Journal of Insurance Regulation
No-Fault Auto Insurance
Reform in Michigan:
An Initial Assessment
Patricia Born, Florida State University
Robert W. Klein, Temple University
Lawrence S. Powell, University of Alabama
When Michigan instituted no-fault auto insurance in , its proponents argued
that it would be a more efficient and less costly system for administering auto insur-
ance claims than tort liability. Unfortunately, the opposite eventually proved to be
true. Michigan’s system was unique among states because it provided unlimited
no-fault medical benefits, and insurers were severely constrained in their ability to
control medical costs. By , Michigan’s auto insurance claim costs and premiums
were the highest in the nation. This motivated the state’s legislature and governor to
significantly reform its no-fault law and tighten its regulation of auto insurance. While
these reforms and regulatory changes are relatively nascent, there is considerable
interest in knowing their effects, including the consequences of allowing consumers
to choose their level of no-fault coverage, instituting medical cost controls for no-fault
coverage, and tightening the regulation of insurance companies.
In this paper, the authors evaluate the no-fault reforms and their impacts. They
find some initial evidence that claims costs and premiums for many drivers decreased
substantially due to the reforms. However, medical providers and trial attorneys are
advocating for legislation that tempers the cost controls, arguing that they are too
harsh and arbitrary and that the adequacy and quality of care received by auto accident
victims have suffered as a result. Fundamentally, there is the issue of whether it is
possible to design a no-fault system that is superior to tort liability and is fair to all of
state’s residents in terms of the benefits it provides and its premium costs. provides
benefits and fair premium costs to state residents. Michigan could be viewed as
an experiment on both the promises and pitfalls of a grand vision for no-fault auto
insurance. This paper contributes to an important debate on whether no-fault auto
insurance can be saved and if it is worth saving.
Journal of Insurance Regulation
No-Fault Auto Insurance
Reform in Michigan:
An Initial Assessment
Patricia Born, Florida State University
Robert W. Klein, Temple University
Lawrence S. Powell, University of Alabama
ABSTRACT
When Michigan instituted no-fault auto insurance in , its proponents argued that
it would be a more efficient and less costly system for administering auto insurance
claims than tort liability. Unfortunately, the opposite eventually proved to be true.
Michigan’s system was unique among states because it provided unlimited no-fault
medical benefits, and insurers were severely constrained in their ability to control
medical costs. By , Michigan’s auto insurance claim costs and premiums were
the highest in the nation. This motivated the state’s legislature and governor to sig-
nificantly reform its no-fault law and tighten its regulation of auto insurance. While
these reforms and regulatory changes are relatively nascent, there is considerable
interest in knowing their effects, including the consequences of allowing consumers
to choose their level of no-fault coverage, instituting medical cost controls for no-fault
coverage, and tightening the regulation of insurance companies. In this paper, we
evaluate the no-fault reforms and their impacts. We find some initial evidence that
claims costs and premiums for many drivers decreased substantially due to the reforms.
However, medical providers and trial attorneys are advocating for legislation that
tempers the cost controls, arguing that they are too harsh and arbitrary and that the
adequacy and quality of care received by auto accident victims have suffered as a
result. Fundamentally, there is the issue of whether it is possible to design a no-fault
system that is superior to tort liability and is fair to all of a state’s residents in terms
of the benefits it provides and its premium costs. Michigan could be viewed as an
experiment on both the promises and pitfalls of a grand vision for no-fault auto
insurance. Our paper contributes to an important debate on whether no-fault auto
insurance can be saved and if it is worth saving.
Journal of Insurance Regulation
I. Introduction
This paper presents an initial assessment of significant changes to Michigan’s no- fault
auto insurance law that were enacted in and phased in from the date of their
enactment through . There was strong political pressure in Michigan to reform its
no-fault system and tighten its regulation of auto insurance because of long-standing
issues and problems with auto insurance generally and no-fault insurance specifically.
These issues and problems included the high cost of coverage and a large number
of uninsured drivers, among others. Very high auto insurance rates in Detroit were
particularly burdensome for its residents and hampered their economic mobility.
Michigan is one of states, along with Puerto Rico, that have some form of no- fault
auto insurance (Insurance Information Institute, ).
1
In a mandatory no-fault system,
if someone suffers bodily injuries due to the negligence of another, the injured party
must meet a damage threshold to sue or file a claim against the negligent party. In
a mandatory no-fault state, personal injury protection (PIP) coverage is the primary
source of recovery for persons injured or killed in auto accidents. PIP provides coverage
for the medical expenses and lost wages of an insured person regardless of who is
at fault in an accident. In a tort liability state, injured parties can file claims against
at-fault drivers and their insurers to recover their damages without having to meet a
damage threshold.
2
When Michigan instituted no-fault auto insurance in , its proponents argued
that it would be a more efficient and less costly system for administering auto insur-
ance claims than tort liability. Unfortunately, the opposite eventually proved to be
true. Michigan’s system was unique among states because it provided unlimited
no-fault medical benefits, and insurers were severely constrained in their ability to
control medical costs. Unlimited medical benefits and the lack of medical cost controls
caused auto insurance claim costs and premiums to soar to the highest level in the
country. In turn, high premiums contributed to a relatively high number of uninsured
motorists in the state. This motivated the state’s legislature and governor to significantly
reform Michigan’s no-fault law and increase its regulation of auto insurance in .
The principal reforms included allowing consumers to choose their level of no-fault
coverage, instituting medical cost controls for no-fault coverage, raising minimum
liability limits, and tightening the regulation of auto insurance rates.
The data indicate that the reforms have lowered claim costs and premiums, but
certain reforms have been challenged by medical providers and trial attorneys who
argue that they are too severe and have caused some accident victims to receive
inadequate medical care. Consequently, legislation has been introduced that would
temper certain cost controls enacted in ; the changes that will be enacted to the
reforms are uncertain as of the writing of this paper.
How recent legislation has affected and might further affect the cost of auto insur-
ance is a topic of considerable interest and the main question we explore in this paper.
We examine the costs of auto insurance in Michigan relative to other states and how
its no-fault system have affected these costs. We review several elements of the reform
. In states with choice systems, car owners can either opt in or opt out of no-fault insurance.
. In some tort liability states, PIP coverage also is provided on a mandatory basis or is optional for a car owner
to purchase.
Journal of Insurance Regulation
legislation and evaluate its likely effects. We also discuss the issues surrounding the
changes to PIP coverage and discuss the motivation for further legislation that would
temper the reforms.
In the next section, we review the high premiums and problems with uninsured
drivers that motivated the push for no-fault reforms. In Section III, we review the
fundamental elements and issues associated with no-fault insurance generally and
in Michigan, specifically, prior to and after the reforms. Section IV follows with
an examination of the claim costs of PIP and bodily injury liability (BIL) coverages, as
these two coverages are affected by Michigan’s no-fault system and affect premium
rates. In Section V, we evaluate key provisions of the reform legislation and consider
how it may be affecting the cost of auto insurance and other aspects of the market.
Our discussion considers criticisms of the changes that were enacted and how certain
cost controls may be relaxed because of these criticisms. We conclude with a summary
of our findings and discuss further research that could be conducted.
II. High Premiums and Uninsured Drivers
To understand the strong political motivations that eventually led Michigan to enact
reform legislation, it is helpful to review the market problems that existed prior to the
reforms. These problems were high premiums for many drivers, particularly in Detroit,
and a large number of uninsured drivers.
A. High Statewide Premiums
According to Insure.com, Michigan had the highest auto insurance premiums in the
country in .
3
In Table II., we show estimated average auto insurance premiums
by state in , , and and each state’s ranking based on the information
provided by Insure.com. This auto insurance cost measure for consumers is for a
hypothetical driver and controls for the amount of insurance coverage purchased
and the risk characteristics of the insured.
Table II. indicates that the average premium in Michigan was $, in , which
was % higher than the national average. Michigan also ranked first among the states
with the highest average premium. The average auto premium in Michigan then fell
by .% to $, in and then rose slightly to $, in . Using this metric,
Michigan’s rank among states moved from first to fourth over this same period.
4
Note
that Insure.com does not include PIP coverage in its premium comparisons; in other
surveys that include a designated level of PIP coverage (e.g., Value Penguin), Michigan’s
average premium is much higher and still ranks first among all states.
