Michigan's FAIR Auto Insurance Plan Isn't Fair

Over the next few months, Michiganders probably will get pretty sick of hearing about auto insurance.  A shadowy group calling itself Fair Affordable Insurance Rates (FAIR)— it lacks a Web page or working telephone number— received approval earlier this month for an effort to collect nearly 350,000 signatures for a ballot initiative that promises lower rates and a new regulatory system for Michigan auto insurance.
 
And FAIR, which counts influential Sen. Hansen Clarke (D-Detroit) as its chief proponent, will certainly attract lots of attention.  Despite promises to the contrary, the FAIR initiative would raise auto insurance rates throughout Michigan, destroy jobs, and damage the state’s already fragile economy.
 
It’s an awful idea. 

The proposal FAIR is pushing combines two very different measures: a supposedly across-the-board 20 percent cut in Michigan auto insurance rates and a complex, red-tape filled refiguring of Michigan’s auto insurance system largely designed to benefit Detroit residents at the expense of those who live elsewhere in the state.
 
For understandable reasons, proponents will devote most of their attention to the promise of an across-the-board rate cut. Although this sounds attractive (who really wants to pay more for auto insurance?), the “rate cut” won’t actually put more money in consumers’ pockets. Other states’ experiences show what will likely happen: when California voters approved a similar “rate-cut” measure in 1988, half of the states’ large auto insurers found that they would become insolvent (bankrupt) if the rate cuts happened. Courts sided with the insurers and many Californians saw their auto rates remain the same.
 
Quite simply, it’s impossible to force a private company to sell a product for less than it costs.
 
The rest of the proposal consists of technical insurance policy changes that have been tried and failed in the legislature year after year. For the most part, the proposals would limit the ability of insurers to use factors like credit history and location in setting auto rates. A wealth of research—including some paid for by the State of Michigan itself—shows that the use of such factors in setting rates tends to make it easier for insurers to offer discounts to the drivers who pose the best risks.

Instead, proponents of the initiative will say that they want to base rates on “driving history” alone. While this sounds fair, it actually isn’t.
 
Although new technology is beginning to change this, auto insurers still can’t generally monitor the things like moment-to-moment driving behavior, alcohol consumption, attentiveness, and mobile phone use that truly impact driving. Instead, they indirectly quantify risk by counting speeding tickets, monitoring credit scores (which correlate closely with accident expenses), and giving discounts to people who live in places with low auto theft rates.
 
By allowing some factors and disallowing others, the authors of the initiative stack the deck in favor of downtown Detroit at the expense of every other part of the state.  Even if premiums fell in the short term—and they probably won’t—motorists throughout Michigan would quickly see all sorts of discounts vanish and end up paying more for auto insurance.  
 
At the same time, the system proposed in the initiative would impose massive new administrative burdens on insurers and consumers alike.  As a result, it’s quite likely that only larger companies based in other states and countries would have the marketing muscle and financial capital to survive.
 
Michigan’s locally based insurers—most of them local or regional players— would either go out of business or sell out to better capitalized firms. Many of Michigan’s 55,000 insurance jobs would vanish. This isn’t what the state needs. 
 
The forthcoming ballot initiative may sound attractive.  Lower rates sound good. But the initiative will hurt Michigan. 
 
Eli Lehrer is a senior policy advisor on insurance issues for the Heartland Institute. He can be contacted at elehrer@heartland.org.