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.
In the 12 no-fault states and Puerto Rico, auto policyholders are reimbursed for accidents by their own insurance companies without proof of fault and are restricted from seeking compensation in court from other parties. Higher underwriting loss ratios in no-fault states reflect, at least in part, a higher frequency of fraudulent claims.
In Michigan, drivers have seen sharp rises in premiums over recent years as PIP claims related to auto accidents have grown. In 2011, Michigan again stood out as the state with the highest direct loss ratio in the country.
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 percent in 2011 from 115.2 percent in 2010. State Farm's share of the Michigan personal auto market stood at 18 percent in 2011, while Progressive and Allstate held market shares of 8 percent and 7 percent, respectively.
Direct underwriting losses on personal auto insurance continued to diverge significantly in no-fault states during 2011. Besides Michigan, Florida reported the fifth-highest direct loss ratio at 72.7 percent, while no-fault New York ranked ninth with a loss ratio of 71.2 percent. All three of these large no-fault states ranked in the top seven on the basis of total personal auto policy premiums written last year.
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.