. Available at https://www.insure.com/car-insurance/car-insurance-rates.html. Insure.com commissioned
Quadrant Information Services to calculate auto insurance rates for seven large carriers in , U.S. cities and
, ZIP codes. The rates are based on full coverage for a single, -year-old male who commutes miles to
work each day, with policy liability limits of $,/$,/$, and $ deductibles on collision and
comprehensive coverages. The estimated premiums do not include PIP coverage. The hypothetical driver has a
clean record and good credit. Rates were averaged in each state for the cheapest-to-insure best-selling vehicles.
. There are different ways to estimate or calculate the average auto insurance premium for a state. An alternative
approach would be to divide the amount of auto insurance premiums written by the number of insured vehicles.
Other sources of these estimates may yield results that differ somewhat from those provided by Insure.com.
Regardless of the source and the methodology, prior to the enactment of the reform legislation, Michigan would
have had the highest or near the highest auto insurance premiums in the country.
Journal of Insurance Regulation
Table II.1: Average Auto Insurance Premiums by State: , , and
State Premium Rank Premium Rank Premium Rank
Alabama $, $, $,
Alaska $, $, $,
Arizona $, $, $,
Arkansas $, $, $,
California $, $, $,
Colorado $, $, $,
Connecticut $, $, $,
DC $, $, $,
Delaware $, $, $,
Florida $, $, $,
Georgia $, $, $,
Hawaii $, $, $,
Idaho $, $ $,
Illinois $, $, $,
Indiana $, $, $,
Iowa $, $, $,
Kansas $, $, $,
Kentucky $, $, $,
Louisiana $, $, $,
Maine $ $ $,
Maryland $, $, $,
Massachusetts $, $, $,
Michigan $, $, $,
Minnesota $, $, $,
Mississippi $, $, $,
Missouri $, $, $,
Montana $, $, $,
Nebraska $, $, $,
Nevada $, $, $,
New Hampshire $, $ $,
New Jersey $, $, $,
New Mexico $, $, $,
New York $, $, $,
North Carolina $, $, $,
North Dakota $, $, $,
Ohio $, $ $,
Oklahoma $, $, $,
Oregon $, $, $,
Pennsylvania $, $, $,
Journal of Insurance Regulation
Rhode Island $, $, $,
South Carolina $, $, $,
South Dakota $, $, $,
Tennessee $, $, $,
Texas $, $, $,
Utah $, $, $,
Vermont $, $, $,
Virginia $, $, $,
Washington $, $, $,
West Virginia $, $, $,
Wisconsin $ $ $,
Wyoming $, $, $,
U.S. Average $1,457 $1,428 $1,682
Source: Insure.com
It is likely that several forces are working in different directions to influence the state’s
average premium and ranking among other states. Hence, the fact that Michigan’s
average premium rose slightly in does not mean that the no-fault reforms have
been unsuccessful in reducing claim costs and premiums. Auto insurance rates have
been rising in many states, as the frequency and severity of auto accidents are increas-
ing. Indeed, according to the Bureau of Labor Statistics (BLS), the Consumer Price
Index (CPI) for motor vehicle insurance increased nationally by .% from to
July ; it increased by .% from to .
We calculated more recent average premium trends using data from the Fast
Track Monitoring System (FTMS).
5
Figure II. shows average premiums for the liability
coverages for the years - calculated using the FTMS data.
6
We calculate the
average premium by dividing total premiums paid by the number of earned exposures
(car-years). Hence, unlike the average premiums published by Insure.com, this measure
of premium costs reflects drivers’ choices and does not control for the coverages
purchased and the risk characteristics of insureds. The FTMS data are provided on a
quarterly basis; we use the data from all four quarters of each year to calculate our
figures for that year. Figure II. shows that the average liability premium in Michigan
tracked the national average closely from -. This changed when the average
liability premium in Michigan dropped from $ in to $ in .
7
In contrast,
the average liability premium nationwide increased from $ in to $ in .
. In constructing this system, industry statistical agents (Verisk and the Independent Statistical Service) obtain
data from a large portion of the industry to determine how auto insurance claim costs and premiums are trending.
The data for this system are not “developed,” e.g., claim costs are on a paid basis, not on an incurred basis.
. We calculate a weighted average liability premium using two different tables in the FTMS data set. We
obtained premium data from one table and data on earned exposures from another table. The organizations that
compile these data generally do not recommend combining data from the two tables as the insurers providing
the data are not exactly the same for the two tables. For our purposes, we are less concerned about the point
estimates of average premiums and more focused on how average premiums have trended.
. Note that this figure for is for the year ending . Its only difference from the figure is that it
reflects the experience for the first and second quarters of .
Journal of Insurance Regulation
Figure II.1: Average Auto Liability Premiums: - — Michigan and U.S.
$500
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
$550
$600
$650
$700
$750
$800
$850
$900
$950
MichiganU.S.
Source: Fast Track Monitoring System and authors’ calculations.
The possible reasons for this marked fall in the average liability premium in Michigan
warrant some discussion. Note that, as we discuss below, the minimum liability limits
increased in , and we have no reason to believe that Michigan drivers chose to
lower their limits if they exceeded the new minimums. Indeed, lower PIP premiums
should give drivers more money to increase their liability limits and the reform legis-
lation increased minimum liability limits. Further, the evidence indicates that the rates
for PIP coverage fell, and some drivers opted for something less than unlimited PIP
coverage. Hence, it is likely that the changes to PIP coverage were largely responsible
for this decrease in the average liability premium. Additionally, some insurers may
have lowered their rates for the other liability coverages to remain competitive in the
post-reform market environment.
In general, there are several factors influencing rates that are largely unaffected by
Michigan’s reform measures, such as increases in auto repair costs and post-pandemic
driving. More specific to Michigan, some drivers may have responded to lower rates
due to the law changes by purchasing more coverage, such as higher liability limits
and lower deductibles. On the other hand, as Michigan drivers are becoming more
familiar with their PIP options over time, more of them may be opting for lower PIP
coverage, which will lower their premiums, all other things equal.
B. High Premiums in Detroit
Using these average premiums statistics reflect statewide averages; the rates insurers
charge vary significantly across locations and vary by different drivers within a state.
Journal of Insurance Regulation
All other things equal, rates in certain urban areas can be much higher than rates in
suburban and rural areas. For example, auto insurance rates in Detroit have been
especially high for several reasons, including high traffic density, high vehicle theft rates,
and high levels of attorney involvement in auto insurance claims, among others. Also,
one study determined that the severity of PIP claims in Detroit—$,—was almost
twice the severity of PIP claims in surrounding communities—$, (Mosely, ).
Despite this evidence, some still contend that insurers overcharged Detroit drivers for
auto insurance before the law was changed (Heller, ) and are still overcharging
Detroit drivers. The high cost of auto insurance in Detroit not only increased the political
pressure for reform, but it also led to other regulatory changes that were intended to
reduce the disparity in rates between Detroit and other areas in the state.
8
According to The Zebra, Detroit has been one of the most expensive cities in the
nation for auto insurance. In , the representative premium in Detroit was $,
compared to a statewide premium of $,.
9
In , the representative premium
in Detroit was $,, and the statewide average was $,; New York City had the
second highest premium of $, in .
10
Consequently, if this survey is reliable, it
would indicate that there has been a significant decline in Detroit auto insurance rates
since (-.%), even if they remain much higher than rates in the rest of Michigan.
C. Uninsured Drivers
One unfortunate consequence of Michigan’s high auto insurance costs is its relatively
high number of uninsured drivers. Various factors affect a vehicle owner’s choice to
purchase and maintain insurance coverage, including the premium they would be
required to pay.
11
All states, with one exception, require car owners to carry a minimum
amount of liability insurance on their vehicles. States vary on how their minimum
insurance requirements are enforced and their financial penalties for driving without
insurance.
12
Nonetheless, some car owners still choose to take their chances and go
without insurance.
To the extent that Michigan’s system for auto insurance has increased its cost, it has
induced more vehicle owners to go without coverage. Figure II. shows estimates of
the percentage of uninsured drivers in Michigan relative to the national average for
the years , , , , , and . These estimates, developed by the
Insurance Research Council (IRC), indicate that in , .% of Michigan drivers were
. Some have expressed disappointment that rates have not fallen enough for Detroit drivers under the new
law. See, for example, “Many Michigan Drivers Drop Unlimited No-Fault Insurance — Yet Rates Slow to Fall,” Detroit
Free Press, April , .
. As with the average premium estimates published by Insure.com, the estimates published by The Zebra are
based on a hypothetical driver and set of coverages.
. Available at https://www.thezebra.com/auto-insurance/how-to-shop/car-insurance-rates-city/.
