How To Lower Car Insurance In Michigan: Here’s What To Know
Give The Insurance Commissioner Real Power To Stop Excessive Auto Insurance Prices And Provide Much-Needed Transparency On Insurer Profits
Want to know the very best way to finally lower car insurance prices in Michigan? It’s time we give our Insurance Commissioner real power to stop car insurance companies from overcharging consumers in Michigan.
I’m talking about real power here. The same kind of power that the Commissioners have in most other states.
The loophole that lets car insurance companies overcharge Michigan drivers
This can be accomplished by closing a loophole that has existed in our state for far too long. This is the “reasonable degree of competition” loophole that currently exists in our state’s definition of “excessive” automobile coverage rates. Economists and people who study predatory pricing have demonstrated that this type of loophole is exactly what allows insurance companies to collude and overly inflate prices for auto insurance.
Under Michigan law, auto coverage rates are “excessive” and, thus, subject to the Insurance Commissioner’s regulatory power only if (1) the rates are unreasonably high for the coverage provided and (2) a reasonable degree of competition does not exist for car insurance.
The problem with the “reasonable degree of competition” loophole is that it makes it effectively impossible to prove insurance company rates are “excessive.”
Until this law is changed, the Insurance Commissioner’s power to stop providers from charging “excessive” auto coverage rates in Michigan is useless – even when the rates they are charging drivers for car insurance are clearly excessive.
Our Insurance Commissioner called for this change in the law 20 years ago, but state lawmakers have refused to act.
Closing the loophole helps lower car insurance rates while upholding Michigan drivers’ constitutional right to fair and equitable coverage. Unlike other insurance products, auto No-Fault insurance is a product all drivers in our state are required to buy. Drivers face civil and criminal penalties if they don’t purchase this product, which makes regulatory oversight even more important.
The state Supreme Court in Shavers v. Attorney General ruled that “motorists are constitutionally entitled to have no-fault insurance made available on a fair and equitable basis. The availability of no-fault insurance and the no-fault insurance rate regulatory scheme are, accordingly, subject to due process scrutiny.”
In ruling as it did, the Michigan Supreme Court has identified a constitutional basis for closing the “reasonable degree of competition” loophole and finally giving the Insurance Commissioner real power to stop excessive car insurance rates and high prices.
The power to regulate ‘excessive’ car insurance rates in Michigan
Under Michigan Law, MCL 500.2109(1)(a), the Director of the state Department of Insurance and Financial Services (DIFS) has the power to regulate and require lowering of “excessive” car insurance rates when the following two conditions are met:
- The rate is unreasonably high for the coverage provided
- A reasonable degree of competition does not exist for the coverage to which the rate is applicable
What is considered an ‘unreasonably high’ car insurance rate in Michigan?
In Michigan, the “excessive rates” statute, MCL 500.2109(1)(a), does not specify what constitutes a rate that is unreasonably high for the car insurance coverage provided.
However, the Michigan Administrative Code for Insurance provides that a rate is unreasonably high for the car insurance coverage provided if it is unreasonably high in relation to anticipated losses or expenses, or both, or to the uncertainty of loss for the coverage provided. (R. 500.1503(a))
‘Reasonable degree of competition’
The “excessive rates” statute, MCL 500.2109(1)(a), outlines factors to consider when determining whether a “reasonable degree of competition” exists in Michigan’s market and how to lower car insurance rates.
Specifically, the statute provides that:
- “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))
However, the Michigan Administrative Code on Insurance clearly defines the factors in the “reasonable degree of competition” analysis, which directly affects efforts to lower car insurance rates.
Specifically, the Administrative Code provides that:
- “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))
The entire theory of reasonable degree of competition is misplaced
The notion that competition among insurers in the Michigan car insurance market is going to keep prices low and affordable for drivers is a myth.
First, if that were true, then drivers in our state – especially those in Detroit – would not be consistently paying the highest auto insurance rates in the country year after year after year.
Second, economists and people who study pricing have proved this doesn’t work. What Michigan’s current law does instead is create an agreement – whether implicit and unspoken, or not – amongst insurers to set and keep rates at a level that maximizes profitability for car insurance companies.
The fancy term for this is tacit collusion. It means that contrary to real price competition, insurers will STILL charge what is most profitable for them – rather than trying to lower prices to undercut other competitors.
Lowering car insurance prices in Michigan too aggressively is bad business for everyone. It results in a back-and-forth trade war that ultimately puts the insurers in a position of selling their product for too little profit (according to the insurance companies, not to us as consumers who are legally required to buy their product).
Instead, insurers set their car insurance prices in Michigan to maximize profit, which happens to be roughly the same for all companies. While they may still try to lure another insurer’s business away with expensive TV ads, celebrity endorsements, and hollow promises to be there when their insureds need them, they never try to do so by charging a truly dramatically lower rate than others.
