been on the books, I’m not aware of it ever having been proven that “a reasonable degree of competition does not exist” in the Michigan auto insurance market.
2. In the one and only study I’m aware of having been done on the issue (which completed in 2004 and reported on in 2005), Michigan’s Insurance Commissioner found:
The market for “private passenger auto insurance … throughout the state [is] reasonably competitive” and, thus, “the rates charged by private insurers … could not be found to excessive under current law, even if they were found to be unreasonably high in relation to covered losses.”
3. Neither the present nor recent past Insurance Commissioners have concluded, determined, suggested or even hinted that “a reasonable degree of competition does not exist” in the Michigan auto insurance market.
4. There are more 700 auto insurers licensed to do business in Michigan. If that’s not enough companies to make the marketplace competitive, I can’t how imagine how many it would take.
I’ve been outspoken as an insurance attorney in this state for many years that the insurance commissioner needs to have more power to regulate insurance companies and to stop overcharging. This bill would be a great start.