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Debate Continues over FAIR Initiative in Michigan

As the months roll on and the November 2010 election approaches, the debate continues over a proposed ballot initiative designed to reform the Michigan auto insurance industry. The proposed initiative, called Fair Affordable Insurance Rates (FAIR), is backed by consumer groups the Consumer Watchdog and Consumer Federation of America (CFA), and requires 305,000 signatures of Michigan voters by May 26, 2010 in order to appear on the state ballot in November.

FAIR Proponents Compare Initiative to California's Prop. 103

According to proponents of the FAIR ballot initiative, the proposed legislation is modeled after California's Proposition 103, an auto reform bill which was passed into law in 1988. According to these groups, California's auto insurance regulatory system has been among the most effective and efficient in the nation in creating a competitive auto insurance market that forces providers to offer low rates and that protects consumers from possible industry abuse [1].

The first part of the FAIR initiative would be an across-the-board cut of 20 percent for auto insurance rates paid by Michigan drivers. The second part would create a review process for pricing practices among auto insurance companies, which, supporters say, would prevent providers from enacting the kind of pricing practices that have resulted in Michigan's insurance rates far exceeding the national average.

The FAIR initiative also seeks to require car insurance companies to base their policy premiums primarily on car owners' driving records rather than on other data, such as their home ZIP code, their marital status, or information from their credit report. According to proponents of this proposed ballot initiative, Michigan's car insurance rates have gone up five times faster than California's over the past 20 years. Their hope is that by modeling a system after that of California, they could see Michigan's insurance industry come to resemble California's, one they regard as exemplary [1].

Critics Skeptical of FAIR Initiative's Promise of Savings

While on the surface, a law legislating reduction in auto insurance rates would seem like something everyone would agree on, the proposed FAIR initiative does have its share of critics. Experts are deeply divided on the effects such a law would have, and even whether the California system it is based on has worked the way it was designed to. Some critics, like the Heartland Institute, argue that the initiative would actually raise rates in the long term across the state. They also claim it would lead to industry job loss from smaller companies having to sell out to larger ones, and that it would damage the state's economy.

At issue are the effects of the changes the FAIR initiative seeks to make. Proponents feel that such a measure would benefit Michigan drivers, while opponents say the only drivers who would benefit would be those in Detroit. They say without factoring in ZIP code and credit rating, most suburban drivers would lose most of their opportunities for discounts, at the expense of Detroit drivers. They say that without technology to directly monitor driving habits (such as alcohol consumption, cell phone use or speeding), indirect methods like statistical comparison of credit scores and home addresses to rate of claims are the most effective methods they have to accurately predict driving behavior, and by extension, assess risk.

When Proposition 103 was passed in California, it did contain a provision instituting a universal cut in auto coverage rates, but insurance companies were able to convince the courts that such cuts would force many of them into bankruptcy; thus, many California drivers never saw the price reductions attached to the passage of that law. Critics are skeptical whether these cuts would ever be upheld in Michigan courts; and even if they were, they believe drivers across the state would see discounts keeping their rates low disappear, which would eventually offset the initial price cuts. In such a circumstance, only drivers in Detroit would gain, at the expense of the rest of the state [2].

As Debate Continues, State Democrats Go to Work on Another FAIR Proposal

With groups like the Consumer Watchdog and the Heartland Institute on opposite sides of the fence, and neither side seemingly willing to budge from its position on the matter, it appears as though both sides are in for a protracted fight on the proposed FAIR initiative. Meanwhile, Democrats in the Michigan state House and Senate have gone to work on a package of bills they call "Fair and Affordable Insurance Reform"-or FAIR. In spite of its similar acronym, this group of bills is not directly connected with the ballot proposal being trumpeted by supporters. The Democrats' goal seems to be to drum up enough legislative support to skip the ballot proposal altogether.

The legislation being put together in the state Congress would enact a ban on using credit scoring to determine auto insurance rates, similar to the proposed ballot initiative; create a low-cost auto insurance program for the working poor similar to California's Low-Cost Automobile Insurance Program; and set stipulations requiring insurance providers to get approval prior to implementing any new rate increases. The proposed legislation is, in part, in response to Michigan Governor Jennifer Granholm's call to state lawmakers during her State of the State address to put together an insurance reform package before the end of the year [3].

It appears that the central point of contention among all sides is an interpretation of what constitutes "fair" practices in the auto insurance industry. Some feel that insurance providers are invading consumers' privacy unnecessarily by looking into their credit profile as part of the process they use to determine policy premiums; while others believe this sort of practice is the only realistic method providers have in coming out with rates which actually reflect the risk they are taking in selling insurance policies. On one side of the conflict are those who mistrust the intentions of insurance companies and who emphasize the protection of the rights of consumers at any cost; and on the other are those who can see the logic and even (they say) necessity of the practices insurance companies utilize to come up with their pricing procedures.

The ongoing debate in Michigan over the proposed FAIR ballot initiative and its counterpart in the state legislature are not being played out in a vacuum apart from events in the rest of the country, either. The conflict in Michigan is analogous to differences in philosophy among insurers, lawmakers and consumer advocacy groups all across the country.

It is impossible to predict at this time whether the FAIR initiative will ever reach the November 2010 ballot in Michigan. It could potentially gather enough support to make the May deadline for signatures, fail to make the deadline and die next summer, or be rendered superfluous by legislation brewing in the state Congress. Whatever becomes of the FAIR initiative, the way the ongoing debate plays out may potentially end up having a ripple effect on auto insurance policy across the country. For Michiganders and interested parties everywhere in the U.S., the progress of this ballot proposal in the months to come is worth watching.

[1] Retrieved 2009-12-06.
[2] Retrieved 2009-12-06.
[3] Retrieved 2009-12-06.



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