Emerging reform of no-fault car insurance policies will likely lower loss ratios in certain states, according to Fitch Ratings. The rating agency found that the loss ratio was 75 percent in no-fault states in 2009 and 2010 compared to 63 percent from 2006 to 2010 for states that do not have no-fault laws.

As a result, large auto policy underwriters such as State Farm, Progressive and Allstate have reported weaker underwriting results in no-fault states that include New York, Michigan, New Jersey, Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New York, North Dakota, Pennsylvania, Utah and even Puerto Rico.

Last year, Michigan stood out as the state with the highest direct loss ratio in the country with loss ratios rising to 148 percent in 2011 from 115 percent in 2010, according to Fitch Ratings data.

State Farm's share of car insurance policies in Michigan was 18 percent in 2011 compared to Progressive and Allstate’s market share of 8 percent and 7 percent, respectively.

“In tracking loss ratios over five years, these states have a higher loss ratio, which indicate that car insurers are paying higher claims in no-fault states than in other states. Reform of no-fault systems may lower the amount of money that large car insurers pay out in those no-fault states,” Fitch Ratings Insurance Analyst Douglas Pawlowski told Insurance Networking News.

In no-fault states, policyholders are reimbursed for car accidents by their own insurance companies without proof of fault and are restricted from seeking compensation in court from other parties.

“In no-fault states, rather than pursuing litigation, insurers pay claims,” said Pawlowski. “No-fault is a convenient vehicle for fraud claim because they’re not going to court, so it’s easier for fraud claims to succeed in no-fault states. Many no-fault states are looking into their no-fault insurance systems and changing the laws so that they are stricter.”

Michigan’s proposed reform legislation addresses rising premium costs by limiting no-fault benefits and introducing a fee schedule for medical services. Currently, unlimited lifetime medical expenses are covered by insurers and the Michigan Catastrophic Claims Association (MCCA), which reimburses primary insurers for medical claims exceeding $500,000. Michigan drivers fund MCCA through mandatory annual premiums, which increased by $30 to $175 per vehicle per year.

Florida reported the fifth-highest direct loss ratio at 72.7 percent. Last month, the Florida Legislature passed a bill that limits personal injury protection (PIP) claims and covered medical treatment due to an auto accident with the intent of reducing fraud under the state's no-fault system. In the New York state Senate, a similar anti-fraud bill is advancing while that state of Michigan entertains reforming its no-fault rule.

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