Michigan Auto Insurers: Costs Rising and Market Hardening

A sharp escalation in recent years in medical costs and an "all-you-can-eat"-style personal injury protection no-fault automobile insurance system is threatening the long-term viability of Michigan's auto market, insurers say.

Michigan insurers say they have been able to combat the rising costs with rate hikes, but a growing concern is how long that can continue.

"What we have found really is a ramp-up in the average personal injury protection medical claim, especially in the last decade," said Peter Kuhnmuench, executive director of the Insurance Institute of Michigan. "We think in the long term the system, designed the way it is today, is not sustainable."

Concerns have not fallen on deaf ears. Michigan lawmakers have been considering reform since late last year. That's good, because the state's auto market, in its current form, is "a challenging one," said Tom Lindell, chief executive officer of Michigan Millers Mutual Insurance Co.

"It appears that the industry has been suffering in silence," Lindell said of the state's system, which last reformed in Michigan more than three decades ago.

A key difference in the Michigan auto system, as opposed to other PIP states, is a stipulation that grants unlimited lifetime benefits to people injured in auto accidents, which Kuhnmuench likened to "going to an all-you-can-eat buffet." The state also does not have a fee schedule for medical treatments, which can vary greatly depending on the provider, according to the IIM.

"The only limitation is reasonable and necessary in the statute, so our pressure has been escalating medical costs," said Fausto Martin, vice president and chief claims officer for Auto Club Group.

Medical costs are impacting insurers more than ever. A recent A.M. Best Co. ratings action issued a negative outlook for Fremont Insurance Co. and Auto Club Group citing, in part, "medical inflation on auto personal injury claims." A.M. Best Senior Financial Analyst Kenneth Tappen said "there is pressure on the market" and insurers are "challenged to make a profit on Michigan personal auto."

"PIP loss severity has been going up at a great rate, and that's being driven by medical inflation," Tappen said.

Michigan pays for its unlimited benefits with the Michigan Catastrophic Claims Association, which is essentially a reinsurance pool that kicks in after the first $500,000 on any auto claim. By law, every auto insurer writing in the state must help fund the MCCA with an annual per insured vehicle assessment that is typically passed along to policyholders. The rate is currently $145, according to the MCCA. Lindell said the MCCA is currently running at a deficit.

"The cost that we are charging our policyholders doesn't fully reflect the liability of the MCCA," Lindell said. "I think if the MCCA was charging more adequate rate, I think there would be more of a grassroots effort to have some kind of reform instituted versus just from the insurance industry."

James Laing, president of Wolverine Mutual Insurance Co., said there could be hope for the current system.

"There is no reason this structure can't stay solid, but people are going to have to pay for it," Laing said.

The Michigan Legislature has been considering H.B. 4936 since September (Best's News Service, Sept. 22, 2011). The bill would do away with unlimited lifetime benefits, allowing residents to choose among three levels of PIP coverage: up to a maximum of $500,000, $1 million or $5 million. The bill, among other changes, would also begin using the state's workers' compensation fee schedule for PIP medical claims.

Under the bill, auto insurers would fully retain liability up to $500,000 on any claim, but the MCCA would reimburse the companies 90% from $500,000 to $1 million and cover all expenses after $1 million. Laing said even at the lowest level, insurers aren't seeing a reduction in liability and that's a concern for smaller carriers like his.

"I personally would like to see the medpay limits drop closer to $50,000. That would be akin to what you would see in other states," Laing said. "At that level you could probably drop premium rates and save consumers some money."

The creation of a fee schedule for medical treatments would help contain costs, because it would make people more carefully consider their treatment options and hold medical providers to the same fee schedule as workers' compensation.

Information provided by the IIM shows that no-fault medical fees can, on average, be several times more than Medicare or workers' compensation. For example, an emergency room visit with an injury of moderate medical complexity costs no-fault an average of $278, while the same service costs Medicare an average of $63 and costs workers' compensation $90.75, according to the IIM information.

"When you are unlimited in total recoverable amount there is no consumer nor provider incentive to control consumption," said Anthony Ptasznik, Auto Club Group vice president of membership and insurance product management. "Without a limit you absolutely as the provider would want to provide service as much as possible and as a consumer you would consume as much as possible.

"If you were faced with a limit you may choose to consume less or to consume a different set of procedures to maximize your value for your limit."

Even though medical costs have gone up, insurers have been coping with the costs by requesting rate hikes, which state regulators have been granting. Insurers said they are seeing a firming trend in the state that began about eight months ago. In the past six months, nine insurers have been granted rate hikes of 10% or more, impacting about 601,300 policy holders, according to Best's State Rate Filings. (http://ratefilings.ambest.com)

"The personal lines market has firmed up in Michigan more rapidly than what I have witnessed in my 36-year career," Lindell said.

Wolverine and Michigan Millers both currently have a Best's Financial Strength Rating of B++ (Good). Auto Club Group has a Best's Financial Strength Rating of A (Excellent).

The top five writers of personal auto in Michigan in 2010, according to BestLink, were: State Farm Group, with market share of 18.5%; Auto Club Group, with 18.3%; Auto-Owners Insurance Group, with 10.1%; Progressive Insurance Group, with 8.3%; and The Hanover Insurance Group Property & Casualty Cos., with 7.4%.

(By Michael Buck, senior associate editor, BestWeek: [email protected])