A special report by The Economist suggests Detroit, MI – the US city with the most expensive auto insurance – is a victim of its state’s poor policymaking.
According to the report, car owners in Detroit pay an average of $5,414 for auto insurance premiums – more than twice the state average and nearly four times the national average. With the average Detroit household earning $26,300 a year, the insurance premiums represent 21% of pre-tax income.
Insurers in Michigan typically base their quotes on the driver’s zip code, credit score, and educational qualifications, but that is just one part of the reason why Detroit’s insurance costs so much, the report said. According to The Economist, Michigan’s poor policies are mostly to blame for the exorbitant insurance fees.
Under state law, all drivers must purchase no-fault insurance with unlimited medical insurance. This means insurers will have to pay for unlimited lifetime medical expenses, rehabilitation expenses, and lost wages after a car accident regardless of who is at fault; Michigan is the only state that has this system in place.
Michigan’s mandatory no-fault insurance system was originally meant to simplify claims and reduce the number of lawsuits. Ironically, the number of lawsuits filed since have doubled – lawyers can earn about 30% from no-fault insurance disputes.
The policy also allows unscrupulous hospitals to bill patients at three or four times the usual negotiated rates. Though other states have set caps on what hospitals can charge, Michigan has not. Since 2000, medical bills for those injured in car accidents have tripled. The Economist noted that increasing medical costs are spiking auto insurance costs, from taking 22% of premium costs in 2000 to 52% in 2013.
The report ends with a warning that Detroit’s current insurance regime, coupled with the city’s high rates of car theft and poor road conditions, is headed for a “death spiral.”
“Those too poor to pay for insurance go without, raising the costs for their fellow drivers. Insurance becomes even more unaffordable, so more people drop it,” the report concluded.
