Mich. Drivers to Pay Only Slightly More for Catastrophic-Claims Fee

There will be a slight increase in the annual amount Michigan motorists must pay to ensure they maintain access to the most generous auto insurance coverage in the nation.

Kuhnmuench quoteCurrently, a portion of a Michigan driver’s premium is a $143.09 fee used to fund a state-run association that provides financial relief to insurers who have to pay out on gargantuan claims.

That fee will rise to $145 starting July 1.

The association exists because of Michigan’s unique no-fault law, which ensures that personal injury protection (PIP) policyholders are covered for all medical costs that result from a car crash—regardless of fault—for life.

No other state requires car insurance policies to provide such extensive protection; most no-fault states mandate that policies provide between at least $8,000 and $50,000 PIP coverage per accident. As a result, the average Michigan no-fault claim size is reported to be larger than the next three highest states’ averages combined.

Because of the huge burden this puts on Michigan insurers, the Michigan Catastrophic Claims Association (MCCA) was established in 1978.

The MCCA keeps costs somewhat lower for coverage providers by using its fee revenue to reimburse them when they have to pay for claims exceeding a certain dollar amount, which is adjusted annually along with the fee amount.

MCCA insurance fee increase imageThe dollar amount operates basically as a collision-insurance deductible would operate for the average policyholder, except that the insurer has to pay for the full amount of the claim first and get reimbursed later and that the threshold is in the hundreds of thousands of dollars.

For the current year, insurers are reimbursed only for claims that exceed the $480,000 minimum, but their exposure will increase a bit in July when that limit is pushed up to $500,000.

The threshold is raised every year as a result of legislative action taken at the beginning of the last decade, back when it was at the $250,000 level. That change to the MCCA structure mandated that the reimbursement threshold be raised by tens of thousands of dollars every year, with the gradual changes stopping at the $500,000 level. After 2013, the rises will be tied to changes in the consumer price index.

“The threshold increases certainly have an impact on the pricing of auto insurance,” says Pete Kuhnmuench, the executive director of the Insurance Institute of Michigan.

He notes that coverage providers would have to increase premiums just to cover the added exposure that results from the increased threshold, but the fact that medical costs continue to rise only solidifies the prospect of rate hikes.

A recent industry report showed that, as a result of the coverage provisions, cheap insurance is hard to find in the state. The average premium for Michigan drivers is estimated to be about 63 percent higher than the national average.

While the minimum amount for MCCA reimbursement to kick in has increased at the same rate for the past three years, the fee increase has been more sporadic. This year’s 1.3 percent increase is significantly smaller than in recent years. The previous two fee hikes brought on an overall increase of 37 percent.

The fee size is determine by the MCCA in similarly to how most insurers determine premiums, by trying to calculate how much will be spent on claims in the next fiscal year based on loss history and adjusted reimbursement levels.

What Kuhnmuench says is interesting about the recent announcement from the MCCA is that they expect there to only be 850 catastrophic claims filed in the 2011–2012 period, compared to 1,200 for 2010–2011.

“What that says to me is that we are collecting essentially the same amount of dollars ($143.09 versus $145) to pay for 29 percent fewer claims,” Kuhnmuench said. ” That means the costs of those claims are anticipated to cost nearly 29 percent more in benefits.”

The association reported that it paid nearly $900 million on reimbursement in 2010 alone. That averages out to about $128 per insured car.

In addition to paying the claims, the MCCA also must use funds to pay for administration and to reduce its $1.6 billion deficit.

“Since 1979, there have been over 25,900 claims reported to the MCCA, which will cost an estimated $74 billion,” according to a release from the association.

About Ben Zitney
Benjamin Zitney has been covering the auto insurance industry for the past 2.5 years. Before coming to Online Auto Insurance News, he produced an extensive company history of the 30-year-old California Joint Powers Insurance Authority and worked at the Cal State Long Beach Daily Forty-Niner as a reporter, copy editor and news editor.

No comments yet.

Comment on this article