Losses Drive High Cost of Detroit Metro Auto Coverage, Insurance Lobby Says

Higher claims frequency and severity make it twice as expensive for insurers to offer full auto and homeowners coverage to residents in metropolitan Detroit than the state as a whole, according to a recent study conducted by the Property Casualty Insurers Association of America (PCI).

Frustrations with the cost of auto and homeowners insurance have been increasingly expressed this year in Michigan, especially by Detroit-area legislators and the administration of Democratic Gov. Jennifer Granholm.

“Although we understand these frustrations to be real, politicizing the cost of insurance doesn’t help provide any understanding of what cost factors actually drive insurance rates,” said Michael Harrold, PCI assistant vice president and regional manager.

PCI’s Michigan Personal Lines Insurance: A Research Perspective on Loss Cost Differences provides background on a number of factors that impact the cost of insurance, with specific emphasis on the types and sizes of insurance losses that cause some Michigan regions or territories to have higher insurance costs than others. The insurers surveyed represent one-third of the personal auto market in the state, and one-fourth of the Michigan homeowners market.

“Based on this survey, a picture emerges showing that losses stemming from auto accidents, crimes, fires, or climatic conditions are significantly greater in certain areas,” Harrold said. “The use of rating by geographical area or territory is an equitable and statistically supported method of distributing costs among policyholders. If this variable were eliminated or restricted, premiums would increase for policyholders with less exposure to risk, and insurers could discontinue writing in areas where prices are inadequate. The impact on consumers in higher-risk areas would be fewer companies, coverages and services in the voluntary market.”

Insured drivers in the Detroit metro area report claims 32 percent more often than the state average (21.8 claims versus 16.5 claims per 100 insured cars), and those claims cost 67 percent more than the statewide average. In other words, it costs insurers more than twice as much to offer full coverage to metro Detroit drivers than drivers across the state as a whole.

The frequency of property claims in Detroit is also about 70 percent higher than across the state as a whole (15.7 claims versus 9.2 claims per 100 insured housing units), with the average claim cost in the city about 30 percent higher than the state average. On average, insurers’ loss costs are twice as much in Detroit than elsewhere in the state, making Detroit the second highest cost city in the country for homeowners insurance.

A number of factors contribute to this discrepancy. Contributing factors include population and traffic density, motor vehicle theft rates, conditions and maintenance of roadways, health care costs, body shop repair rates, and likelihood to file a claim.

For example, doctors’ services cost about 20 percent more in Detroit than in Lansing or Ann Arbor, and are even higher when compared with Traverse City and Muskegon (about 30 and 60 percent more, respectively).

Homeowners insurance costs are driven by similar factors, including the age and structure of the unit, fire, crime and arson occurrences, exposure to natural disasters, the growing problem of fraud, and an emergence of mold claims. Theft and arson play a significant role in the cost of insurance. Theft claim frequency in Detroit increased 141.5 percent from 1996 to 2000, compared with a 2.5 percent increase in the rest of Wayne County. Similarly, the chance of arson happening in Detroit is 3.6 times greater than the rest of the state (25.3 arson fires per 10,000 population versus 7.0).

PCI members write 55.8 percent of Michigan’s personal auto insurance and 45.1 percent of its homeowners coverage.