Record Profits for Michigan Insurers
A recent analysis of the financial reports from AAA, Allstate and State Farm (these three insurers account for about 45 percent of Michigan auto insurance premiums) documented that they have made record profits since 2002. Even accounting for losses caused by Hurricane Katrina, these companies have earned record profits and created record levels of reserves. This performance is consistent with record after-tax profits in the industry generally: the industry reported profits in 2006 of 63 billion dollars--which was fifty percent above 2005's record profit of 43 billion dollars.
The Auto Insurance Report, a respected industry commentator, explained that the Michigan insurers are "significantly" more profitable than their reported loss ratios would indicate; and other industry investment organs have described Michigan insurers' profits as "eye-popping" or "the second-highest of a generation". As the Auto Insurance Report described the situation: "Everyone, and we mean everyone, made money..." For the decade ending in 2002, [this would be measuring performance prior to the full impact of "reform"], AIR estimated that Michigan auto insurers earned a profit on net-worth that was approximately 25 percent higher than auto insurers nationwide. These profits will rise in 2007 and in the future as Michigan apparently has the lowest loss-to-premium ratio in the industry and that ratio is declining on an annual basis as "reforms" reduce the number of viable claims.
AAA, the best indicator of Michigan's auto insurance performance, had a loss ratio (earned premiums to defense costs) of eight percent: "lower than virtually all insurers doing business on a national level". In fact, in Michigan these premium dollars are so lucrative that the only area of increased expense is marketing. Michigan insurers are willing to spend one-third of their premium dollar on agents' commissions and underwriting expenses in order to compete to attract these low-payout premiums.
AAA, which writes 80+ percent of its business in Michigan, doubled its annual profits in the past five years (from 50.9 million in 2002 to 104.2 million in 2006) and increased its surplus from 915 million dollars to $1.534 billion by the end of 2006. Allstate and State Farm, which conduct substantial business in other states, reported similar profits and surpluses.
These record profits originate substantially from automobile liability coverage. Auto insurance accounts for about forty percent of all property and casualty insurance. While liability coverage constitutes only between 15 and 16 percent of the total cost of Michigan No Fault coverage, it is highly lucrative. About fifty percent of the cost of coverage is for physical damage to property. The remaining one-third of the Michigan auto premium dollar goes to no fault coverage (which primarily covers medical expense).
Analysis of the claims incurred or paid, when compared with premiums collected, shows that premiums collected for liability coverage are "excessive" and are a primary source of the documented profits. Premiums collected for this coverage exceed the dollars paid out and disproportionately support profits and other coverages. While it is clear that Michigan insurers make a significant profit on liability coverage and property coverage, it is impossible to evaluate the propriety of the final component of no fault premiums--no fault medical profits, because all Michigan insurers must contribute to the catastrophic claims fund which is operated by a board of insurance representatives: this board has refused to release its actuarial or reserve calculations to the public and denies that it is subject to the Freedom of Information Act. The catastrophic claims fund that sets and collects these premiums is the same entity that was embarrassed into returning excessive premiums ($180 per car) to Michigan rate-payers in 1998.
Since liability coverage constitutes only fifteen percent of total Michigan auto premiums, if half of all existing liability claims were eliminated it would reduce the cost of auto insurance by only about seven percent. Nevertheless, when insurers talk about the cost of coverage and "reform", liability and trial lawyers are the only topics they discuss: where "liability" was once associated with "safety" and "accountability", it has now been purposely equated in the public's mind with frivolous greed.
Investigation of these profit figures and claims information make clear that Michigan citizens have been duped into giving away their rights when victimized, not to save on insurance premiums, but rather to enhance the profit potential of large insurance corporations. If insurance or tort "reforms" and profits were monitored by the State and actually translated into a reduced cost of using the roads, we could say that a legitimate public policy choice ( cheap transportation over reparations for injury) had been made. As matters stand, however, we merely have one more example of ordinary people being taxed through auto insurance to support big business profits.