No-fault insurance systems, combined with increasing health costs and rampant fraud, have led to skyrocketing insurance rates in states across the country. Efforts to reform these no-fault insurance systems are underway in several states.
Fitch Ratings, a Nationally Recognized Statistical Rating Organization, argues that the new proposals now being considered in states like Florida, Michigan and New York, which address the growing issues of fraud and abuse, could have a positive effect on costs for auto insurance companies and possibly bring down associated insurance rates for policyholders.
Legislation recently passed in some states and under review in others could reduce underwriting losses for the largest U.S. auto insurers. Fitch Ratings sees prospective reform of no-fault insurance systems in Florida, Michigan, and New York as a positive development for large personal auto policy underwriters such as State Farm, Progressive Corp., and Allstate Corp., which in recent years have reported weaker underwriting results in no-fault states.
Last month, the Florida Legislature passed a bill that seeks to limit personal injury protection (PIP) claims and the scope of allowed medical procedures following an auto accident, with a focus on reducing the incidence of fraudulent claims under the state’s no-fault system. Another antifraud bill is advancing in the New York state Senate, while comprehensive no-fault reform is being debated in Michigan with the backing of the insurance industry.
The legislation being considered in Michigan makes several changes in how no-fault benefits are regulated and the amount that can be received. The Michigan proposal tackles the rising costs of health care and their personal injury protection system by placing a cap on the benefits provided under no-fault (Michigan’s no-fault system is currently uncapped) and by creating a new fee schedule for medical services. Fee schedules place a ceiling on the reimbursements health care providers receive for certain treatments.
Under Michigan’s “no-fault” system, originally established in 1973, unlimited lifetime medical expenses must be covered by insurers and a reinsurance fund, the Michigan Catastrophic Claims Association (MCCA), which reimburses primary insurers for medical claims exceeding $500,000. Michigan drivers fund MCCA through mandatory annual premiums, which were recently raised by $30 to $175 per vehicle per year.
Based on statutory data provided by SNL Financial, the industry aggregate personal auto insurance direct loss ratio on policies written in Michigan shot up to 148.4% in 2011 from 115.2% in 2010. State Farm’s share of the Michigan personal auto market stood at 18% in 2011, while Progressive and Allstate held market shares of 8% and 7%, respectively.
Opponents of the new legislation argue that under a fee schedule certain hospitals, physicians and other health care providers could lose millions of dollars in reimbursements. They say out-of-pocket expenses for health care will likely increase for many patients. Supporters of fee schedules argue the proposed changes are necessary to check growing provider reimbursements.
The Michigan reform legislation would attempt to address rapidly rising premium costs by capping no-fault benefits and introducing a fee schedule for medical services. Insurers view the open-ended nature of the Michigan system and the MCCA reinsurance framework as contributors to a higher frequency of fraud and the unfavorable change in underwriting performance over recent years.
No-fault laws were intended to lower the cost of auto insurance by keeping claims out of the courts, and in many cases, they achieve this goal. Common-sense regulations that set standard prices and disallow quack treatments are a better answer to rising costs in a no-fault system then scrapping the system altogether. Michigan, Florida and New York are taking positive steps towards attacking the real problem, fraud. If their reforms succeed, other states can follow their lead. This could mean lower insurance rates for everyone.