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4 ways transparency will lower your auto insurance premiums

February 27, 2015 by Steven M. Gursten

Let’s stop allowing the foxes to watch the hen house when it comes to No Fault in Michigan

Yesterday, I talked about stopping No Fault fraud. That includes certain medical providers, including those coming to Michigan over the past two years from states like Florida, and the lawyers they’re working with.   Today, I want to discuss the actions that can and should be taken to make the auto insurance pricing process more transparent  – and how that will  help lower premiums and prices.

Specifically, I would suggest:

  1. Require desperately needed transparency into insurance company profits, premiums and payouts.
  2. Pay auto insurance claims … or pay refunds!
  3. Warn – and allow public hearings – about proposals to increase auto insurance prices.
  4. Bring much-needed transparency to the Michigan Catastrophic Claims Association (MCCA).

I will discuss each of the above steps in greater detail below.

1. Require transparency into insurance company profits, premiums and payouts.

As I’ve been emphasizing, the solution to lowering auto insurance prices in Michigan begins with transparency. We need to have the facts. Unfortunately, we don’t right now.

The reason is because Michigan auto insurance companies do not – and are not required to – make these important facts available to the public.

For instance, as the debate rages on about what to do to lower Michigan’s auto insurance prices, wouldn’t it be helpful – and  extremely relevant – to know whether existing prices are contributing to record-breaking profits for the auto insurance companies?  And if the insurance companies are truly not making the kind of profits that people strongly suspect they are, then they should welcome this inquiry as well as a justification for why it’s reasonable to raise prices.

Wouldn’t it also be important to know whether – at existing prices – Michigan auto insurers are taking in more in auto insurance premiums (maybe as much as $1 billion or more, as I’ve previously written) than what they’re paying out in claims?

Of course, the answer to both questions is “YES!”

So what we need to do to make this happen?

First, we need to change the laws to require Michigan’s auto insurance companies – who have the incredible benefit of selling a product (No Fault insurance) that consumers are required by law to purchase – to disclose their annual profit figures (which would, of course, be adjusted to reflect reimbursements from the MCCA).

As it stands, we have no idea what the profit margins are for Michigan auto insurers. That is an incredible oversight that we need to correct. We’ve forced people to purchase No Fault and created significant civil and criminal penalties for people who do not purchase auto insurance in this state, but we have no idea what the profit margins are for the companies that sell this product.

I suspect, as I’ve analyzed various filings, that these insurance companies are wildly profitable.

And if this is true, then cutting profit margins to a more reasonable percentage – say, the same reasonableness percentage that is used by many other states that allow their state insurance commissioners to regulate profit margins – would be the simplest and easiest way to significantly reduce the cost of auto insurance.

The additional benefit is that we can keep the nation’s best insurance system intact. We do not have to dismantle or cap No Fault insurance in this state. We can still provide the best level of medical care to people who are catastrophically injured in automobile accidents, those who sustain serious brain and spinal cord injuries.

We just need to find out what insurance companies are truly making and what their profit margins truly are. And if they’re excessive, then keep it more in line with what is fair and reasonable for both the insurance industry and the people of this state who are required by force of law to purchase their product.

For more about auto insurer profitability in Michigan, you can read my blog post, “Michigan auto insurance industry “highly profitable,” according to former insurance commissioner.”

Second, we need to change the laws – and/or the practices of the Michigan Department of Insurance and Financial Services (DIFS) – to require disclosure to the public of data regarding premiums dollars collected versus payouts on claims for Michigan auto insurance companies.

As I noted in my 2013 guest column in the Detroit Free Press:

“Michigan auto insurance companies collected more than $2 billion more in auto premiums in 2011 than they paid out in claims. They brought in about $6.8 billion in private passenger and commercial auto premiums and paid out some $4.7 billion in losses on private and commercial auto claims, according to data provided to Michigan Auto Law by the National Association of Insurance Commissioners and the Michigan Office of Financial and Insurance Regulation. Michigan auto insurers pocketed the difference. That’s more than $2 billion in unused premiums in 2011 for the trouble of selling a product (auto no-fault insurance) that consumers in this state are required by law to purchase.”

The issue of disclosing “premiums versus payouts” data can be easily resolved if the Insurance Commissioner (i.e., the Director of DIFS) would include the information in her Annual Report.

