Insurance Premiums and the Myth of Liability Insurance “Crises”

By Jacob W. Gent, Attorney at Law

Imagine an industry that sold a product so important that each and every person and business in America needed it.  A product so important that the industry could threaten a state’s economy by pulling it from the market.  An industry not accountable to any federal agency, regulated only by often powerless state agencies, and exempt from anti-trust laws that police price-fixing and collusion with competitors. Add to this: this industry is legally permitted to keep its financials secret from regulators, law makers and the public; allowing it to advance its own political and legislative agenda at the expense of the American public.

This industry exists.  It is the property/casualty insurance industry which provides auto and homeowners insurance for individual consumers, medical malpractice insurance for physicians, and liability insurance for businesses and local governments.

Over the last four decades, the insurance industry has manufactured so-called “liability insurance crises” to drastically raise premium rates making insurance unaffordable or unavailable for many individuals, businesses, and professions.  During each of these “crises,” the insurance industry blamed a ‘litigation explosion/runaway jury award epidemic’  to justify rate hikes and called upon lawmakers to enact ‘tort reform’ laws which strip away victims’ rights and impose unjustified and crippling caps on damages juries can award to victims. These reforms, they argued, were the only way to reduce escalating premiums.

Yet studies have shown that there is no evidence to support the “litigation explosion/runaway jury award” argument.[1] Nor is there any evidence to prove that the passage of tort reform laws has reduced insurance premiums.[2]

For example, tort reform measures enacted in the mid-1980’s failed entirely to lower insurance rates in the following years, despite the promises to legislature and the voting public that it would.[3]  Indeed, states with little or no tort law restrictions saw similar changes in insurance premiums as compared with states that had not imposed significant restrictions on victims’ rights.[4]

Contrary to the industry’s justification; it is not a ‘litigation explosion’ which caused rate increases but the industry’s own “boom and bust” economic cycle at the root of the alleged “liability insurance crises.”  Due to anti-competitive (yet entirely legal) underwriting practices and the relatively unchecked power in setting premium rates and establishing reserves for future claims payments,[5] insurance companies  undergo a self-made cycle of “hard” and “soft” markets.[6]

To understand this boom and bust cycle, one must first understand that insurance companies make the most of their money from investment income by investing premium dollars received from policyholders in the stock market.  Specifically, they invest the “float” that occurs in the time between when premium dollars are received by the insurer and when losses are paid out by the insurer.[7]  Insurers engage in fierce competition for market share and premium dollars to invest, resulting in the underpricing of policies during periods when the market is strong, high interest rates are present, and/or insurers’ profit margins are robust.  This is called a “soft market.”  When the stock market plummets, interest rates drop, and/or cumulative prices cuts cause profits to fall, insurers begin increasing premiums and reducing coverage, creating a “hard market” and a corresponding “liability insurance crises” for policyholders.[8]

These boom/bust cycles occur nationwide, regardless of a state’s particular tort law regime.  Each time such a crisis occurs, insurers routinely blame state tort laws as the root cause.  Lawmakers, under pressure from the insurance industry, respond to the insurance “crises” as if the carriers were the victims, rather than the creators of the problem.  These “tort reform” laws passed in response to the self-created insurance crises are designed to increase insurance company profits, and restrict an injured party’s access to justice, or place limitations on damages to compensate injured victims.[9]   Lawmakers have passed these measures based on incomplete and/or inaccurate information provided by the insurance industry and its lobbyists, as federal and state laws do not require insurance companies to reveal information that could be used to fairly examine the actual financial health of the industry.[10]  Moreover, under state law, insurance companies are permitted to conceal important information that would inform lawmakers about the claims insurers raise during times of alleged crises to justify drastic rate hikes.  Such withheld data includes the amount of reserves held by insurers to pay future claims, the amount paid for different types of claims, actual sums paid to victims, and the amount insurers pay in cases involving multiple defendants.[11]

What can be done to remedy this situation?  To start,

  1. Congress and state legislatures should require insurance companies to disclose substantially more meaningful data regarding their actual financial well-being which justify the industry’s huge premium increases and limitations on coverage during hard markets.
  1. States should pass laws and regulations requiring insurers to provide information on premium and investment income, reserves held, and actual claim payouts and expenses incurred.
  1. Congress should also repeal the federal anti-trust exemption under the McCarran-Ferguson Act to ensure all domestic and foreign insurers and reinsurers comply with federal anti-trust prohibitions applicable to other industries. By prohibiting price fixing and monopolies, the resulting competition in the insurance marketplace would yield lower premiums and expanded availability of coverage to consumers.
  1. At the state level, legislators should enact stronger regulation and oversight of the insurance industry.
  1. States should repeal anti-competitive laws and provide increased resources to underfunded and understaffed insurance compliance departments so they can be pro-active in investigating, reviewing, and approving any proposed premium increases. States should also repeal anti-rebate and anti-group laws which prohibit insurance agents from offering discounts to policyholders and the formation of groups to negotiate favorable premiums based to economies of scale.[12]

Part of the mission of Adler ♦ Giersch ps is to promote public awareness of insurance and legal issues affecting those who have been injured by the negligence of others or by insurers that do not act in good faith in handling personal injury claims.  Our consultations are complimentary and confidential.


[1] See e.g.: Adler Giersch, ps-The Advocate, Civil Litigation by the Numbers: The Truth Insurance Companies Don’t Want You to Know About of “Runaway Juries” and “Frivolous Lawsuits” (June 2016).

[2] See Center for Justice & Democracy, Premium Deceit: The Failure of “Tort Reform” to Cut Insurance Prices (1999).

[3] See Americans for Insurance Reform, Repeat Offenders: How the Insurance Industry Manufactures Crises and Harms America (December 2011).

[4] See Americans for Insurance Reform, Stable Losses/Unstable Rates 2016 (November 2016).

[5] The McCarran-Ferguson Act of 1944 exempts the insurance industry from anti-trust laws, allowing it to on components of insurance prices and prohibits any federal regulation or Federal Trade Commission scrutiny of the insurance industry.

[6] See Americans for Insurance Reform, Repeat Offenders: How the Insurance Industry Manufactures Crises and Harms America (December 2011).

[7]Id. For example, there is about a 15 month lag in auto insurance claims, while in medical malpractice, the lag is anywhere between 5 and 10 years.

[8] See Americans for Insurance Reform, Premium Deceit 2016: The Failure of “Tort Reform” to Cut Insurance Prices (November 2016).

[9] Id.

[10] Id.

[11] See Americans for Insurance Reform, Repeat Offenders: How the Insurance Industry Manufactures Crises and Harms America (December 2011).

[12] Id.