. Borba () examines the factors associated with differences in the incidence of uninsured motorists
across states. He found that economic factors—particularly differences in income, education, and employment
rates—explain a large portion of state differences in uninsured motorists premium rates.
. In Michigan, an individual convicted of driving without insurance can be fined up to $ for two years and
required to pay court costs. Additionally, an individual can have their license suspended for days and face up
to one year in jail for driving without insurance.
Journal of Insurance Regulation
uninsured (Insurance Research Council, ).
13
This figure was considerably higher
than the national average of .% and had increased substantially since when
it was %. Only one state—Mississippi—was estimated to have a higher percentage
of uninsured drivers than Michigan in .
14
However, in , the percentage of
uninsured drivers in Michigan had fallen to .%, dropping its ranking from second
to fifth for this metric. We believe that the premium savings due to the reforms were
largely responsible for this positive development.
Figure II.2: Estimated Percentage of Unisured Motorists: -
Michigan and U.S. Average
30%
25%
20%
15%
10%
5%
0%
2007
13.0%
17.0%
13.4%
19.5%
12.2%
21.0%
12.2%
20.3%
12.6%
25.5%
19.6%
2009 2012 2015 2019 2022
Michigan US Average
14.0%
Source: Insurance Research Council
Several concerns arose from Michigan’s historically high number of uninsured
drivers, including its negative effects on drivers who do not have coverage and the
shifting of accident costs to vehicle owners who purchase coverage. In essence, this
is a problem that, to a degree, could be self-perpetuating and self-reinforcing. As
more car owners go without coverage or choose to buy lower liability limits to lower
their premiums, the costs of uninsured and underinsured motorist coverage increase
. The percentage of uninsured drivers is estimated by dividing the number of uninsured motorist claims by
the number of BIL claims. There may be other ways to estimate the percentage of uninsured drivers, but this is
the method that insurance researchers typically use.
. In , the IRC estimated that .% of drivers in Mississippi were uninsured.
Journal of Insurance Regulation
for those who buy this coverage.
15
In turn, higher insurance premiums, due to more
uninsured/underinsured drivers, induce more drivers to go without insurance.
Both uninsured drivers and those they injure are at risk. A driver without insurance
will not be able to collect on their own policy for any damages they suffer and will not
be allowed to sue other drivers who cause harm to them. Further, the costs of damages
not covered by insurance and otherwise not paid by uninsured drivers are shifted
to others, including people injured by drivers without insurance, medical providers,
and taxpayers who absorb the medical costs arising from accidents not covered by
insurance. Further, not having insurance will not relieve a driver of their liability for
the damages they cause. Any assets they have are subject to being taken, and their
future wages and other income can be garnished to pay for the damages they owe.
Additionally, these estimates of uninsured drivers do not reflect how high auto
insurance costs affect peoples’ ability and decision to own a vehicle. The higher this
cost, the more people we would expect to not own a vehicle, all other things equal. This
may be less of a concern for people who have good access to public transportation,
but it is a greater concern for people who do not. Lack of access to transportation
could have negative effects on a person’s ability to obtain employment and engage in
other activities. Hence, the high cost of auto insurance in certain areas could adversely
affect the economic status of households and the economic health of those areas.
It appears that the changes to PIP coverage that have enabled car owners to lower
their premiums have had a beneficial effect in reducing the number of uninsured
drivers. There are indications that some drivers who previously could not afford or
chose not to buy auto insurance have purchased coverage. According to a press
release issued by Michigan’s Department of Insurance and Financial Services (MDIFS),
more than , previously uninsured drivers took advantage of the law’s amnesty
period to buy coverage without paying a penalty.
16
This report is consistent with the
significant decline in the percentage of uninsured motorists revealed in Figure II..
III. No-Fault Auto Insurance in Michigan
In this section, we review how no-fault auto insurance generally works in the states
that have this type of insurance system and Michigan’s no-fault system, specifically,
before and after it was reformed in .
A. Fundamental Elements of No-Fault Auto Insurance
Michigan is one of nine states, as well as Puerto Rico, with a mandatory no-fault system;
three additional states have “choice” no-fault systems (Insurance Information Institute,
).
17
There are states with a tort liability system and states that are termed
“add-on” states.
18
PIP coverage is compulsory in states and optional in six states.
. A car owner could avoid this additional cost by not purchasing uninsured/underinsured motorist coverage,
as this coverage is not mandatory in Michigan. However, this coverage is typically included when consumers seek
quotes in buying auto insurance.
. According to a more recent estimate, , previously uninsured drivers have purchased insurance
due to the reforms (Poe, ).
. In states with choice systems, car owners can either opt in or opt out of no-fault insurance.
. An “add-on” state is a state that has a tort liability system but also requires or allows car owners to purchase
PIP coverage.
Journal of Insurance Regulation
In states with tort liability systems, drivers who cause accidents are directly liable
for the bodily injuries (BI) and property damage (PD) they cause. In a traditional
no-fault system (without “add on” PIP coverage), if someone suffers bodily injuries
due to the negligence of another, the injured party must meet a damage threshold
to sue the negligent party. These thresholds can be monetary—a certain amount of
medical expenses must be incurred (e.g., $,)—or verbal (e.g., there must be
an injury that results in the total or partial loss of a body member or function). Five
of the no-fault states, including Michigan, have verbal thresholds, and the other
seven have monetary thresholds. In a mandatory no-fault state, the injured persons
and family members of persons killed in auto accidents can seek recovery from their
PIP coverage. PIP provides coverage for the medical expenses and lost wages of an
insured person regardless of who is at fault in an accident.
When no-fault auto insurance was first introduced in the early s, many believed
that it would be a better system for compensating people injured in auto accidents.
19
The belief then was that no-fault would be a less costly and more equitable system
for compensating persons injured in auto accidents than tort liability. Its proponents
contended that it would significantly reduce litigation and other costs and, hence,
result in lower auto insurance premiums.
20
In theory, no-fault imposes a tradeoff
between restrictions on lawsuits and lower premium costs with more certain, timely,
and equitable benefits for injured persons.
Early empirical studies of no-fault found that strict tort thresholds—high monetary
or verbal—could reduce litigation costs (Carroll and Kakalik, ).
21
However, no-fault
generally has not lived up to its promise. Initially, states that adopted no-fault achieved
cost savings, but over the years, these savings have dissipated. Auto insurance has come
to be more costly in no-fault states than in tort liability states (Anderson et al., ).
One might also question whether any gains in greater benefit certainty, timing, and
equity that have been achieved under no-fault have justified its overall higher costs.
One problem is that the predicted reduction in tort claims under no-fault in a given
state either did not materialize or was not sustained. Further, expensive PIP coverage
due to high medical costs in some no-fault states, such as Michigan, has likely more
than offset any savings from reduced litigation over liability. Consequently, no state
has enacted a no-fault system since , and it is no longer proposed as a solution
for high auto insurance rates. Indeed, five states have repealed their no-fault systems
since they were enacted in the s (Insurance Information Institute, ).
22
One significant problem appears to be that state thresholds for filing lawsuits were
not drawn tight enough to offset the high medical costs of the no-fault systems that were
. Refer to, for example, Anderson et al. () for a historical review of no-fault insurance in the U.S., which
includes Michigan. Keaton and O’Connell () first presented a proposal for no-fault auto insurance. Mellon
and Kowalski () review the history of no-fault auto insurance in Michigan.
. Additionally, no-fault proponents argued that it would result in more certain, timely, and equitable
compensation for those injured in auto accidents; people injured would not be subject to the vagaries and
uncertainties associated with tort liability.
. Cummins and Weiss () examined the effects of no-fault auto insurance systems on pure premiums (the
average loss cost per insured vehicle) and found that verbal thresholds reduced costs, but monetary thresholds
increased them. They did not distinguish between states with low monetary thresholds and high monetary
thresholds. They did note that if monetary thresholds do not rise in pace with inflation, their ability to reduce
costs will decline over time.
. One of these states—Pennsylvania – subsequently reinstated its choice no-fault system.
Journal of Insurance Regulation
created. Indeed, Michigan’s verbal threshold appears to have substantially checked
its BIL costs relative to other states. However, Michigan’s high PIP costs swamped any
savings achieved due to its tort threshold for reasons we discuss below. Nonetheless,
O’Connell et al. () contend that no-fault is a better system if properly constructed
and is a valid policy option to address high auto insurance costs. Whether Michigan’s
no-fault reforms have, in fact, produced a better system is a fundamental question
that we address in this paper.
