How Michigan’s car insurance rates are keeping people in poverty

Laureen Horan

A new policy brief published this month by the Poverty Solutions department at University of Michigan confirms what we’ve known all along — Michigan car insurance rates are too damn high. Because of this, many of our residents drive uninsured, posing a huge financial risk to themselves and those around them. In this study, Patrick Cooney, Elizabeth Phillips and Joshua Rivera conclude that the high costs of auto insurance is an effective barrier preventing upward mobility out of poverty across the state, preventing people from improving their economic status. 

With an estimated annual premium exceeding $2,600, Michigan insurance rates double the national average. With an average premium of $5,414, Detroiters are forced to deal with the most expensive car insurance rates in the country. These unreasonable rates not only push low-income residents to drive uninsured, but also prevent some from being able to own an automobile at all. 

In Detroit, average auto insurance rates make up between 12 and 36 percent of resident’s pre-tax incomes. This policy brief highlights the fact that the zip codes in Michigan who have the most affordable insurance rates happen to be exceptionally affluent communities, which shows that this issue ties in to the gentrification of Michigan residents as well. 

So, why exactly are the insurance rates here so absurd? Cooney, Phillips and Rivera cite Michigan’s no-fault policy as the main culprit. Michigan is one of only 12 states with a no-fault insurance system, whereby a driver’s own insurance company pays for damages from an accident, no matter who is at fault. Furthermore, Michigan is the only state that requires drivers to purchase unlimited Personal Injury Protection (PIP). This means that in the event of an accident, insurers are on the hook for unlimited medical damages, which causes the costs of insurance to skyrocket for everyone. 

In addition, Michigan does not impose medical fee schedules, subsequently allowing hospitals to charge auto insurers more than they charge health insurers. This leads no-fault insurers in Michigan to be charged significantly more than Medicare, workers compensation or private insurers for the exact same medical procedures. Together, this means that the average cost per claim is dramatically higher in Michigan than in other states. In 2013, the average cost per auto accident claim in Michigan was over $75,000 — more than five times the figure in the next highest state. 

Proposed solutions to this issue are all over the board — some want to rein in PIP payouts and requirements while others believe the problem lies in rate setting practices. Either way, an important part of this conversation is the fact that this issue disproportionately affects Michigan’s poorest residents. Based on a 2018 study by the Consumer Federation of America, low-income drivers in U.S. cities pay 59 percent more for auto insurance than those with higher incomes. Cooney, Phillips and Rivera assert that proposed solutions to this predicament should seek to reduce insurance rates while also narrowing the gap between what Michigan’s wealthiest and poorest residents pay for auto insurance.