Detroit mayor’s insurance plan crashes head-on into reality
We have seen over and over the folly of government-run insurance schemes. Whether it’s the National Flood Insurance Program, the Federal Crop Insurance Corp., the Texas Windstorm Insurance Association, the Pension Benefit Guaranty Corp., the Federal Housing Administration or the State of Florida’s twin behemoths – Citizens Property Insurance Corp. and the Florida Hurricane Catastrophe Fund – the paired promises of lower costs and actuarial soundness just never materialize in reality.
Political expediency generally dictates that it’s the latter promise that is violated first. Given the voting power of beneficiaries and the irresistible temptation of using taxpayer dollars to paper over shortfalls, public insurance entities almost always charge less to take on the risks they insure than the actuarial tables would dictate. Thus, all of the programs mentioned above either now or in the recent past have run deep deficits. Not only do these deficits inevitably require taxpayer bailouts, but they ultimately serve to subsidize and encourage even more of the risk-taking the entity was created to help mitigate, perpetuating an endless vicious circle of bigger subsidies and bigger bailouts.
Thus, it is with a healthy dose of skepticism that we anticipated the formal announcement by Detroit Mayor Mike Duggan – more than a year in the making – of his plan to create a municipal auto insurance company to serve the people of his city.
It isn’t as if his concerns are unjustified. As confirmed by the most recent report from InsuranceQuotes.com, released earlier this week, Michigan residents pay more for car insurance than any other state, about 136 percent above the national average. Residents of the Detroit metro area pay more than any other city, about 165 percent more than the average. Within the city, average rates run a whopping $5,000. In addition, it’s estimated that more than half the city’s drivers are uninsured.
First discussed in his 2014 State of the City address, Duggan’s plan was to create a city-run auto insurer, to be dubbed “D Insurance,” that would offer lower-cost policies solely to Detroit residents. In November, the City Council voted 8-0 to pay $75,000 to Pinnacle Actuarial Resources to conduct a feasibility study of the idea.
That study is not yet complete (or, at least, has not yet been made available to the public) but it sure sounds like Duggan is beginning to think better of his original plan. When presented to the public this week, Duggan’s plan now calls for a lower-cost insurance pool, made up of private providers, who within city limits will be allowed to ignore Michigan’s unique no-fault system that ordinarily requires unlimited lifetime medical benefits.
Duggan’s long-anticipated proposed legislation, which he said would knock $1,000 off motorists’ annual bills next year if passed, would provide $25,000 in base benefits for personal-injury protection and another $250,000 for catastrophic care for disabling injuries from…auto accidents.
“We have worked at this every single day for the last year,” Duggan told a packed community meeting at Little Rock Baptist Church on Woodward. “This is the most complicated thing I’ve dealt with in my life.”
…Under Duggan’s plan, when motorists hit the $275,000 cap, they would have to get additional coverage from health insurance plans. The draft bill also allows insurers to set up limited-provider networks for nonemergency treatment, such as physical rehabilitation or occupational therapy.
Of course, placing any cap on benefits is not possible under current Michigan law. To become reality, it would require a vote by the Legislature. State Sen. Virgil Smith, D-Detroit, will be the one to carry legislation asking for a special carve-out for this program.
Critics might call that a bait-and-switch. I’d be more generous and give Duggan credit for recognizing the facts on the ground. The cost of auto insurance is always and everywhere primarily a function of auto claims costs. The costs in Michigan, and particularly in Detroit, are just simply more than anywhere else.
If the state House can move past the objections of the hospital industry, which long has enjoyed the geyser of cash spewed by auto accident cases, Michigan may finally pass legislation in the coming days that would bring some real reforms to the system. The bill under consideration would create a fraud bureau to deal with one of the biggest problems in the state’s auto insurance market. It would restructure the state-run Michigan Catastrophic Claims Association from a reinsurer to a mandatory excess insurer, so that companies considering doing business in the state no longer would have to contend with the balance sheet risk of a counterparty whose long-term solvency has, at times, been questionable. And it would implement a real fee schedule, set at 150 percent of Medicare rates, to reduce the massive cost-shifting by medical providers.
But the bottom line is that there is no free lunch. These reforms would be welcome, but they are no panacea, and their effects probably will be relatively modest. So long as Michigan hangs on to its unlimited PIP mandate – among the 12 states with no-fault systems, the next highest limit is New York’s, at $50,000 – the state will remain a very costly place for auto insurance.
