Cross-posted from Tort Deform: The Civil Justice Defense Blog

The debate about tort "reform" has many contours, subparts, and winding passageways to it.

However, at the crux of this back and fourth (which Lee Tilson so successfully described in his recent post) is the tort "reform" movement's reliance on the prevalence of increasing insurance premium rates as their justification for the need for tort "reform."

The story goes that insurers, especially medical malpractice insurers, are charging increasingly higher rates because of too many lawsuits and too many fraudulent claims.

Well, like Lee pointed out in his post, one has to ask themselves if insurance companies are being so squeezed by lawsuits that they have to increase rates simply to stay afloat and are not just choosing to do so to make more money, shouldn't they be making far less money than they used to?

The recent statistics on property and auto insurance company profits, even after Hurricane Katrina, do not fit well into this narrative.

Center for Justice and Democracy

Insurance industry profits hit record highs in 2005, despite Hurricane Katrina.

*    The property-casualty insurance industry's after-tax net income for 2005 was the highest ever, a record-breaking $44.8 billion!

*    2005 profits are up 18.7 percent over last year's profit of 38.7 billion; 2004 had been the record until 2005.

*    The property/casualty industry's surplus also is at the highest level ever, rising by more than 7 percent to nearly $427 billion.

(link to full Center for Justice and Democracy piece)

Even in light of these astounding post-Katrina numbers, insurance companies still argued that they need more support from the state and will need to premium raise rates.

They said that even with the increase, insurers face deep problems that can be fixed only by substantial premium hikes, a scaling back of commitments by several firms to the most disaster-prone portions of the country and, according to some, a greatly expanded role for the state and federal governments in insuring individuals against the largest of catastrophes.

"Unless insurers can get relief, you're going to see a pullback by the private industry," warned Robert P. Hartwig, chief economist of the industry-funded Insurance Information Institute.

"We're not being good stewards of our investors' capital or our policyholders' surplus if we keep doing business where we can't make money."

(link to Los Angeles Times Article)

This perspective is already kind of hard to swallow, but it almost gets worse.

As explained by Peter G. Gosselin, of the Los Angeles Times, these insurance companies are doing fine because they have over time pulled back their coverage and (beleive it or not) gotten their own insurance for their insurance policy losses. In short, they have slowly shifted financial risks to be increasingly "borne by individuals:"

But the industry's remarkable performance also reflects a dozen-year effort by insurers to insulate themselves from the most extreme financial consequences of catastrophe by, among other things, shifting risks previously borne by companies to policyholders and the public.

The effort started after the last big batch of natural disasters in the early 1990s, among them Hurricane Andrew in Florida in 1992, and the Oakland hills firestorm in 1991 and Northridge earthquake in 1994 in California.

The effort has included industry adoption of increasingly sophisticated techniques for analyzing catastrophic risk, as well as self-imposed limits on how much firms will cover and where. It also has included successful campaigns to get states or state-created entities to shoulder such dangers as earthquakes in California and wind in Florida, Texas, Hawaii and elsewhere. And it has involved tightening policy language -- by, for example, narrowing the definition of "replacement cost" for homes -- in ways that leave individuals bearing more of the burden of putting their material lives back together after trouble strikes.

While premiums for homeowners insurance have increased by more than half since the early 1990s, coverage, especially in disasters, has shrunk. Historically, insurers covered a little more than 60% of total losses in disasters, according to Hartwig, the industry economist. During the 2004 hurricanes in Florida, they covered less than 50%, according to Hartwig's numbers. During Katrina, he said, they covered about 30%, due in part to the high flood damage.

In making these changes, the insurance industry has been part of a trend that has picked up steam as the U.S. economy has grown more competitive in recent decades -- a shift of financial risks from business and often government to individual households.

"If last year's hurricane season had occurred 10 years ago, it would have been devastating for the company," said Allstate Vice President Fred F. Cripe in an interview. "Last year, it was merely disappointing."

(link to Los Angeles Times Article)

Also, see Justinian'stelling post and chart on this issue.

If you or your organization is interested in learning more about or working on these types of civil justice issues, please feel free to contact me at cdugger@drummajorinstitute.org.

Cyrus Dugger

Senior Fellow in Civil Justice

Drum Major Institute for Public Policy

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