B. Problems with No-Fault Auto Insurance in Michigan
Michigan’s historically high auto insurance costs and rates were due to several factors,
with its PIP coverage as the primary source of its problems.
23
Prior to the reforms,
Michigan’s PIP coverage offered unlimited medical benefits. In other states with PIP
coverage that is either mandatory or optional, benefits are subject to a minimum limit
(e.g., $, in New Jersey).
24
Further, under the old law, there was no medical fee schedule in Michigan; medical
providers could be reimbursed according to their “reasonable and customary” charges.
Also, family members could be paid for services they provided to an injured person and
there was no statutory limit on the number of hours they could charge. Additionally,
insurers were severely constrained in their ability to control the utilization of medical
services. Insurers could attempt to limit the fees they paid, and their reimbursement of
the care provided by family members, but there were no clear rules they could cite in
such efforts. Hence, disputes over PIP claims often resulted in costly litigation. These
aspects of no-fault benefits encouraged considerable fraud and abuse by medical
providers, trial attorneys, and others who found ways to milk the system.
25
The operations and financing of the Michigan Catastrophic Claims Association
(MCCA) reflect the high medical costs under the state’s no-fault system. The MCCA
was established in to assume and distribute the cost of high PIP claims among
all Michigan drivers.
26
When a claim reaches a certain monetary threshold, the MCCA
pays for any costs that exceed the threshold, functioning as an excess reinsurer for
PIP claims. To cover its costs, the MCCA imposes an annual assessment per vehicle
that insurers pass on to their policyholders.
27
In , the MCCA covered PIP claim
costs exceeding $, on a given claim with an annual per vehicle assessment of
$. As claim costs came down due to the reforms, the assessments also declined.
. Some of these factors are beyond the control of policymakers per se, such as traffic density, the costs of
auto repairs and medical care, and adverse weather conditions, among others.
. Next to Michigan, New York and the District of Columbia have the highest amounts of PIP benefits at
$,.
. A study by the Citizens Research Council (CRC) found that medical claims cost auto insurers % more
in Michigan than claims for similar accidents in other states (Citizens Research Council, ).
. The MCCA was created when insurers found it difficult to purchase excess reinsurance coverage for auto
insurance claims from private reinsurers.
. This assessment is based on what the MCCA expects to pay out on claims in the coming fiscal year.
Journal of Insurance Regulation
In , the MCCA provided a $ per vehicle refund for car owners, as it was able
to reduce its loss reserves due to the reforms.
2
Unlimited medical coverage, the lack of a medical fee schedule, and uncontrolled
utilization had enabled and encouraged considerable fraud and abuse under the
prior system. (For an example, refer to Insurance Research Council, b.) There
were strong incentives for medical providers to prescribe or offer more services than
necessary for injured people. With no out-of-pocket payments required of injured
persons, they had no financial incentive to decline unnecessary services. Additionally,
a person’s family members could be paid substantial amounts for providing home
attendant care. Further, some attorneys encouraged their clients to bring suits against
their own insurers regarding their PIP benefits in order to obtain a contingency fee.
Hence, all these aspects of Michigan’s system for PIP benefits created significant moral
hazard, resulting in significant “hard fraud” and “soft fraud” and abuse where injuries
were either exaggerated or excessive services were provided.
C. Reform Legislation
The concerns about high PIP costs and other problems with auto insurance in Michigan
motivated the no-fault amendments that were enacted. On May , , Michigan’s
Governor Gretchen Whitmer signed a compromise bill, S.B. , (which became P.A.
) to reform Michigan’s system for auto insurance.
29
The new law’s provisions were
phased in from the day it was enacted through . This legislative accomplishment
occurred after many years of failed attempts at fixing Michigan’s auto insurance system.
Certain stakeholders, such as medical providers and trial attorneys, as well as some
consumer advocates, had strongly opposed the significant reforms, making it more
difficult for legislators to change the system. The political pendulum swung in favor of
reform when Michigan’s Democratic governor, the mayor of Detroit, and prominent
business leaders advocated for no-fault reform.
The new law made substantial changes to PIP coverage. Michigan drivers now have
six options for the amount of PIP coverage they purchase. These options include: )
$,, if the insured is enrolled in Medicaid, or if the person’s spouse and resident
relatives have “qualified health insurance,” Medicaid, or other insurance that provides
PIP benefits; ) $,; ) $,; or ) unlimited coverage. Insureds also can
lower their PIP premiums if they make their health insurance primary for their medical
costs arising from auto accidents. Additionally, a “qualified person” is allowed to
opt out of PIP coverage entirely if the person’s spouse and any resident relative has
“qualified health insurance” or PIP coverage.
The new law also instituted a fee schedule for medical provider reimbursement
that allows insurers to limit these fees to %-% of the applicable Medicare rate
that varies with the type of facility. For a service that does not have a Medicare rate,
providers are allowed to charge .%-% of what they charged for the service in
. Currently, the MCCA covers PIP claim costs exceeding $,; member insurers retain losses on claims
up to $,. For fiscal year , there are two MCCA assessments. One assessment is $ per vehicle for
drivers who elect unlimited PIP coverage. The second assessment is $ per vehicle for every driver regardless
of their PIP coverage for debt recoupment due to litigation that invalidated certain cost controls for persons
injured before the law changed.
. The text of S.B. can be accessed at https://www.legislature.mi.gov/documents/2019-2020/publicact/
pdf/2019-PA-0021.pdf.
Journal of Insurance Regulation
, adjusted for inflation. Additionally, insurers were given greater ability to control
the utilization of medical services.
New limits were also imposed on home attendant care provided by family members.
Insurers are not required to pay family members for more than hours per week
although they can choose to pay for more hours. There are also limits on the hourly
rates that family members can be paid.
Additionally, Michigan’s minimum BIL limits increased from $, per person
and $, for all persons to $, per person and $, for all persons. The
minimum required limit of $, for property damage did not change. A driver’s
liability limits default to $,/$,/$, unless they elect lower limits.
Further, the legislation returned Michigan to a prior approval (PA) rate regulatory
system for auto insurance and prohibits insurers from using several “non-driving” rating
factors. These regulatory changes were motivated by the high rates in Detroit and
allegations that insurers were engaging in unfair discrimination against low-income
and minority drivers. Some stakeholders also insisted on increased regulation to
ensure that the no-fault changes would produce premium savings for consumers. The
new law mandated specific rate reductions according to the amount of PIP coverage
that a vehicle owner chooses.
Although the new law has only been in full effect for a couple of years, there is
evidence that it already has reduced claim costs and produced significant premium
savings for at least some and perhaps many drivers. There also are indications that
the number of uninsured drivers has decreased significantly as the cost of insurance
has fallen. However, some stakeholders have sought to roll back or at least temper
some of the medical cost controls that were part of the reforms, and consumer
advocates want to further tighten the regulation of auto insurers.
30
In a recent decision
on a lawsuit challenging the no-fault reforms, Andary vs. USAA Casualty Insurance
Company, the Michigan Supreme Court nullified certain medical cost controls for
persons injured before the law changed. Further, new legislation has been introduced
and passed by the Michigan Senate that would significantly relax these controls for
all insureds, including people injured after the law changed. In other words, no-fault
insurance in Michigan may continue to evolve.
IV. No-Fault and Auto Liability Claim Costs in Michigan
To gain a better understanding of what was causing Michigan to have such high auto
insurance premiums and how the reforms may be affecting claim costs, it is helpful to
review the underlying costs of providing this coverage. Here we consider the average
loss costs (total claims costs divided by earned exposures), also known as the pure
premiums, for the liability coverages and the frequency and severity of liability claims.
The coverages most relevant to this review are PIP and BIL, as they were the focus of
the legislation.
. The website for the Coalition to Protect Auto No-Fault (CPAN) outlines the policy positions of the critics of
the no-fault amendments. Available at https://protectnofault.org/.
Journal of Insurance Regulation
A. Personal Injury Protection Costs
Figure IV. shows the weighted average loss cost per insured vehicle for PIP in Michigan
and mandatory no-fault states generally (choice no-fault states excluded) for the years
-.
31, 32
Michigan is excluded from the calculation for no-fault states, as its
inclusion would skew the average for all no-fault states. This figure indicates that the
average loss cost for PIP was increasing and was much higher in Michigan in
($.) than in other no-fault states ($.). The data suggest that the very high
cost of PIP claims in Michigan was largely responsible for its high PIP premium rates
that created significant political pressure to reform its no-fault system.
