Taking Aim at Auto Insurers
With health insurance dominating the political debate, few Americans give much thought to automobile insurance. A developing situation in economically devastated Michigan, however, may revive an issue that hasn’t aroused much political concern lately.
Some background: In the 1980s, rising tort costs coupled with state-imposed price controls made auto insurance increasingly expensive and difficult to get. In response, states experimented with different regulatory schemes and politicians gained votes bashing auto insurers. Ultimately, however, leaders in both parties couldn’t help but notice that states like Illinois, Virginia, and Ohio that lacked price controls, subsidies, and the like actually had lower rates and greater levels of consumer satisfaction. Most states followed their lead and, by the late 1990s, the crisis ended and auto insurance dropped from public view.
Through the chaos, Michigan stood apart. Since the late 1970s, it has required all auto insurers to provide unlimited medical benefits for auto accident victims while making it virtually impossible for drivers to sue over accidents. The resulting rates are higher than those in surrounding states but, except in the City of Detroit--where high theft and fraud rates raise premiums to over $5,000--basically affordable at around $925 a year.
The state’s recent economic turmoil (unemployment stands at around 15 percent), however, has begun to change things. Even though auto rates have actually fallen recently, Gov. Jennifer Granholm and her allies in the state legislature (mostly from Detroit) have begun to agitate for a series of reforms that would make auto insurance into a political hot potato once again.
The first set of new proposals—a series of “bad faith” bills aimed at punishing insurers that wrongly deny claims—would likely scare away an industry that provides over 50,000 Michigan jobs. The set of seven bills, which has already passed the Michigan House of Representatives, would replace modest fines for wrongful denial of insurance claims with jail terms for executives whose companies fall astray of the law. While Michigan’s current laws may let companies off too easily, it’s hard to imagine that many companies would bother doing business in a state where a bad management decision could land an executive in jail.
A forthcoming Michigan ballot proposal misleadingly named “Fair Affordable Insurance Rates” (FAIR) would make things worse through an impossible promise of across-the-board auto insurance rate cuts coupled with the creation of a massive new state insurance bureaucracy and a 100 percent tax on insurance company advocacy activities. All this would leave untouched laws that require insurers to charge rates high enough to pay likely claims. In other words, the state will have to give up on either the bureaucracy or ignore the rate cuts (the latter is explicitly allowed.)
Given Detroit’s desperate straits and, for that matter, the general distaste for paying auto insurance bills (it’s only useful when something bad happens and too many insurance companies provide bad service), the proposals could go somewhere. Together, they’ll worsen the perceived problems they’re intended to address. But, if they produce votes for their backers, they’ll spawn imitators throughout the country.