Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
Drivers in Michigan currently have some of the most generous auto insurance coverage in the country with Michigan’s mandated unlimited personal injury projection (PIP) coverage, which provides unlimited medical benefits as well as wage-loss and other benefits to individuals injured in auto accidents. But it comes at a cost. The unlimited nature of Michigan’s PIP benefits has caused insured drivers in Michigan to have some of the highest auto insurance premiums in the nation, especially in highly congested urban areas such as Detroit. For years, Michigan legislators have debated over ways to solve the state’s premium affordability problems without materially sacrificing the level of care provided to the most critically injured. After many failed attempts, legislators finally passed a historic piece of legislation in 2019, Senate Bill No. 1 (SB 1), which will bring sweeping changes to auto insurance in Michigan starting July 1, 2020.
While there are many ancillary components, the centerpiece of SB 1 is comprised of three changes aimed to reduce PIP costs in Michigan:
Under the new legislation, insureds will be able to select one of the following per-person PIP medical limit options:
The selected limit will apply only to medical payments made under PIP coverage, meaning coverage for PIP wage-loss and other benefits will remain unchanged. With medical payments comprising upwards of 90% of all PIP payments, however, the limit will impact the majority of PIP payments. Insureds who select limited PIP coverage will not be required to pay the assessment for the Michigan Catastrophic Claims Association (MCCA), which is an unincorporated, nonprofit entity that acts as a reinsurer for the industry by covering PIP losses in excess of the MCCA retention (currently $580,000).
In addition to the optional PIP limits, insureds in certain situations also have the option to exclude drivers from PIP medical coverage when they have other qualifying medical coverage. For example, insureds who have Medicare coverage can opt to exclude PIP medical coverage altogether.
For each limit option, SB 1 requires insurers to meet, on average, the specified PIP premium reductions shown in Figure 1, measured relative to the rates in effect as of May 1, 2019.
Figure 1: PIP Premium Reductions
|Limit||Required PIP Premium Reduction*|
*Relative to rates in effect as of May 1, 2019.
These PIP premium reductions are required to be in effect for eight years and, because they are measured relative to rates in effect as of May 1, 2019, outside of a few limited exceptions, insurers will effectively be unable to file rate increases (relative to rates in effect as of May 1, 2019) for PIP coverage before July 1, 2028.
Because insureds will be able to purchase lower limits of PIP coverage, in order to minimize the number of instances of injured parties being unable to be made whole, SB 1 also broadens bodily injury coverage to allow for injured parties to collect economic damages (e.g., medical benefits, wage-loss benefits, etc.) from at-fault parties. Because PIP coverage provides unlimited medical benefits today, the current legislation effectively only allows for injured parties to sue at-fault Michigan drivers for noneconomic damages (i.e., pain and suffering). Along with the broadening of bodily injury coverage, SB 1 requires that insureds carry “minimum” bodily injury limits of $250,000/$500,000 (an increase from the current minimum limits of $20,000/$40,000), though insureds can opt to purchase limits as low as $50,000/$100,000.
To further help control costs, Michigan lawmakers have enacted a medical fee schedule effective July 1, 2021, which will limit the amount that healthcare providers can bill for certain medical services related to auto accidents. These limited amounts will vary based on the provider and service and will be a function of the amount payable under Medicare, the provider’s charge description master, or the amount the provider charged on January 1, 2019. Further, these allowable amounts charged will decrease each year until July 1, 2023. This will replace the current system wherein healthcare providers can essentially bill auto insurers for full rates for any reasonable service.
The new legislation also makes revisions to the order in which coverage applies in certain situations. With the new PIP limit options, SB 1 clarifies that, in the instance when multiple insurance policies may provide coverage, benefits are payable up to the highest limit under any of the covering policies (i.e., coverage is not stackable). The legislation also makes changes to who is responsible for providing coverage when an injured individual does not have PIP coverage and is not required to carry PIP coverage, such as a pedestrian or third-party passenger (non-household member) of a vehicle. In these situations, coverage will be provided by the Assigned Claims Plan, which will effectively eliminate the need for individual insurers or the MCCA to provide payments to these injured parties.
In addition to the core changes listed above, SB 1 also includes several revisions intended to improve affordability issues among certain segments of drivers as well as drivers in higher-rated locations such as Detroit. The new legislation bans the use of credit scores (e.g., FICO score) and ZIP Code in the rating of auto insurance. Insurers may, however, continue to use insurance scores and may continue to rate policies by other geographic measures not related to ZIP Code (e.g., county, city, or census tract). Furthermore, SB 1 also bans the use of occupation, education level, and home ownership in the determination of insurance premiums.
Among other miscellaneous provisions, the legislation also allows insurers to offer managed care options to policyholders, which would allow insurers to monitor and adjudicate an injured person’s care in order to further control costs.
