Mich. DOI Study Finds Competition Doesn’t Equal Affordability; Insurers Say Losses Driving Rates

March 24, 2005

Michigan’s Office of Financial and Insurance Services last week released the results of its long-awaited study of competitiveness in the state’s insurance market. While the report found competition under the very strict definition of the law, the commissioner said that competition does not necessarily equal affordability in the market.

OFIS Commissioner Linda Watters said there are a few places in the state with “excessive” rates — as defined by the law — but called the existing law inadequate for ensuring affordable insurance. The commissioner, who has pushed a ban on credit-based insurance scoring through the administrative rule-making process, called for greater tools to ensure affordable insurance in all of Michigan’s communities.

The market competition report (officially, The Competitiveness and Premium Excessiveness of the Home and Auto Insurance Industries in the State of Michigan) is the result of a data call early last year and long delayed, examined whether home and auto insurance rates are excessive in Michigan.

The report indicated that although there are areas of Michigan that have excessive insurance rates, insurance rates statewide are not “excessive,” because, the report maintains, the law says that the only measure of “excessive” is whether competition exists.

The report, according to a statement released by OFIS, also indicated that there is still a need to reduce the premiums that Michigan residents pay for insurance. Such a reduction will serve as an important component of the department’s strategy to be competitive as it strives to increase employment and population. The report was prepared by economist George Galster of the Center for Urban Studies at Wayne State University on behalf of OFIS.

“While the law may indicate there is competition,” Watters said, “common sense indicates that competition as currently defined by state law is not delivering affordable insurance for our citizens. The definition of ‘excessive’ needs to look at more than just the presence of competition.”

The data call, which hadn’t been done in 20 years, required insurance companies to provide specific information about premiums, expenses, pay-outs on claims, and other important areas dictated by Michigan law.

Watters said she would push legislation to address the market competition question as well as auto insurance affordability. She said state law should not require a finding of an absence of competition in order for rates to be considered excessive and that market competition should be based on a regional basis, as opposed to the current statewide basis.

She also said the evaluative factors used to measure competitiveness that are enumerated in state law should be reexamined, prioritized, and assigned relative weights in the competition analysis.

Watters also said that driving history should be emphasized as a rating factor, and that the state’s residual market should be allowed to lower its rates to make it more affordable.

Agents and insurers welcomed the findings of competitiveness in the market. “The commissioner’s study found that the consumers of this state enjoy a competitive insurance marketplace,” said Bob Pierce, CEO of the Michigan Association of Insurance Agents. “We are pleased that insurance consumers benefit from this competitive market and strongly encourage consumers to take full advantage of it by actively seeking the best insurance services and products available.”

The Insurance Institute of Michigan also issued a statement agreeing with the report’s official finding without commenting on Watters’ and the report’s finding that rates are still unaffordable in many areas, especially Detroit and Flint.

IIM reported the results of two statewide reports by a nationally recognized actuarial firm that concluded losses drive the cost of insurance in Michigan. The industry-released studies on homeowners and auto insurance in Michigan were conducted by EPIC Consulting, an actuarial firm specializing in insurance review.

“The primary driver of rising insurance rates in Michigan has been a steady, persistent increase in the average cost of claims,” said Mike Miller, the actuary who oversaw the studies.

According to the reports, 98 percent of every auto insurance premium dollar in 2001 was used to pay claim losses. For homeowners insurance, carriers spent 109 percent of each premium dollar on claims that same year. Premiums for homeowners insurance have been exceeded by the sum of losses and expenses in Michigan each year from 1995 through 2001.

The EPIC studies also found a competitive marketplace and significant difference in rates being charged by each insurance company.

“With more than 200 auto and homeowners insurance carriers authorized in the state, plus the differences in rates and how insurance companies assess risk, the study indicates a fair amount of a competition in Michigan’s insurance market,” Miller said. “This amounts to more choices for insurance policyholders in regard to their insurance policies.”

“The EPIC studies are about as comprehensive as you get,” said Pete Kuhnmuench, IIM executive director. “I think the results speak volumes about the insurance industry here in Michigan. Michigan insurance companies are working hard to pay claims and keep premiums as low as possible.”

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