Michigan Must Address Fraud to Lower Auto Insurance Costs
The halls of Michigan’s state capitol will be swarmed with people in the next few months looking to change the way state residents buy auto insurance. The bills they’ll discuss—depending on one’s point of view—will either give consumers more choice about the levels of auto coverage they receive or gut a unique system of “no-fault” insurance that offers limitless coverage for injuries sustained in auto accidents.
Amid all this discussion about such insurance industry arcana as “personal injury protection caps” and “medical fee schedules,” one major thing seems to be getting lost: the enormous extent to which fraud increases Michigan’s auto insurance costs and the poor job the state does in fighting it.
Right now, the average Michigan consumer pays about $950 per year per vehicle for auto insurance ($5,000 a year in Detroit)—when rates in neighboring states average $650. Less than half of the $300 difference comes from the fee assessed for the Michigan Catastrophic Claims Association that pays out for medical claims covered by health insurance and government programs everywhere else (the crux of debates in the legislature).
Fraud the Big Factor
The rest results from other factors, and everything indicates fraud ranks first among them.
The National Insurance Crime Bureau reports Michigan, the eighth-largest state, has more possibly fraudulent insurance claims than either California (the biggest state) or Texas (the second-biggest). The number of such claims has more than doubled since 2008. Although the state’s overall medical costs are just about average for the Midwest, the average cost of automobile-related medical claims, about $30,000, is twice what it is in any other state.
Fraud permeates every corner of the auto insurance business in Michigan—even the reasonably low-cost auto glass repair market experienced more than a 1,000 percent increase in fraud in the past decade.
Falling Theft, Crash Rates
Other potential explanations for high insurance rates in Michigan just don’t hold water. The state’s car theft rate has plummeted in recent years and, by most measures, residents get into fewer serious accidents and speed less than those in nearby states. The state’s aging population means accident-prone young, male drivers are also less common on the roadways.
To date, however, nobody has focused closely enough on fraud. Only one person in the entire state—a private investigator paid by the insurance industry—works full-time investigating insurance fraud. Efforts by local and state police to crack down have been at best rudimentary. And at least some insurers have taken the easy way out and raised rates instead of looking carefully at fraudulent claims.
If Michigan wants to reduce rates for consumers and catch crooks involved in auto insurance fraud, insurers, law enforcement, and others have to get on the same page.
Auto Fraud Authority Model
A special statewide anti-fraud authority paid for by the insurance industry could do just this. Michigan already has an insurer-funded Auto Theft Prevention Authority that has saved about $59 million for state residents since 1996 and helped drive down the state’s auto theft rate. If historical experience is any guide, an authority focused on fraud could save even more. A similar entity in Pennsylvania, which has about the same population as Michigan, saved taxpayers $113 million over five years.
Efforts to change the way Michigan residents buy auto insurance are quite controversial, and they should be. Efforts to crack down on criminals who drive up everyone’s auto insurance rates through their fraudulent actions shouldn’t be. If it’s going to reform auto insurance in the state, Michigan’s legislature should focus on the elephant in the room that it has ignored so far: insurance fraud.
Eli Lehrer (firstname.lastname@example.org) is vice president of Washington, DC operations for The Heartland Institute and national director of its Center on Finance, Insurance, and Real Estate. Used with permission from The Detroit News.