Annual premium revenue versus pay-out information has been routinely collected and published for years in the Annual Report for other major lines of insurance sold in Michigan, such Accident and Health, Property and Casualty, Annuity, Life and Title.

But, inexplicably, that hasn’t been the case for auto insurance. It’s time for that to change.

2. Warn – and allow hearings – about auto insurance price increases.

Auto insurance consumers deserve fair warning when their auto insurers plan to raise insurance rates. And before these rates can be raised, we should have a public hearing or at least the Insurance Commissioner, decide whether this spike is reasonably necessary.

In 2014, former Rep. Phil Cavanagh (D-Redford Township) devised an excellent plan for ensuring this would happen. In House Bill 6092, former Rep. Cavanagh proposed the following:

  • “At the time of a rate filing for automobile insurance [i.e., when an auto insurer indicates that it wants to increase its prices], the [DIFS] Director [i.e., the Insurance Commissioner] shall prominently post the rate filing information in plain language on the [DIFS] department website …”
  • “An automobile insurer shall not increase rates for automobile insurance unless written notice is given to insureds of the rate increase filing, not less than 60 days before the proposed effective date of the new rates, stating in plain language the amount of the increase and the insured’s ability to request a public hearing and provide written comments to the director concerning the rate increase …”
  • “A person or organization aggrieved with respect to any rate filing may request the director to conduct a public hearing to provide input regarding the rate filing.”

Unfortunately, HB 6092 “died” due to inaction at the end of the 2013-14 legislative session.

3. Bring transparency to the MCCA.

The issue of transparency at the Michigan Catastrophic Claims Association (MCCA) has been the subject of debate for many years.

A 2014 study made a compelling case for why the issue of transparency at the Michigan Catastrophic Claims Association (MCCA) needs to be dealt with – and dealt with more urgently than many lawmakers and courts have cared to believe.

The study showed that MCCA assessments – the costs of which are passed by Michigan auto insurance companies to consumers – have been 15% to 26% “higher than necessary.”

In his July 2014 study, “An Analysis of Profitability and Pricing In the Michigan Auto Insurance Market,” insurance expert and former Missouri Insurance Commissioner Jay Angoff determined:

“[T]he annual per-car surcharge assessed by the MCCA and paid by policyholders has been approximately 15% higher than necessary over the long run. A reduction in these surcharges would reduce auto insurance premiums.”

The study also showed that between the years of 2004 and 2012, the MCCA’s assessments were, on average, 26% “higher than necessary.”

To learn more about the study, please check out Michigan Auto Law’s blog post, “Michigan drivers paying 26% more than they should for car insurance.”

To learn about transparency proposals for the MCCA (such as making the MCCA subject to the Freedom of Information Act and requiring the MCCA to disclose “the assumptions, methodology, and data used to determine the incorporated association’s annual assessments”), take a look at my blog post, “How about some Republican-style transparency for the MCCA?”

4. Pay auto insurance claims … or pay refunds!

Auto insurance companies should be required to spend at least 80% of each premium dollar on payouts for their insureds’ auto insurance claims.

And if they fail to do so? Then auto insurance companies should be required to pay money back to insured customers in the form of refunds.

I first called for such a rule in a November 2012 blog post, then, again, in my January 2013 “Open Letter” to Gov. Rick Snyder.” Since then, I’ve continued to call for the creation of what could be called an “80/20” rule.

In 2014, former Rep. Thomas F. Stallworth III (D-Detroit) introduced House Bill 5528, which proposed the creation of an 80/20 rule for No Fault auto insurance companies:

“[I]f an insurer that writes automobile insurance policies … pays less than 80% of the money it collects as premiums for the policies in a calendar year to pay claims made under the policies in the year, the insurer shall refund the difference between the amount actually paid for claims and the amount that would have equaled 80% to the holders of the policies for the year on a pro rata basis.”

Unfortunately, HB 5528 “died” due to inaction at the end of the 2013-14 legislative session.

To learn more about a No Fault auto insurance 80/20 rule, please check out my blog post, “Pay auto insurance claims or pay refunds?”

Tomorrow, in my final installment in this series, I will discuss the actions that can and should be taken to empower consumers to make informed choices.

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