Figure IV.1: Average PIP Loss Cost per Vehicle Insured: -
Michigan and No-Fault States Excluding Michigan
$0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 201920182017
$100
$200
$300
$400
$500
$600
$700
$800
MichiganNo-Fault States Excl. Michigan
Source: NAIC and authors’ calculations
We can also examine more recent PIP pure premium trends developed from the FTMS
data to see how the new law may be affecting PIP costs. Figure IV. shows the PIP pure
premium for Michigan and other mandatory no-fault states for the years -;
the figures for only reflect the year ending the second quarter of . The chart
shows a significant .% decline in Michigan’s PIP pure premium from ($)
to ($). We see a small uptick in the pure premium to $ in stemming
from the first and second quarter results. This uptick could be due to insurers
. The data used to create this figure reflects three years of loss development, making it more accurate from
an actuarial perspective than more current data available from the FTMS. The data here are drawn from various
editions of the NAIC’s Auto Insurance Database Report.
. Because no-fault is optional in states where drivers can choose the type of system in which they participate,
these states are not comparable to states where no-fault is mandatory.
Journal of Insurance Regulation
increasing their payments on claims incurred before the law changed in due to
the Andary lawsuit challenging the medical cost controls.
Figure IV.2: Average PIP Loss Cost per Vehicle Insured: - — Fast Track Data
Michigan and No-Fault States Excluding Michigan
Source: Fast Track Monitoring System and authors’ calculations
The two factors most likely contributing to the decline in insurers’ PIP costs from
through are the medical cost controls and consumers’ PIP coverage choices
enabled by the new law. If many drivers opted for lower levels of PIP coverage, this
would reduce PIP claim costs. Also, other provisions of the new law, such as limits on
the fees of medical providers and home attendant care provided by family members,
could be further contributing to lower PIP costs, although insurers are now compelled
to apply the old rules to “legacy insureds”—people injured before the law changed.
It is helpful to further decompose the elements of PIP average loss costs to better
understand the drivers of these costs. Figure IV. compares the frequency of PIP claims
in Michigan with the frequency of PIP claims in other mandatory no-fault states for
the years -.
3
The frequency of PIP claims in Michigan had been relatively
low compared to the frequency of PIP claims in other no-fault states. For example,
in , the frequency of PIP claims in Michigan was . compared to . in other
no-fault states. Hence, claim frequency does not appear to have been the primary
cause of high PIP costs in Michigan.
. Frequency is the number of claims multiplied by , divided by the number of insured car years.
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
$0
$100
$200
$300
$400
$450
$350
$250
$150
$50
$500
MichiganNo-Fault States Excl. Michigan
Journal of Insurance Regulation
Figure IV.3: PIP Frequency: - — Michigan and No-Fault States
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
MichiganNo-Fault States Excl. Michigan
Source: NAIC and authors’ calculations
Using the FTMS data, we can get some idea as to how the new law may be affecting
the frequency of PIP claims. Figure IV. shows paid claim frequency trends for the
years - derived from the FTMS data. We can see from this figure that paid
claim frequency had remained relatively stable in both Michigan and the U.S. until
when we see declines in both. It could be that the decrease in driving due to
the pandemic caused the frequency of accidents and claims to fall. Claim frequency
stabilized nationally from to , while in Michigan we see a further decline from
. in to . in . It is possible that the law changes in Michigan contributed
to this decline. If the medical cost controls reduced reimbursement rates for medical
services covered under PIP, fewer PIP claims may be filed because the incentive to
encourage auto accident victims with minor injuries to file for PIP benefits is lower.
Journal of Insurance Regulation
Figure IV.4: PIP Paid Claim Frequency: - — Fast Track Data
Michigan and No-Fault States Excluding Michigan
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
1.3
1.2
1.1
1
0.9
0.8
0.7
0.6
0.5
0.4
MichiganNo-Fault States Excl. Michigan
Source: Fast Track Monitorung System and authors’ calculations
Figure IV. compares the severity of PIP claims based on incurred losses in Michigan
with other mandatory no-fault states for the years -.
34
This figure indicates
that claim severity had been a major driver of PIP claim costs in Michigan and a
principal contributor to total auto insurance costs in the state; it was $, in .
The sharp rise in the severity of PIP claims in Michigan, as well as the fact that it was
much higher in Michigan than in other mandatory no-fault states (more than times
higher in ), was a matter of considerable concern that motivated the no-fault
reforms that were enacted.
. “Severity” is the total dollar amount of claims divided by the number of claims.
Journal of Insurance Regulation
Figure IV.5: PIP Claim Severity: -
Michigan and No-Fault States Excluding Michigan
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
0
10000
20000
30000
40000
50000
60000
70000
80000
90000
MichiganNo-Fault States Excl. Michigan
Source: NAIC and authors’ calculations
These comparisons of PIP frequency and severity in Michigan with PIP frequency
and severity in mandatory no-fault states indicate that the severity of these claims in
Michigan was the principal reason why Michigan’s PIP costs have been considerably
higher than PIP costs in other mandatory no-fault states. Hence, the data lend support
to the contention that Michigan’s unlimited PIP medical benefits and its lack of a
medical fee schedule, uncontrolled utilization, and substantial fraud and abuse were
the principal factors causing Michigan’s PIP costs to be so high.
We can offer additional observations on how Michigan’s PIP benefits likely con-
tributed to the high severity of its PIP claims. With no effective limit on the amount
of the medical benefits that could be claimed and the lack of cost controls, there
were strong incentives for medical providers to prescribe or offer more services than
necessary for injured people. With no out-of-pocket payments required of injured
persons, they had no financial incentive to decline unnecessary services. Additionally,
a person’s family members could be paid substantial amounts for providing home
attendant care.
3
Hence, all these aspects of Michigan’s system for PIP benefits created
significant moral hazard. This most likely resulted in significant hard fraud, soft fraud,
and abuse where injuries are either exaggerated or excessive services are provided.
3
. As explained in Section V, family home attendant care refers to care that might otherwise be provided by
a nurse or home health aide, including assistance with daily living activities.
. An article by Detroit Free Press reporter JC Reindl highlighted the kinds of problems that caused very high
auto insurance premiums in Detroit: “How aggressive lawyers, costly lawsuits and runaway medical bills make
Detroit car insurance unaffordable,” Detroit Free Press, May , .
Journal of Insurance Regulation
The more current FTMS data allow us to see whether there are indications that
the reform legislation has had any initial effects on the severity of PIP claims. Figure
IV. compares PIP severity in Michigan to that in other no-fault states for the years
- . For Michigan, we see a decline in paid claim severity from $, in
to $, in —a .% decrease. The decline in PIP severity in Michigan
was particularly significant from to . This suggests that, as the reforms took
full effect, insurers’ payments on PIP claims dropped considerably. However, we also
see that paid claim severity increased to $, in based on two quarters of
experience in . Note that because these data are for paid claim severity, they reflect
payments on claims incurred in and , as well as claims incurred in previous
years. It may be the case that, as insurers began increasing their payments on the
claims of legacy insureds due to the Andary lawsuit, paid claim severity increased as
any savings on claims for non-legacy insureds (i.e., people hurt after the law changed)
were more than fully offset by payments on the claims of legacy insureds.
Figure IV.6: Paid Claim Severity: - — Fast Track Monitoring System
Michigan and No-Fault States Excluding Michigan
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
0
10000
20000
30000
40000
50000
60000
70000
MichiganNo-Fault States Excl. Michigan
Source: Fast Track Monitoring System
B. Bodily Injury Liability
Because Michigan’s PIP coverage law is an element of its broader no-fault insurance
system, we also consider how this system may have affected the cost of BIL claims in
Michigan relative to other states. To the extent that Michigan’s no-fault law may have
reduced the cost of BIL claims, this could have offset Michigan’s high PIP costs at least
Journal of Insurance Regulation
to a degree, understanding that the net result still may have been much higher overall
insurance costs in Michigan. Additionally, if further changes to the reform legislation
are contemplated, the benefits of Michigan’s tight threshold for liability claims should
still be achievable with the changes to its rules for PIP benefits.
We begin by examining the average loss costs for BIL claims. This gives us a general
picture of how Michigan’s no-fault system and verbal threshold had been affecting
liability claim costs in total. Figure IV. compares the average loss cost for BIL claims
for split limits policies in Michigan with the average loss costs in other mandatory
no-fault states and all states for the years -.
