A provision in Detroit's new city charter could create a system to combat the crippling and often discriminatory high cost of auto insurance for city residents.
The charter, which went into effect Jan. 1, authorizes the city to "establish an insurance system to provide, support, supplement or otherwise assist in the provision of automobile and/or property insurance for City residents."
Exactly what kind of insurance system Detroit could create is left wide open. But several advocates of the idea have come up suggestions for what it could look like -- and why such changes are more than necessary.
Michigan has historically had much higher auto insurance rates than the national average, and in Detroit they're even higher. A 2011 Insure.com study ranked Michigan as having the most expensive auto insurance of any state, with an average premium of $2,541.
But that's nothing compared to Detroit premiums, which are the highest of any city nationwide. At nearly $6,000, the average Detroit premium is almost $2,000 more than Philadelphia's, the second highest. Perhaps due to the high cost, a staggering number of Detroit residents drive without car insurance (which is illegal) -- according to one study, more than half of all Detroit drivers are uninsured.
"The number of uninsured is just too high," said Melvin "Butch" Hollowell, former Michigan consumer insurance advocate. "It's reflective of the fact that policies are too unaffordable."
Some put the blame for high costs on unlimited no-fault insurance. Michigan is the only state to provide unlimited medical benefits for policy-holders and their families, also called personal injury protection (PIP), and no-fault insurance can drive costs up.
Eric Poe, CEO of CURE Auto Insurance, which does not operate in Michigan, said that insuring policy-holders for millions of dollars was cost-prohibitive.
"I would be attracted to come into Michigan if they put a cap [on PIP benefits] that is meaningful," he said. "If you can't predict the market, you don't want to offer insurance."
In June, State Sen. Virgil Smith introduced a bill that would legislate the creation of a pilot program, designed for Detroit, where drivers meeting certain requirements would be eligible for a stripped-down insurance plan without unlimited PIP coverage. According to MLive, Smith hopes the change will bring down premiums to around $1,000 yearly, making it possible for more people to purchase insurance.
Smith's plan has precedent: California pioneered a low-cost insurance model, with a state program created in 1999 to provide liability insurance for less than $400 yearly to low-income drivers. New Jersey also provides a low-cost basic policy.
But Rep. Hansen Clarke (D-Mich.) of Detroit, as well as Poe and Hollowell, say the issue at the root of Detroit's unfairly high auto insurance rates is not PIP, but how insurance companies determine those rates.
Many companies use factors like education, occupation, home ownership and credit score -- what Poe called "income proxies" -- to determine rates.
The result, Clarke says, is that people who make less money end up paying much more for car insurance.
"The totality of all those rating factors penalizes people because they're lower income or financially struggling, not because they're risky drivers," Clarke said.
In 2010, the Michigan Supreme Court ruled that insurers could use credit scores to set premiums.
Clarke is currently drafting federal legislation to address unfair rating factors in pricing automobile insurance, which he expects to introduce into the House of Representatives this February.
Earlier in his career, Clarke floated the idea of Detroit creating a reciprocal auto insurance plan, where subscribers mutually insure each other. It gained some support but didn't go far at the time.
General Counsel to the City Charter Commission Lamont Satchel offered two other possibilities under the new charter: a system wholly sponsored by the city, or a partnership with a private vendor.
Some have criticized the provision, calling it vote-bait. And a Detroit News editorial said it was an "extremely bad idea" to "[build] pressure for the city to enter the insurance business right into the charter."
But for the most part, there seems to be little opposition to the pending proposal -- after all, it's just a study waiting to happen.
"My sense is that the overwhelming appetite in the city is to move towards reform," Hollowell said.
Satchell agreed, saying the charter puts the power in the hands of Detroiters.
"We want a more aggressive role from our city, rather than just sitting back and waiting for something to happen in Lansing," he said.