Is Michigan Auto Insurance Causing Poverty?

If you were to research “factors that cause poverty” you’ll typically see things such as being a single mom, being a minority, or not having more than a high school diploma. However, a recent investigation from the University of Michigan Poverty Solutions center suggests that auto insurance cost are causing an alarming cycle of poverty for Michigan residents. This raises the question…can lack of affordable transportation be considered another factor in poverty?

Insuring the Motor City

When you think of Michigan you may imagine Motown, universities like MSU and U of M, and of course big ticket sports teams like the Red Wings, Pistons, Tigers, and Lions. But don’t forget Michigan knows a thing or two about cars-I mean Detroit’s not called the Motor City for nothing!

Unfortunately, car ownership for Michigan residents is not as lucrative as it once was as Michigan residents are paying the most in auto insurance premiums with annual premiums doubling that of the national average. What’s worse is that residents in cities such as Detroit face steeper prices with annual premiums averaging $5414.

Alright now before you go pulling out the world’s smallest violin and saying,

Well everybody feels that they pay too much in auto insurance. How does that justify a poverty discussion?

We have to consider a basic financial literacy principle of managing income and expenses. Ideally, you want your income to be greater than your expenses. However, if the reverse is true where your expenses are greater than your income you will end up in situations resulting in debt and potential poverty. In regards to auto insurance, the U.S. Treasury Department’s Federal Insurance Office defines affordable auto insurance as that where premiums are less than 2% of a ZIP codes median household income. By this metric 97% of all of Michigan’s ZIP codes are deemed to have unaffordable insurance rates.

With the residents by law being required to have expensive insurance they can not afford…are Michigan residents being forced into poverty?

You Don’t Have to Own a Car?

But cars are optional. I mean no one is forcing you to own a car.

Well, not exactly… You see when it comes to public transportation the Detroit Department Of Transportation buses (according to Curbed) suffers from severe lack a reliability. The industry standard is 90% on time performance, compare that to Detroit’s on time performance which ranged from 60-70% in 2017. That lack of reliability can be devastating for someone juggling employment, school, or any other task that relies on routine punctuality. Hence, the inclination towards owning a vehicle. However, with added technology in vehicles, poor road conditions, and expensive auto insurance-the cost of owning a vehicle can take a toll on one’s finances. In other words many residents feel trapped in a costly battle of deciding whether to rely on public transportation or own a vehicle.

How Michigan Attempts to Solve this Problem

Well, the State of Michigan has recently changed its PIP auto insurance requirement which politicians feel should hopefully reduce the hefty price tag residents were facing. However, something that should be noted in this discussion is the household median income for Detroit residents. If you look at Table 1 you will notice that the only other city listed that has a lower median household income is Cleveland. Despite this difference their auto insurance cuts into 4% of their income (for the record that’s still considered unaffordable) compared to Detroit’s losing 18% of their income to insurance. Yes, reducing the burden of insurance will be beneficial, but if we are serious about reducing poverty we are going to need to address the low income levels felt by people in the city and surrounding areas.

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