37
Figure IV.7: Estimated Percentage of Unisured Motorists: -
Michigan, No-Fault States, and All States
All States
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
$40
$60
$80
$100
$120
$140
$160
$180
$200
$220
$240
MichiganNo-Fault States Excl. Michigan
Source: NAIC and authors’ calculations
This figure reveals that BIL claim costs in Michigan were significantly below what they
were in other no-fault states and all states. In , the average loss cost for BIL for split
limits policies was $. in Michigan compared to $. in other no-fault states
and $. in all states. This suggests that Michigan’s verbal threshold is helping to
reduce its BIL costs. It also is possible that Michigan’s high PIP benefits had reduced
the incentive for injured persons to file claims against parties at fault even when their
injuries met the verbal threshold.
. In such policies, there are separate limits for bodily injury damages per person, bodily injury damages for
all persons, and property damages. Having separate limits can reduce the amount of liability damages covered
due to an accident relative to what would be covered if there was one combined limit for all damages.
Journal of Insurance Regulation
We performed additional analysis of the frequency and severity of BIL claims in
Michigan that we only summarize here but are available in detail from Born and Klein
(). Our analysis indicates that BIL claim frequency was considerably lower in
Michigan than in other no-fault states and all states. In , BIL claim frequency was
. in Michigan, . in other no-fault states, and . in all states.
Michigan’s verbal threshold for liability claims could be substantially reducing
the number of these claims relative to what would be the case if Michigan had a less
stringent threshold or did not have a no-fault system. It also might be the case that
Michigan’s generous PIP benefits made it less likely that injured parties would file a
liability claim, but this is a matter of speculation. Regardless, it is apparent that the
relatively low frequency of BIL claims in Michigan has been a substantial contributor
to its relatively low average loss costs for this coverage.
On the other hand, the data indicate that the severity of BIL claims has been
considerably higher in Michigan than in other states. In , the average BI claim in
Michigan for split limits policies was $, compared to $, in other mandatory
no-fault states and $, in all states. The higher severity of BIL claims in Michigan is
not necessarily surprising if Michigan’s verbal threshold is causing the liability claims
that are filed to be more severe, i.e., the threshold discourages small claims from
being filed. Other factors could also be causing liability claims for larger amounts
to be filed and paid in Michigan, such as higher levels of attorney involvement and
greater levels of soft fraud or hard fraud.
38
We can gain some perspective on how the no-fault amendments may be affecting
BIL costs by examining more recent data on BIL pure premiums, claim frequency, and
severity from the FTMS. If the amendments have caused PIP claims to fall, it is possible
that there has been an associated increase in BIL claim costs, as accident victims may
be more likely to recoup their costs from at-fault parties. Figure IV. shows BIL pure
premium trends for the years -.
. We performed the same calculations for pure premiums, claim frequency, and claim severity for combined
limits policies. The results for combined limits policies were very similar to the results for split limits policies, so we
do not report the combined limits results here. The only difference is that the pure premium and claim severity
for combined limits policies are a bit higher than that for split limits policies.
Journal of Insurance Regulation
Figure IV.8: BIL Pure Premiums: - — Fast Track Monitoring System
Michigan and No-Fault States Excluding Michigan
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023
40
60
80
100
120
140
160
180
MichiganNo-Fault States Excl. Michigan
Source: Fast Track Monitoring System and authors’ calculations
What we see in this figure is that the BIL pure premium increased in Michigan and
other mandatory no-fault states from to . However, the BIL pure premium
increased at a greater pace in Michigan—.%—than in other mandatory no-fault
states—.%. This suggests that Michigan’s no-fault amendments may be influencing
its BIL claim costs. The data also indicate that while the frequency of BIL claims only
increased modestly after the changes to the no-fault law, there was a sharp increase
in the severity of BIL claims in Michigan in followed by a smaller increase in
. In other mandatory no-fault states, the increase in BIL severity has been more
gradual. Hence, the increase in the BIL pure premium in Michigan appears to be due
to an increase in claim severity and not claim frequency.
Several factors could be contributing to the sharp increases in the BIL pure premium
and claim severity in Michigan. One of these factors could be the greater use of tort
liability by accident victims who are seeking to recoup their damages from at-fault
drivers. We note that the new law allows accident victims to sue at-fault parties in
tort for damages not paid by their PIP coverage without having to meet the verbal
threshold. The new law also increased the minimum required BIL limits that drivers are
required to carry. Together, these two provisions of the no-fault amendments could
be at least partially responsible for the increase in BIL claim costs.
Overall, the data indicate that despite the much higher severity of BIL claims in
Michigan, the low frequency of such claims caused the average loss cost for these claims
to still fall far below that of other states. Nonetheless, if Michigan’s verbal threshold
Journal of Insurance Regulation
was working to reduce the costs of auto insurance generally, it was not enough to
fully offset the high costs of its PIP coverage prior to the reform. The data also suggest
that the no-fault changes for PIP coverage may have shifted some bodily injury
costs that were previously paid through PIP to other coverages and payors.
V. Evaluation of No-Fault Reforms
In In this section, we evaluate key provisions of the reform legislation and consider issues
that have been or could be raised with these provisions. We focus on the provisions
that involve PIP coverage, reimbursement of medical expenses, and minimum liability
insurance requirements. While proponents of the legislation believed that the changes
to PIP coverage would substantially reduce the costs of auto insurance for many
drivers, some stakeholders have expressed concerns that those who choose low PIP
limits, or opt out of PIP entirely, will not have adequate coverage if they are seriously
injured. Further, medical providers and others contend that medical cost controls
for PIP coverage under the reforms are too tight, causing some accident victims to
receive inadequate care; the critics of these controls have challenged them in court
and also support legislation to temper them. The regulatory changes in the reform
legislation also could prove to be problematic but an evaluation of these changes is
beyond the scope of this paper.
3
A. PIP Options and Premium Savings
As explained in Section III, under the new law, car owners have five options for PIP
coverage levels and can also lower their premium by making their health insurance
primary for medical expenses arising from auto accidents. A article in the Detroit
Free Press reported the following statistics on drivers’ PIP choices for the fourth quarter
of
4
:
PIP Choice % of Drivers
Unlimited %
$, %
$, %
$, %
Opt out %
Unknown %
Source: Detroit Free Press
It is interesting to note that, based on these statistics, more than % of Michigan car
owners were still opting for unlimited PIP coverage at the end of . There may be a
number of reasons for this, but car owners that maintain unlimited PIP coverage limit
the premium savings they can achieve. It is possible that, over time, more drivers will
. Indeed, some have expressed considerable disappointment with how much the new law has actually
reduced rates (Kaffer, ). Refer to Born and Klein () for an evaluation of competition in Michigan’s auto
insurance market and the likely effects of the new law’s tightening of insurance regulation.
. “Many Michigan Drivers Drop Unlimited No-Fault Insurance – Yet Rates Slow to Fall,” Detroit Free Press,
April , .
Journal of Insurance Regulation
opt for something less than unlimited PIP coverage as they become more familiar with
the new law. This would further reduce premiums for these drivers, all other things
equal. Regardless of the mandated rate reductions, the new law should have lowered
premiums significantly for many drivers if they chose something less than unlimited
PIP coverage. Indeed, over time, competition among insurers could prompt them to
offer even larger rate reductions than those required. In , the MDIFS reported
that the average statewide rate reductions initially filed by insurers for PIP coverage
were greater than those mandated by the new law.
4
Our initial analysis of average premiums suggests that some drivers are benefiting
from substantial reductions in their premiums due to the reform legislation. The savings
that any driver could achieve depend on many things including their choices on PIP
coverage, liability limits, and deductibles. With the average premium falling by almost
% from to , we expect that some drivers are seeing much larger premium
reductions, e.g., drivers who have opted out of PIP coverage. Rates are rising again
for several reasons, but this does not mean that the reforms have not had desirable
effects if premiums are still lower than they would be otherwise for many drivers.
On July , , the MDIFS issued a press release touting the cost savings and
other benefits that have been achieved under the new law.
4
The press release stated
that the reforms had generated more than $ billion in premium savings. It also stated
that Michiganders received $ billion in premium refunds.
4
According to the press
release, more than , previously uninsured drivers took advantage of the law’s
amnesty period to buy coverage without paying a penalty. Further, the DIFS reported
that companies or their affiliates received authorization to enter Michigan’s market,
suggesting that the reforms made Michigan’s auto insurance market more attractive.
In addition to the premium savings that many Michigan drivers are likely seeing,
the premium reductions available appear to be reducing the number of uninsured
drivers as indicated in the MDIFS press release and the latest statistics from the IRC.
If auto insurance becomes more affordable for certain drivers, they should be less
likely to go without insurance, all other things equal. Further, some people who did
not own a car because they could not afford the cost of insurance may now be able
to purchase a vehicle. Having a car could help some people become employed or
get a better job.
