There's one big problem with Michigan's no-fault auto insurance reform

Nancy Kaffer
Detroit Free Press

If you're wondering about the worst thing that could possibly happen after the auto insurance reform Michigan lawmakers adopted becomes law next year, I've got a not-completely-hypothetical contender: What if no-fault reform works for some people, but not for Michigan's most vulnerable drivers? 

Michiganders pay the highest auto insurance rates in the nation; Detroiters pay the highest rates in Michigan. Michigan's no-fault auto insurance system offers unlimited, lifetime benefits to injured motorists, widely considered a primary driver of insurance costs. The no-fault reform passed this spring allows drivers to choose their own level of personal injury protection, sets a fee schedule for medical billing through no-fault insurers, and requires insurers to offer increased liability protection.

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Here's the problem: No-fault reform has been sold as the key to bringing down Michiganders' insurance costs. But under Michigan's newly adopted insurance regulations, insurers can still set rates using factors like geography and credit history, and they can apply those rates to newly created territories of variable size. 

The Michigan Legislature passed no-fault auto insurance reform this year, proposing caps on insurance coverage to drive the price of insurance down for some customers.

That's risky, because there's nothing in Michigan's no-fault reform legislation to prevent insurers from micro-targeting rates, offering more attractive premiums to customers outstate, in Detroit's suburbs, or even residents of the city's most rapidly growing neighborhoods — while leaving most Detroiters with unaffordably high insurance bills.

Changes to Michigan's no-fault system won't kick in until next summer. And that means Gov. Gretchen Whitmer and the Michigan Legislature have time to ensure that no-fault reform actually leads to rate relief, for everyone.

How? Data. And transparency. 

Insurance industry representatives concede that no-fault reform isn't guaranteed to cut costs, noting that increases to other portions of a customer's bill could offset savings generated by no-fault reform. Most recently, the Insurance Alliance of Michigan told the Free Press that the new law's requirement that insurers provide increased liability protection could mean higher premiums. 

No-fault is just one portion of any driver's insurance premium, and insurers use a multitude of factors to set rates, including the number of miles driven per day, a driver's safety record, and the safety features or value of the car itself. Insurers also use non-driving factors to set rates, like gender, marital status, credit history, or home address, claiming that information correlates to risk. 

Here's where it gets tricky. The risk insurers are talking about isn't risky driving; it's the risk they'll have to pay an auto insurance claim. Because folks living in poverty  are more likely to have bad credit (or no credit), basing insurance rates on credit history means folks with the least financial security pay higher rates. 

Michigan's no-fault reform bars the use of some, non-driving factors, such as gender, marital status, home ownership and credit scores. But the new law permits insurers to use credit reports, which contain the data that credit bureaus use to determine credit scores.

And Insurers can still use geography to set rates as long as they can demonstrate a connection between location and risk. 

Michigan's new regulations allow for territories of variable size — territories, the state spokesperson said, don't need to be uniform in size or population density, and insurers don't even have to use the same territories.

State insurance regulators can reject an insurer's proposed rate, but only if it violates criteria established under the new law.  

Joshua Rivera, a data and policy advisor at the University of Michigan's Poverty Solutions program, says the state should "make sure that that geography is not a proxy for the for other indicators that are intimately tied to where people live, such as potential racial segregation or income segregation of a given neighborhood. 

A lack of regulatory rigor could "lead to changing what used to be kind of a rough knife around certain neighborhoods to isolating certain characteristics with a surgical scalpel,"  he warns.

Rivera says the insurance market is lopsided because it's difficult for customers to find out how rates are set, or how exactly insurers factor credit history or geographic location into rates. So making the reform law work for everyone will require the state to demand more data, and more transparency, than insurers have provided in the past. 

"What gets measured gets managed," Rivera says. If the state prioritizes accountability, tracking data to ensure that rates actually go down, for everyone, no-fault reform could be a an important step forward.

Nancy Kaffer is a Free Press columnist. Contact: