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Why auto insurance industry’s ‘free market’ disinformation is No Fault ‘snake oil’

April 21, 2015 by Steven M. Gursten

Even Pete Kuhnmuench of the Insurance Institute of Michigan doesn’t think the Senate’s No Fault plan, Senate Bill 248, will lower auto insurance prices for consumers

No Fault reform is snake oil

Contact the Michigan Senators who voted for SB 248, and they will e-mail you a carefully crafted response defending their votes. This e-mail will say that the SB 248 is based upon “free market” principles that will deliver lower auto insurance prices to consumers. For an example of this e-mail I received, scroll down to the bottom of this blog post.

The only problem with this e-mail is that it’s total nonsense and doublespeak. It is political propaganda of the worst kind. And it’s being used to defend an unpopular vote to pass a bill that’s great for the auto insurance companies in this state, but terrible for seriously injured auto accident victims and those who require attendant care help for catastrophic injuries.

It does nothing to lower auto insurance premiums for Michigan drivers.  It does nothing to help consumers.

It is the exact opposite of “free market” principles at work. SB 248 imposes fee schedules for doctors and hospitals, and it imposes a cap for what attendant care providers can charge. It creates a fraud authority that has the power to look only at claimants, but the insurance companies that act in bad faith and cause great harm get a free pass.

Even Pete Kuhnmuench, Executive Director of the Insurance Institute of Michigan, doesn’t see SB 248 generating lower auto insurance prices (i.e., “rate rollbacks”) for consumers anytime soon.

When asked by WLNS’s Mariah Harrison what effect SB 248 would have on “insurance rates,” IIM’s Kuhnmuench stated:

“Are we ever going to roll back costs? No, I don’t think we’re at that point, but I think we can bend down that cost curve going into the future.”

Even without Mr. Kuhnmuench’s admission,  there’s plenty of reasons I believe the propaganda and talking points coming from the politicians who voted for SB 248, based upon the auto insurance industry’s “free market” theory is nothing but No Fault “snake oil”:

  1. There’s no guarantee the “free market” theory will deliver lower auto insurance prices to consumers – not to mention the fact that, without a legal, statutory obligation, auto insurers may choose to ignore any downward pressure on prices that “free market” principles might be having.
  2. Even if the “free market” theory does deliver lower auto insurance prices, how long will consumers have to wait? How long is it going to take to “bend that cost curve” as Kuhnmuench said? And exactly how much lower will prices be, compared to the boost to insurance company profits? And, as we’ve seen before when the insurance companies have promised lower rates if favorable legislation passes, how long will the lower prices last before they are ramped up again?
  3. If the “free market” does result in lower auto insurance prices, then it will also set up consumers and auto accident victims for another round of yet more drastic No Fault “reform.” With lower auto insurance prices comes lower profit margins. Consequently, auto insurance companies will complain they’re not making money and, thus, pressure lawmakers into injecting more benefits restrictions into the No Fault Law.
  4. The cornerstone of the auto insurance industry’s “free market” theory – imposing price controls on what doctors and hospitals can charge for treating Michigan car crash victims – is an idea that goes against everything that “free market” principles stand for.
  5. The auto insurance industry subscribes to an impossible “free market” double-standard: “Free market” principles prevent imposing price controls on what auto insurance companies charge for their product, but those same “free market” principles don’t prevent prices controls on what others – like doctors and hospitals – charge for their products.

This rather Orwellian talking points e-mail that justifies a pro-insurance company vote based upon the “free market” appears to be the position the auto insurance industry and certain politicians have committed themselves to as a justification for why they refused to include guarantees of definite, quantifiable, meaningful and long-term savings in SB 248 as they hustled it through the Senate last week.

Sen. Joe Hune (R-Fowlerville), who sponsored SB 248, was reported by Michigan Radio’s Jack Lessenberry to take the following view of consumer savings under the Senate No Fault plan:

“Senator Hune, a believer in the justice of the free market, said he thought [“lower … auto insurance rates for consumers”] would just happen automatically, and said he’d be happy to revisit the issue in a few years if the rates don’t decline.”

Sen. Hune’s comments to Mr. Lessenberry explain why the chair of the Senate Insurance Committee was so short on details about consumer savings under SB 248 when he talked to MLive’s Emily Lawler:

“Neither [Senate Majority Leader Arlen] Meekhof [R-West Olive] nor Hune could put a number on what the average consumer could expect to save on car insurance as a result of this legislation. ‘I don’t have a number. It’s been a moving target,’ Hune said.”

Sen. Patrick Colbeck (R-Canton)’s office recently explained how “free market” principles factored into the Senator’s support for SB 248:

“The legislation should help reduce PIP rates by correlating rates to an average of free market reimbursement levels … [W]e need to return to free market principles in our healthcare system.”

Finally, the Associated Press’s David Eggert reported:

“While the bills don’t mandate reduced rates, insurers say they would drop in the free market to coincide with unspecified corresponding cost savings.”

Here’s what the auto insurance company’s “free market” argument boils down to:

  • The No Fault changes in SB 248 will allow Michigan auto insurance companies to make more money (read: more profits).
  • As profitability increases, the marketplace appears more attractive, thereby enticing more auto insurance companies to do business here.
  • The influx of auto insurance companies into the market will increase competition.
  • Competition will cause auto insurance prices to drop (presumably auto insurers will drop their prices in an effort to lure away business from their competitors).

However, aside from the points raised above, there’s a crucial flaw in the reasoning of the auto insurance industry’s “free market” theory: Michigan auto insurance marketplace is already 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.

And, finally, 14 of the top 20 “largest auto insurance companies by market share” (as compiled by Insure.com) are already doing business in Michigan.

Here’s a great example of the insurance industry’s talking points, courtesy of an e-mail I received from the Office of Senator Patrick Colbeck:

“Thank you for contacting our office in regards to SB 248 and SB 249.

This legislation looks to reform the Michigan No-Fault Insurance system in an effort to increase transparency for citizens coping with insurance claims, eliminate uncertainty in the current insurance claim process, and shift the burden to insurers and healthcare providers in an effort to encourage them to do better for their consumers.

Senator Colbeck voted for both SB 248 and SB 249 after they were amended by the Senate. The reforms create increased transparency into how Personal Protection Insurance (PIP) rates are set, while retaining unlimited coverage for people requiring long-term care as a result of injuries sustained in a traffic accident.

The legislation should help reduce PIP rates by correlating rates to an average of free market reimbursement levels rather than the prices charged by hospitals. Making the PIP rate formula more transparent will provide us with the ability to identify and isolate key cost drivers. The key issue with our PIP rates is the high cost of healthcare. The senator believes that we need to return to free market principles in our healthcare system.

SB 248 and SB 249 passed the Senate, 21-17, you can track its process at:

Thanks again for contacting our office, and if you have any further questions or concerns please do not hesitate to do so again.


Austin Koltonowski
Office of Senator Patrick Colbeck
(517) 373-7350
1020 Farnum
P.O.Box 30036
Lansing, MI 48909”

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