One concern with the new law is how well drivers are covered for the medical
expenses they incur if they are injured.
4
To the extent that someone relies on their
health insurance to cover their medical costs from an auto accident, they will be subject
to out- of-pocket payments, such as deductibles, co-pays, and coinsurance. This
should not be a big concern for people with health insurance with low out-of-pocket
payments but could be a problem for drivers with high out-of-pocket payments in
their health plans.
. Press release available at https://www.michigan.gov/difs/News-and-Outreach/press-releases/2020/06/09/
new-auto-insurance-rate-filings-approved-average-statewide-savings-exceed-new-law-requirements.
. Available at https://www.michigan.gov/difs/news-and-outreach/press-releases/2022/07/11/governor-whitmer-
state-leaders-celebrate-cost-savings-provided-by-auto-no-fault-reform-law.
. To place these savings in perspective, auto insurers in Michigan collected $. billion in direct premiums
written in .
. Refer to, for example, Kaffer ().
Journal of Insurance Regulation
Another significant issue could be the expenses associated with custodial care and
other types of care that are typically not covered by health insurance.
4
Custodial care
is the assistance that someone receives to help them with daily living activities, such
as bathing, dressing, etc. This type of care is different than the home nursing care that
a person would receive, such as the administration of medications, physical therapy,
etc. Home nursing care is typically covered by health insurance, but custodial care
is not.
46,
The provision in the new law that allows Michigan residents to sue at-fault
drivers for damages that exceed their PIP limits provides another potential source of
recovery for their costs of custodial care but no assurance that all of these costs can
be recovered.
While at least some Michigan drivers may have obtained substantial savings under
the new law, other payers of medical expenses are likely seeing increases in their
costs. These other payers include employers who offer group health insurance to
their employees, Medicare, and Medicaid.
The cost of liability coverage also could increase because drivers with little or no PIP
coverage who are injured in accidents caused by others are more likely to sue those
at fault and/or sue for larger amounts. The new law allows injured persons, if they are
Michigan residents, to sue at-fault drivers for medical expenses and lost wages that
exceed their PIP limits even if their injuries do not meet the verbal threshold. One
justification for this provision is that it gives injured persons a means of recourse to
recover excess damages not covered by their own insurance. Additionally, all other
things equal, this provision could prompt more drivers to choose lower PIP limits.
However, this provision also effectively weakens the application of the verbal threshold
and may be leading to more litigation and higher liability insurance costs.
B. Limits on Reimbursement Rates
Reimbursement rates also changed for medical providers. Under the reform law,
insurers are only required to reimburse medical and rehabilitation providers for
services rendered at %-% of Medicare reimbursement rates. For most providers,
the maximum reimbursement rate started at % and dropped each year by five
percentage points to % of Medicare rates after July , , where it was intended
to stay. Recently proposed legislation would increase this percentage to %.
The limits on reimbursement rates are higher for certain medical facilities, such as
hospitals with a high percentage of indigent patients and stand-alone rehabilitation
facilities that specialize in treating traumatic injuries; these facilities are reimbursed
at % of what Medicare pays. It is proposed that this percentage be increased to
%. Additionally, certain facilities are allowed to charge up to % for emergency
medical services; this percentage would rise to % under the proposed changes.
If Medicare does not provide an amount payable for a treatment, then a provid-
er’s reimbursement was initially capped at %-% of their scheduled fee for the
treatment in effect on January , , adjusted for inflation. As with the scheduled
. The annual cost of nursing home care in Michigan can easily exceed $, depending on the level of care.
. Long-term care insurance is designed to cover the costs of custodial care. However, relatively few people
buy this coverage because of its high cost and young people rarely purchase this coverage.
. Medicaid will cover the custodial care of individuals who have essentially exhausted all their assets. However,
only a limited number of nursing homes are qualified to accept Medicaid patients.
Journal of Insurance Regulation
fees for services covered by Medicare, certain facilities receive a smaller haircut on
their regular fee. For the sake of simplicity, we will term this the “% rule.” This range
is now .%-%.
Medical providers that specialize in post-acute care and rehabilitation services
have expressed concerns that the reimbursement rates that insurers are allowed to
use for services not covered by Medicare under the reforms are insufficient to cover
their costs of providing care for accident victims suffering catastrophic injuries.
48
These
concerns have been articulated by the Coalition Protecting Auto No-Fault (CPAN).
49
The haircut for non-Medicare-coded services has been of much greater concern to
medical providers than the scheduled reimbursement rates tied to Medicare and was
one of the two cost controls that were challenged in the Andary lawsuit.
The Michigan Public Health Institute (MPHI) conducted a study, consisting of two
surveys, on the impact of the new fee structure on service availability for people with
catastrophic injuries resulting from a car crash (Michigan Public Health Institute,
and ).
50
These surveys found that the new cost controls have had or are expected
to have severe adverse financial effects on many providers specializing in post-acute
and rehabilitation care. CPAN contends that a substantial number of these organizations
had to close or significantly curtail their operations and this, in turn, has negatively
affected the quality of care received by auto accident victims requiring post- acute
and rehabilitation services.
As noted above, for drivers who continue unlimited PIP coverage for medical
services, insurers are not required to pay for more than hours per week of home
attendant care by family members; insurers can choose to pay for more than hours
per week in specific cases. Further, under the reforms, family members can be paid
based on the fee schedule used for medical providers. Previously, there was no fee
schedule for services provided by family members, so insurers were hampered in
their ability to limit what they were required to pay. These provisions of the reforms
were added to address the concern that the reimbursement of family members for
home attendant care had been abused in many cases under the old law. To provide
some perspective, home attendant care accounted for $. billion (%) of the claim
costs of the MCCA in (MCCA, ).
51
As discussed above, there was litigation regarding whether the % rule and
the -hour-per-week limit for family care should apply retroactively to accidents
and injuries that occurred before the new law took effect in a suit filed against two
insurers—Andary v. USAA Casualty Insurance Company.
52
The plaintiffs in this suit
argued that the contested medical controls were overly restrictive and arbitrary and
should not apply to people injured before the law changed. The defendant insurers
prevailed in the trial court but lost on appeal in the Michigan Court of Appeals and
. Refer to, for example, “Uncertainty Looms for Hospitals Under New Auto Insurance Law,” Crain’s Detroit
Business, June , .
. CPAN’s website can be accessed at https://protectnofault.org/.
. The study was commissioned by the Brain Injury Association of Michigan (BIAMI).
. This figure includes the care provided by a residential facility, care within a home provided by an agency,
and care within a home provided by a person’s family members. Family attendant care accounted for $.
million – .% – of the MCCA claims payments in .
. Refer to “Michigan Supreme Court: No-Fault Overhaul Doesn’t Apply to , Catastrophic Survivors”
Detroit Free Press, July , .
Journal of Insurance Regulation
the Michigan Supreme Court. Hence, the medical cost controls enacted in have
been invalidated for legacy insureds.
The concerns that motivated the plaintiffs in the Andary suit also may affect the
limits on reimbursement rates going forward. In October , legislation was passed
in the Michigan Senate that would substantially modify the medical cost controls
for PIP coverage that were enacted in .
53
This legislation would increase the
scheduled reimbursement rates for services covered by Medicare as noted above.
For services not covered by Medicare, the legislation specifies the reimbursement
rates that insurers would be required to pay delineated by the type of service, with
different rates for the Detroit Metro Area and the remainder of the state. These rates
are more generous for most providers than what they are receiving under the %
rule. Additionally, the -hour-per-week limit for reimbursement of family members
for providing home care would be increased to hours per week. The legislation
further specifies higher hourly reimbursement rates for family members based on the
types of services they provide.
This legislation, if enacted, will affect rates moving forward. Insurers will need to raise
their rates to adjust for higher claim costs stemming from increasing reimbursement
rates for providers of medical, rehabilitation, and home attendant care services, as
well as the increase in the hourly limit and reimbursement of home attendant care
provided by family members. In turn, this will raise premiums for drivers who continue
to purchase some amount of PIP coverage. This could induce more drivers to lower
their PIP coverage or opt out of it entirely.
