This week’s installment of CuriosiD looks at one of the city’s most popular questions. Click on the audio player above or use this link to hear the audio story.

“Why is auto insurance in Detroit so much more expensive than the suburbs?”

– Rodney Kirk, Detroit

The Short Answer

I know what you’re thinking, and no, it’s not theft.

The Steepest Premiums in the Nation

To understand why Detroit’s insurance rates are through the roof you have to understand Michigan’s insurance laws. We have the highest insurance premiums in the nation.

There are a couple reasons for this – Michigan is one of 12 states that requires drivers to buy no-fault insurance which essentially means that your insurance company pays up regardless of who’s at fault in the accident. That means more cost for you.

But the key component is a section of your premium called Personal Injury Protection (PIP). It’s essentially your healthcare coverage if you got in an accident.

States with no-fault require drivers to buy a certain minimum dollar amount of this coverage. New York requires a $50,000 minimum. New Jersey requires $250,0000. 

Michigan requires unlimited coverage.

“Either you buy the most expensive coverage or you’re a criminal.”

– Melvin Butch Hollowell, City of Detroit Corporation Counsel

Detroit’s Dilemma

Earlier this year, Detroit commissioned Pinnacle Actuarial Resources to perform a study looking at insurance claims and premiums from the largest insurers in the city.

The study revealed that on average Detroiters pay twice as much as their neighbors in the suburbs. Detroit premiums cost around $3,400 in comparison to the $1,700 for the metro region.

And because of the high cost, many residents go without insurance altogether.

“At least half, perhaps as high as 60% of all Detroiters are driving now without insurance,” says Melvin Butch Hollowell, Corporation Counsel for the City of Detroit. “And that’s a crime under Michigan law.”

He says some residents avoid paying the high rates by using a family member’s address outside the city or even buying one-week insurance policies from pop-up agencies. This gives them just enough time to get their car registered.

Pricing Out Insurance

Tom Shields, spokesperson for the Michigan Insurance Coalition, says a number of factors go into deciding the cost of insurance.

“Insurance is all about figuring out what are the odds that someone is going to file a claim, and if they file that claim – how much is that going to cost?” he says.

Shields says insurers look at things like, based on geography, a person’s likelihood of getting in an accident or having property damage. He says urban areas automatically have higher premiums because the increased likelihood of collision.

Ay, There’s the Rub

According to the Pinnacle study, Detroit drivers get into accidents just as frequently as suburbanites.

But here’s the key difference – Detroiters on average file twice as many Personal Injury Protection (PIP) claims and those claims are twice as costly, making it hugely risky for insurers.

“Detroiters on average file twice as many Personal Injury Protection (PIP) claims and those claims are twice as costly.”

Why is this?

The city would point to two factors. First, they claim personal injury attorneys target city residents and convince them to file claims when they otherwise would not do so. Mayor Duggan calls out firms like 411-PAIN, whose ads can be seen and heard on bus wraps, televisions and radio stations throughout the city. 

“Clearly there’s been an industry that has built up in Detroit,” says Hollowell. “In fact, that 411-PAIN isn’t even a Michigan law firm. They’re based in Florida. But they’ve set up shop here in Detroit frankly because of no-fault.”

Secondly, Hollowell says hospitals get reimbursed for procedures at different rates depending on the insurance provider. 

Let’s say you get into a non-car-related accident – your Obamacare or Medicaid would kick in. In that case, a hospital could charge less than 10 cents on the dollar.

But if you’re in auto accident and your unlimited personal injury protection kicks in, the hospital can charge 300 cents on the dollar.

“So there’s an incredible incentive built into say well why not have that extra MRI,” says Hollowell.

The hope is that it won’t be like this forever. The Coalition for Auto Insurance Reform is working to introduce legislation in Lansing that would put a cap on what hospitals can charge.

And the city is working on its own, more affordable insurance called D-Insurance. Hollowell says that if the plan makes its way through Michigan legislature, Detroiters who sign up could save between $600 and $2300 on their insurance premiums as early as next year.

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