Crash Course: How Michigan’s Auto Insurance Policy Shapes Risky Driver Behavior

Abstract

In July of 2020, Michigan implemented a new auto insurance policy reform that decreased insurance premiums by effectively setting a price ceiling. This paper studies how that new policy reform and a decrease in insurance prices affects the frequency of risky driver behaviors and fatal accidents. By utilizing the synthetic controls method and placebo/permutation tests to control for endogeneity in the difference-in-differences model, this paper finds that the new Michigan auto insurance policy has no statistically significant effect on either risky driver behavior or fatal accident rates. This result suggests that drivers choose their level of care on the road with more consideration for their own health and self-preservation rather than evaluating the monetary cost of an accident. This is contradictory to some of the current literature and frees policymakers from worrying that a reduction in insurance premiums would lead to a more dangerous driving environment.