A thorough evaluation of this legislation is beyond the scope of this paper, but we
can offer some observations. Medical providers already are constrained by the reim-
bursement rates used by private health insurers, Medicare, and Medicaid. Additionally,
the scheduled reimbursement rates under no-fault exceed the scheduled fees for
workers compensation. Consequently, assuming their marginal costs are adequately
covered by these payers, the issue for providers is how they cover and allocate their
overhead (fixed) costs. Under the old system, providers had become accustomed
to relying on auto insurance to cover an inordinate portion of their fixed costs. They
are not able to do this to the same extent under the reforms. Michigan drivers could
contend that this is only fair. Nonetheless, if medical providers are being truthful with
respect to the concerns they have expressed, it appears that some are being forced
into cutbacks of their services and facilities.
To our knowledge, no one has conducted any formal research on how the proposed
legislation would affect the services received by auto accident victims or how it would
affect claim costs and premiums, but insurers have offered initial cost estimates. In
testimony before the Michigan House Committee on Insurance and Financial Ser-
vices, Eric Poe (the CEO of Citizens United Reciprocal Exchange), estimated that the
legislation would increase premium costs by more than $ million.
54
Presumably,
the provider community and trial bar believe this legislation would provide sufficient
. This legislation in Michigan Senate Bills , , and . A summary of this legislation is available at https://
www.legislature.mi.gov/documents/2023-2024/billanalysis/Senate/pdf/2023-SFA-0530-F.pdf.
. Testimony available at https://www.house.mi.gov/Document/?Path=2023_2024_session/committee/house/
standing/insurance_and_financial_services/meetings/2023-11-02-1/documents/testimony/CURE%20Auto%20
Insurance.pdf.
Journal of Insurance Regulation
reimbursement of the cost of providing medical and post-acute care to auto accident
victims. The questions that remain unanswered are whether the objective of funding
adequate care for accident victims could be achieved at a lower cost and how much
the proposed changes would affect claim costs and premiums going forward.
C. Utilization Controls
The new law has enabled insurers, including the MCCA, to institute greater control
over the utilization of medical services arising from auto accidents. Insurers are allowed
to conduct utilization reviews, which refer to an insurer’s initial evaluation of the
appropriateness of both the level and the quality of treatment, products, services, or
accommodations provided to an insured under their PIP coverage based on medically
accepted standards. A medical provider can be required to submit necessary records
and other information concerning a treatment or service they have provided. A provider
that knowingly submits false or misleading records or other information to an insurer
or the MDIFS commits a fraudulent insurance act and is subject to sanctions.
It appears that one intention of the new provisions is to flag and require medical
providers to justify services that go beyond what is normally provided for a particular
injury. Specifically, under the reforms, if a provider provides a service that is not usually
associated with the diagnosis or condition for which a patient is being treated, the
insurer may require the provider to explain the necessity or indication for the service.
The MDIFS oversees the utilization review process. An auto insurer must have a
certified utilization review program that complies with the department’s utilization
review administrative rules and is subject to its approval. An insurer also is required
to submit an annual report to the MDIFS detailing its review program and activities.
Additionally, insurers’ utilization decisions are subject to appeal to the MDIFS.
We are not aware of any published evaluations on how well utilization review is
working under the new law and how it may be affecting the cost and quality of medical
care provided. Anecdotally, our discussions with insurers indicate that their enhanced
ability to control utilization has helped to lower PIP claim costs. As with the limits on
reimbursement rates, this is an area that warrants further study.
D. Minimum Liability Insurance Requirements
As discussed in Section III, the new law also raised the minimum liability insurance
requirements for drivers to $, per person and $, for all persons, and
insurers must also offer BIL coverage with limits of $, per person and $,
for all persons.
55
One argument for raising the minimum liability insurance requirements
is that the change to PIP requirements increases the likelihood that drivers will be sued
for accidents they cause as the new law allows injured persons to sue at-fault drivers
for damages that exceed their PIP limits. A second argument for higher liability limits
is that they will help injured persons to recover more of the damages they suffer from
the insurance of at-fault drivers. A vehicle owner can purchase underinsured motorist
coverage, but this comes at a cost.
. Only two states—Alaska and Maine—have minimum liability insurance requirements this high. Some states
also require vehicle owners to purchase uninsured/underinsured motorist coverage, but Michigan does not.
Journal of Insurance Regulation
The downside of higher liability insurance requirements is that they increase
premiums for vehicle owners who would otherwise choose lower amounts of coverage.
The premium costs of higher limits could be particularly burdensome for low-income
car owners and could cause more of them to drop their insurance. Consequently,
policymakers have to consider the tradeoff between the greater protection provided
by higher liability limits against their costs and effects on certain drivers. We expect
that this aspect of the new law has raised premiums for this coverage for drivers who
had previously opted for lower liability limits.
Further, the increase in minimum liability insurance requirements will likely lead
to higher liability claims costs, all other things equal, and the most recent data are
consistent with this prediction. This is not just a matter of higher amounts of insured
losses. Some injured persons could choose to sue for higher damages than they would
otherwise if the at-fault driver has higher liability limits. Hence, while higher minimum
insurance requirements provide greater protection for at-fault drivers, they also may
be leading to more lawsuits and higher court awards and settlements. Anticipating
an increase in BIL claim costs, insurers will need to raise premiums for this coverage
that will partially offset the savings from lower PIP limits.
5
VI. Summary and Conclusions
This paper provides an initial and high-level look into no-fault auto insurance reform
in Michigan. Our initial analysis reveals several things. One, prior to the reforms, what
car owners were paying for auto insurance in Michigan had been increasing at a fast
pace and was much higher than what other car owners were paying in other states.
Two, high PIP costs appear to be the main culprit that had caused auto insurance
premiums to be so high in Michigan. Three, it was the severity and not the frequency
of PIP claims that has been the problem in Michigan. Four, Michigan’s verbal threshold
for liability claims appears to have reduced auto insurance costs and premiums in
Michigan relative to other states, but any cost savings from this were swamped by
high PIP costs prior to the reforms. Five, Michigan has had a high number of uninsured
motorists, which is likely due, at least in part, to its high auto insurance premiums.
Our initial evaluation of the likely effects of the reform legislation indicates
that it is significantly reducing the costs of auto insurance for many Michigan drivers.
The savings for any given driver will depend on the amount of PIP coverage they
choose, among other factors. Based on recent data available from the FTMS, we
see sharp reductions in average liability premiums from through the second
quarter of . These data also indicate that the average loss cost for PIP and the
severity of PIP claims had fallen considerably from to as the medical cost
controls took effect. However, PIP claim costs increased in , which is likely due
to the Andary lawsuit and other litigation. These statistics suggest that the reforms
have provided considerable premium savings, at least for some Michigan drivers. It
also appears that lower premiums due to the reforms have reduced the number of
uninsured drivers in Michigan.
. Increased costs due to higher minimum liability insurance requirements could be offset somewhat by lower
costs for underinsured motorists coverage.
Journal of Insurance Regulation
However, there are reasons to believe that we could see PIP costs and premiums
increase again, as indicated by the most recent data. The Michigan Supreme Court’s
decision in the Andary case is causing insurers to pay out more on PIP claims for
people injured before the law changed. The most recent proposed changes to PIP
medical cost controls for all insureds would increase claim costs and compel insurers
to increase their rates for PIP coverage, all other things equal.
As time passes and more data become available, we will be able to better gauge
how the reforms are affecting claim costs and premiums and the likely effects of
changes to the reforms. One development that we would like to examine is drivers’
choices for liability limits and PIP coverages. If drivers are significantly reducing their
PIP coverage as allowed under the new law, we would expect this to substantially
reduce claim costs and premiums, all other things equal. Over time, more drivers may
reduce their premiums by choosing lower amounts of PIP coverage. Additionally, if PIP
premium rates rise due to the proposed modifications of the medical cost controls,
this will likely induce more drivers to lower their PIP coverage or opt out of it entirely.
Additionally, we need to gain a better understanding of how the reforms as originally
enacted have affected the cost and quality of medical care for persons injured in
auto accidents and monitor how changes to the cost controls, if enacted, will affect
medical care going forward. It would be desirable to disentangle the effects of the
scheduled reimbursement rates for medical providers, the reimbursement of post-
acute and rehabilitation services, the limits on family-provided home attendant care,
utilization controls, and drivers’ choices on their PIP coverage. How are these measures
affecting the adequacy and quality of the medical care received by injured persons?
How are injured persons dealing with the cost of custodial care if they do not have
PIP coverage? To what extent and with what effect are drivers suing at-fault drivers
for auto accidents if their PIP coverage is insufficient to cover their medical costs?
Answering these and other questions will help us better understand how Michigan’s
unique system for no-fault auto insurance has performed and affected the interests
of Michigan drivers and accident victims.
Journal of Insurance Regulation
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