by Gongwer News Service
February 9, 2009

A decades long battle between the insurance industry and state regulators picked up steam last week with Governor Jennifer Granholm’s order to freeze auto insurance rates for a year.

Exacerbating the fight is a 300-page report released Wednesday by Granholm-appointed Auto and Home Insurance Consumer Advocate Butch Hollowell that blasted Michigan’s rates as some of the highest in the country.

Among the issues that resurfaced with the report: whether insurers should be allowed to use credit scores in deciding discounts and if premiums would go down if the state raised the maximum amount accident victims can collect from at-fault drivers.

Though Mr. Hollowell and the industry quibbled over where Michigan ranked in the cost of premiums, they agreed the state was in the top 12 nationally.

Particularly given the drops in employment and household incomes in recent years, Mr. Hollowell said premiums need to come down so people in the state can afford to have their cars covered.

But insurers said none of the changes suggested by the insurance czar would lower rates and instead suggested allowing people more choice in the types of coverage they choose, which the industry said will have the biggest impact on insurance costs.

In the meantime, the industry said freezing rates could have an economic backlash in an already struggling economy, by forcing insurers to balance cost increases they would usually offset with rate increases with layoffs of some of their 70,000 employees.

Mr. Hollowell’s proposals also weren’t well received by many Republicans in the legislature, some of whom said the governor’s overregulation and rate freeze smacked of socialism.

Matt Marsden, spokesperson for Senate Majority Leader Mike Bishop (R-Rochester), said the regulations also contradict Ms. Granholm’s insistence that she is attempting to make the state more business friendly.

Mr. Marsden indicated the way to cut costs might be to consider Mr. Hollowell’s job. “I’m not sure why we have a $150,000-a-year insurance czar when we have an insurance commissioner to address these issues,” he said.

The governor pushed to at least keep those rates where they are, issuing an executive directive late Tuesday that requires auto insurance companies to indicate by March 1 that they will freeze rates for the coming year — holding the hammer of rate disapproval by state regulators if they do not.

The directive also calls on the Office of Financial and Insurance Regulation (OFIR) to issue rules to keep rates affordable.

Rate affordability was coved in the first recommendation by Mr. Hollowell, who said the state should set a definition and require approval by OFIR before rates can take effect. He also called for changes to authorize the office to order refunds upon a finding of excessive rates.

He noted that one of the first court cases addressing the state’s no-fault law said the state could not require coverage unless it ensured that coverage was affordable. He also called for changes that would ensure the commissioner could order refunds if rates were found excessive.

Other recommendations:

• A closer look at insurance rate filings, which would be more likely to find excessive proposals.
• Allow public review and objection of proposed rate increase.
• Remove the current $500 cap on tort damages cases, allowing drivers to seek reimbursement for their repair expenses from the at-fault driver.
• Penalties for insurance companies that increase premiums or cancel customers for filing claims if they are not at fault in the crash.
• Trying a special low-cost policy for low-income residents, similar to one in place in California. The policy costs $400 a year and provides essentially full coverage, but buyers have to meet income standards and have good driving records.
• An end to credit scoring as a basis for setting insurance costs.
• A prohibition on “data mining,” to keep insurance companies from selling customer personal information to marketers.
• A prohibition on OFIR commissioners working in any of the regulated industries for at least two years after leaving office.

Most of that agenda was panned by Peter Kuhnmuench, executive director of the Insurance Institute of Michigan, whose main point is that oversight is already in place to ensure affordable rates.

“It’s the insurance commissioner’s job to review rates that are filed,” Mr. Kuhnmuench said. “Rates must be adequate, they cannot be discriminatory and they can’t be excessive.”

He said the provision to ensure refunds would not be a concern because, to date, no rate filing has been found excessive. Plus, he said the trend is returning to low profits, given the drops in the financial markets in 2008.

But Mr. Hollowell said state and national insurance industry profits in recent years show there is room to reduce rates. Nationally, the industry set profit records, in actual dollar amounts, in 2003-06, and profits as a percentage of premium are also increasing.

Mr. Hollowell said insurers should be limited to the eight criteria outlined in the Insurance Code for setting their rates, all of which he said are directly tied to a person’s driving experience.

One item not included in that list is place of residence, but Mr. Hollowell said he did not look at rating territories in his report. While he said there is redlining going on in the state (insurers essentially refusing to serve certain areas even though they are required to have a presence statewide to be licensed), he said the efforts to reduce rates for all residents would result in lower rates in the state’s urban areas.

High rates in the city of Detroit (Mr. Hollowell said he pays $12,000 a year for four vehicles) and the resulting high rates of uninsured motorists have been the impetus for looking at insurance rates.

Mr. Kuhnmuench argued none of Mr. Hollowell’s proposals would get at the one issue needed to drive down rates: the cost of claims. Those costs would be driven even higher, he continued, with the proposal for a removal of the tort cap because of higher court costs to resolve disputes.

Mr. Hollowell acknowledged the proposal would shift costs to the at-fault driver, but hailed the prospects of a cut in collision coverage by as much as 40 percent for those who can be judged not to be at fault. And because many people don’t file claims because rates could be increased, he said, “Really it’s a windfall profit for the insurance company.”

The special low-cost rate recommendation is something that is consistent with some ideas the insurance industry has explored, but Mr. Kuhnmuench said the specific California plan works because it requires customers to be Medicaid eligible and uses that coverage to pay for any injury claims. He said the industry would be willing to consider a similar program if it has similar exposure limits for insurers.

He said the industry has already recommended special policies for seniors that would allow them to use their Medicare coverage for injuries rather than their vehicle insurance and pass on the savings for that.

And he said the industry is still interested in a system that would allow customers to purchase personal injury protection at levels below the current unlimited lifetime benefits at a reduced cost.

Mr. Hollowell said that plan is unacceptable because it would open too many families to potentially devastating medical bills and, as presented, would not guarantee any rate cuts.

The recommendation for a ban on use of credit scoring in insurance rate-setting continues a long-standing battle that is already in the courts in a challenge to state rules prohibiting the practice. The Court of Appeals has already turned down the industry’s challenge and the Supreme Court, with its new make-up, is arguably more inclined to uphold that decision.

“So long as our actuaries can justify it, any trait from you can be used in rating,” Mr. Hollowell said was the reasoning behind using credit ratings. But he argued the ratings were a stand-in for income and allowed companies to try to weed out the lower-income customers through higher rates.

Mr. Kuhnmuench said it rather showed a person’s ability to be careful with their finances, which appeared to translate into care with their goods as well.

But Mr. Kuhnmuench argued if the case was decided “based on the facts,” the credit score-based discounts would remain in place.

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