The anticipated impact on consumers, initially, will be highly variable and depend on a combination of their selected limits of coverage and insurers’ initial responses to SB 1. Because insurers are required to meet mandated average premium reductions for PIP coverage, most consumers should see the PIP portion of their auto insurance premium decrease. These reductions will likely be offset by increased premiums for bodily injury (BI), uninsured motorists (UM), and underinsured motorists (UIM) coverage because these coverages will likely be used more frequently and will on average pay more per claim because of the PIP and BI limit changes mandated by the legislation. The broadening of BI coverage will also contribute to this expected increase in premium. Insureds who continue to select unlimited PIP coverage and higher liability limits may very well see their premiums increase on an all coverages combined basis. Of course, insureds will be able to reduce their auto premiums by selecting lower PIP and liability limits, though they should first verify that their health insurance covers auto accidents or decide whether the increased risk of possibly not having coverage for medical expenses in excess of their PIP limits is worth the premium savings.
In the long term, consumers will likely see premium decreases regardless of the coverage limits selected as insurers reflect the cost savings of the medical fee schedule and order of priority in their rates.
Other components of SB 1 will likely have smaller or less noticeable impacts on consumers. For instance, most insurers currently use insurance scores in the rate calculation process for auto policies, so the prohibition of the use of credit scores will likely only affect a small number of companies. Those companies will presumably implement insurance score in place of credit score, and because insurance score and credit score are highly correlated, the overall premium impact will likely be negligible. Similarly, the prohibition of the use of ZIP Code will likely also have minimal impacts, as most companies can opt to implement census tracts, which are typically more granular than ZIP Codes. As such, these required rating plan changes will likely not achieve what legislators intended.
Aside from the legwork required to comply with the new legislation, insurance companies have considerable challenges ahead in navigating the Michigan auto market. As stated above, for the next eight years insurers will have limited ability to increase PIP premiums from the rate level in effect as of May 1, 2019 and must meet certain required PIP premium reductions for each PIP limit option relative to rates in effect as of May 1, 2019. The introduction of the medical fee schedule and changes to the order of priority of coverage should ostensibly reduce PIP costs compared to a 2019 cost level, but insurers may still face the need for rate increases on PIP coverage to the extent that their PIP rates in effect as of May 1, 2019 were inadequate or to the extent that per annum cost increases in medical services and wages erode the aforementioned savings. If insurers find themselves in need of PIP rate increases, they must manage the overall profitability of their auto books by more aggressively maintaining adequate rates for other coverages (i.e., proposing rate increases equal to or closer to what is actuarially indicated) or correct mis-pricings that may exist in their rating plans (i.e., fix adverse selection issues).
The legislation will also affect insurers’ reserves. Because the medical fee schedule will impact the payments on all medical services rendered after July 1, 2021, payments expected to be made after this date for all outstanding claims will be made at a reduced rate, meaning the reserves for these anticipated payments should decrease. This will have a more leveraged effect on insurers’ gross reserves but will also impact insurers’ reserves net of the MCCA retention as well. The reduction in insurers’ net reserves will flow through insurers’ income statements as underwriting profit, which may increase an insurance company’s income tax liability. While the medical fee schedule is not currently in effect, insurers could begin to reflect these anticipated reserve reductions in their 2020 year-end financials if deemed appropriate by management; some may have even reflected these savings in their 2019 year-end financials.
Finally, insurers will have to make human capital investments in response to SB 1. From claims to compliance, insurers will need to train staff to ensure they are meeting the requirements set forth in the legislation. Additional staff may also be necessary to meet the increased demand of defense costs associated with the broadening and increased use of bodily injury coverage.
The impact on the healthcare industry will affect both providers and insurers, though there is much uncertainty as to how significant the impacts will be. As auto insureds exhaust their PIP, BI, UM, and/or UIM limits, any remaining medical expenses that cannot be recouped through auto coverages may spill over into the healthcare industry. If auto accidents are covered under the injured party’s health insurance, the health insurer will likely bear the remaining losses. However, these losses might be mitigated due to the health insurer’s negotiated rates with in-network and out-of-network providers if they are less than the medical fee schedule rates. Programs like Medicare and Medicaid can expect larger impacts as insureds enrolled in these programs will likely have limited or no PIP coverage. If auto insureds exhaust their PIP limits, have no qualifying health insurance that will pay for the expenses, and cannot afford to pay for the medical services provided in excess of the PIP limit and in excess of the liability limits of any at-fault third parties, healthcare providers will have to absorb the losses.
The introduction of the medical fee schedule will also greatly impact providers, as it essentially eliminates the blank check that they are currently given for services related to auto accidents. This will likely result in lost revenue for healthcare providers, who will either need to recoup the lost revenue in other ways (e.g., increase rates for service to the extent allowed by law) or reduce expenses by making cuts (e.g., lower wages, reduce staff, or eliminate unnecessary procedures).
With all of the moving pieces, it is difficult to predict exactly how the dust will settle once Senate Bill No. 1 is in effect. While insurers have already submitted filings to regulators to demonstrate compliance with the legislation, there remain many unknowns on how consumers will react. This uncertainty surrounding consumer decisions may also be exacerbated by recent economic events, as consumers become even more price-sensitive. The one thing that is certain, however, is that insurers will need to be quick to respond to an ever-changing market.
PIP PIP hooray! The changing Michigan auto market
After many failed attempts, Michigan legislators finally passed a historic piece of legislation in 2019, Senate Bill No. 1, which will bring sweeping changes to auto insurance in the state starting July 1, 2020.