No one wants to be the first to lower car insurance prices in Michigan, because doing so can trigger an unprofitable price war that leaves all auto insurers worse off.
Impossible to prove that a ‘reasonable degree of competition’ does not exist
There are good reasons why I have concluded that it is – and will forever be – impossible to prove that a “reasonable degree of competition does not exist” in our state’s auto coverage market:
- Neither the statute nor the Administrative Code state what the standard is for whether a “reasonable degree of competition” exists or “does not exist.” Both identify factors that should or must be part of the determination. But neither authority states how the analysis of those factors either adds up to or does not add up to the existence of a “reasonable degree of competition” in our state’s auto coverage market.
- Given the subjective nature of the complex factors involved in the determination, it will be effectively impossible to prove the absence of a “reasonable degree of competition” from a practical, financial or time perspective. For instance, when does the “underwriting return” – or “profits” – weigh in favor or against a finding of competition? And who makes that determination? Additionally, who is going to agree to pay to conduct a study to make the determination? DIFS? State legislature? The auto insurance companies themselves? The Insurance Alliance of Michigan?
- The factors identified as being part of the “reasonable degree of competition” determination seem to have been chosen – both by virtue of their complex, subjective nature and their number – to ensure that an absence of a “reasonable degree of competition” would never be found. For instance, in the 45 years that the “excessive rates” statute has been on the books, I am not aware of it ever having been proven that “a reasonable degree of competition does not exist” in our state’s auto coverage market. And, given the complexity of the determination and the many obstacles that make it vastly unlikely to ever be undertaken, I do not foresee this determination ever being made in the future.
- For the past 20 years, lawmakers have tried unsuccessfully to eliminate the “reasonable degree of competition” loophole for excessive auto insurance rates because they know that it leaves drivers in our state vulnerable – as well as unprotected and powerless – to the ever-increasing prices that our state’s profit-driven auto insurance companies continue to charge. Here are lawmakers’ legislative efforts to close the “reasonable degree of competition” loophole: (1) House Bill 6000 of 2022, (2) House Bill 4651 of 2019, (3) House Bill 5524 of 2014, (4) House Bill 4972 of 2009, (5) House Bill 5420 of 2007 (passed the House), (5) Senate Bill 1023 of 2008, (6) Senate Bill 994 of 2006, and (7) House Bill 5583 of 2006.
It’s time to close the “reasonable degree of competition” loophole for excessive insurance rates
For many years, I’ve been calling for lawmakers to empower the Insurance Commissioner to stop car insurance companies from charging excessive rates for car insurance.
I have argued – repeatedly over the years – that this can be stopped in one easy fell swoop by closing the unworkable and impossible “reasonable degree of competition” loophole in the Insurance Code’s definition of “excessive” car insurance rates.
Because the “reasonable degree of competition” requirement is effectively impossible to meet, the power to stop “excessive” auto insurance prices that is bestowed on the Insurance Commissioner is effectively useless.
I’m not alone in acknowledging this obvious, historically-ignored reality.
In a 2005 study of the “Competitiveness and Premium Excessiveness” of our state’s Auto Insurance Industry in 2001 and 2002, the Insurance Commissioner made the following recommendation regarding the “reasonable degree of competition” requirement:
- “The Code should not require a finding of an absence of competition in order for rates to be considered excessive.”
The Insurance Commissioner explained:
- Even where “[r]ates are not unreasonably high in relation to covered losses, premiums may still be unaffordable from a consumer’s perspective—particularly in urban areas. Based on the foregoing, it is very clear that in many parts of the state, competition isn’t doing enough for consumers. Insurers are not competing in a manner that actually makes insurance more affordable in these areas.”
Like the recommendations and observations above, which lawmakers inexplicably ignored, the Insurance Commissioner also made the following suggestion — one that is just as urgently necessary now in Michigan to help lower car insurance rates as ever:
- “Where rates are excessive, the Commissioner should be given the authority to order refunds to policyholders who have paid too much. This would promote fairness, encourage companies to carefully avoid excessive rates, and make insurance more affordable.”
Real power for the Insurance Commissioner. Fair and equitable rates for drivers.
I’ve been outspoken as an insurance attorney in this state for many years that the Insurance Commissioner needs to have real power to regulate insurance companies and to stop them from overcharging drivers.
It’s clear that the current law prohibiting “excessive” auto insurance rates is unworkable and useless because the impossibility of proving that a “reasonable degree of competition” loophole does not exist effectively ties the Insurance Commissioner’s hands and ensures that no rate – regardless of how unreasonably high it is – will ever be declared “excessive.”
Closing the “reasonable degree of competition” loophole would breathe life into a law that was effectively dead on arrival when it was passed in 1981 and it would give substance to the state Supreme Court’s declaration that Michigan drivers are “constitutionally entitled” to lower car insurance rates that are “fair and equitable.”
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