The Michigan Catastrophic Claims Association is once again raising its annual assessment to support the state’s no-fault auto insurance system, which uniquely guarantees unlimited lifetime medical benefits. And state Rep. Brett Roberts, R-Charlotte, wants to know why.

“The fund has over $20 billion in it, and it is still growing. Now we are led to believe that there is not enough money to match their potential liabilities. If $20 billion is insufficient, they shouldn’t have any trouble proving it to us,” Roberts said in a recent statement. “To effectively reform the insurance system in Michigan, we need to look at legislation that includes transparency for the MCCA, rather than ignores it.”

The representative is right to have questions. The annual assessment has bounced around quite a bit in recent years. After a significant cut from $186 per-driver in 2014 to $150 in 2015, the catastrophic injury fee has risen to $160 in 2016, $170 in 2017 and now is set to go up to $192 per-driver, effective July 1.

It’s also fair to wonder why assessments for the state-run reinsurer would be rising when the general direction of Michigan’s personal injury protection (PIP) market has been toward greater stability. While many states have seen loss ratios tick up in recent years, aggregate loss ratios for Michigan auto insurers have been on the decline. As the following graph shows, after peaking at a staggering 475.3 loss ratio in 2011, Michigan’s insurers have actually turned an underwriting profit on PIP coverage in four of the past five years.

graph one

SOURCE: S&P Global

It’s also true that, over time, the program – through which the state’s auto insurers are able to reinsure the costliest auto injuries – should take on relatively fewer new claims. Under reforms passed in 2001, when the industry’s per-claimant retention was just $250,000, the threshold for new claims has risen from $500,000 in 2011 to $530,000 in 2013, $545,000 in 2015 and $555,000 in 2017. It is prescribed to continue to rise every two years by either 6 percent or the Consumer Price Index, whichever is lower.

But while Roberts’ proposal for more transparency for the MCCA – for it to be subject to the Freedom of Information Act and the Open Meetings Act – seems like a reasonable suggestion for an entity that was created by the Legislature, it doesn’t actually take any particularly esoteric disclosures to see why the assessment needs to go up. It’s all in the association’s public filings.

In a nutshell, the assessment was cut by too much in 2015, and the program’s deficit immediately began to skyrocket.

It’s perfectly understandable why the steep cut of 24 percent was recommended at the time. Not only were losses trending positively, but so were investment returns. The MCCA managed to reduce its deficit by $1.4 billion from 2013 to 2014. Premiums collected by the MCCA exceeded benefit and loss-related payments by $275.9 million in 2014 and by $253.6 in 2015.

However, that number flipped negative in 2016, with MCCA paying out $11.8 million more in benefits than it collected in premiums. In 2017, the fund paid out $1.57 billion in benefits but collected just $1.20 billion in premiums, a gap of -$369.5 million.

But even that doesn’t quite get at the problem, because short-term cash flows tells you next to nothing when dealing with the kinds of long-term obligations on the books of the MCCA. Precisely because Michigan requires lifetime benefits for catastrophic injuries, even claims that date back as far as the 1970s can still take a turn for the worse.

Thus, what you really need to look at isn’t the MCCA income statement, but its balance sheet. The association has never had positive policyholder surplus. If it were a private insurer, it would be ordered to shut down and stop writing new policies. But after improving markedly from -$1.87 billion in 2013 to -$410.5 million in 2014, the MCCA’s policyholder surplus has proceeded to deteriorate for three years in a row. It now stands at -$2.63 billion. In the next graph, I offer another way to demonstrate the same finding.

graph two

SOURCE: MCCA

As the graph shows, while the MCCA’s liabilities have exceeded its assets every year, things really were improving – nearly to the point of breakeven – before that 2015 decision to slash the assessment by nearly a quarter. The shortfall has been growing ever since. That’s why $31 of the $192 per-driver assessment will go toward shoring up the deficit.

There are any number of proposals that could help check runaway costs in the MCCA, and we at R Street have offered several of them, from creating an industry-funded fraud bureau to instituting a fee schedule linked to Medicare.

But ultimately, while transparency is certainly a noble goal, Michigan’s auto insurance woes (a recent study found the state’s drivers will once again pay more than anywhere else for their coverage) will only be resolved when consumers are given the freedom to choose policies that don’t require unlimited lifetime coverage. Just as they are, without incident, in every other state in the union.

Prior attempts to provide that consumer choice inevitably have run into the buzzsaw of entrenched interests like the state’s hospital networks, who profit handsomely from auto insurers’ indemnity billing, charging them far more for the same procedures than payors with more market power would ever agree to pay. Maybe this will finally be the year the Legislature gets it right.


Image by Navidim