A common refrain from big business and the insurance industry is that lawsuits are out of control and that so called "tort reform" needs to be introduced to curb what they deem as frivolous lawsuits. However, a new study done by Georgetown University's Center for Justice and Democracy sheds light on just how false that narrative is.
Co-author Joanne Doroshow said, “It is appalling that, for decades, the insurance industry has gotten away with victimizing U.S. businesses by creating crises in insurance affordability and availability, while falsely blaming juries and victims for the industry's own mismanagement. The public has had enough of this endless cycle and the periodic crises that accompany it. We hope insurance regulators finally take some steps to reign in the excesses of the insurance industry, whose business practices are wreaking havoc on both businesses and injured victims who are falsely blamed for this.”
The study found several important and interesting facts the insurance industry doesn't want the public to know about:
· Insurance companies have a massive surplus. The insurance industry claims it is suffering losses, but it is actually prospering. Claims of financial peril are easily proven to be untrue. In fact, insurers' surplus – the money held above that reserved for expected losses – doubled from 2004 to 2018, quadrupled since 1994, and has risen by more 5,000% over the past 60 years. It is now at all-time record levels.
· An economic cycle has been driving insurance rates for generations. Over the past five decades, insurance rates have gone up and down in sync with the insurance industry's economic cycle. The cycle leads to what are known as “hard” (increasing rates) and “soft” (low or decreasing rates) insurance markets. Since around 2006, the nation has been in a “soft” insurance market but the industry is now attempting to end it by signaling to each other to raise prices and tighten markets. Given the industry's excessively capitalized financial condition, there is no reason why the soft market should be turning.
· Anti-competitive behavior within industry facilitates coordinated pricing strategies. The industry can get away with signaling among themselves that rate action is about to occur because the industry enjoys an exemption from antitrust laws.
· Industry has invented a new term to shift blame for its economic cycle. Over the last few months, insurance executives and consultants have been boldly declaring to the entire industry that it is time to raise rates on business policyholders because of a concept known as “social inflation.” The existence of “social inflation” is contradicted by all credible evidence: litigation trends, jury verdict trends, insurance claims data, and other basic facts. “Social inflation” does not exist.
· Loss inflation by insurers is shown in the data. The insurance industry inflates losses by manipulating its own claim reserves at key moments to justify rate hikes particularly as it is trying to trigger a hard market as is likely happening today. While reserve hikes lead to price increases, these reserves are later released into profits by insurers.
· Actual insurance payouts have been stable for decades. Since 1999, total commercial insurance payouts have never spiked and have generally tracked the rate of inflation and population. Premiums and reserves, however, have gone up and down in sync with the insurance industry's economic cycle and are not reflective of any trends in paid claims.
· After adjustments for inflation, population growth, and annual mileage, losses have declined in key commercial insurance lines. Over the last 20 years, adjusted losses have stayed generally flat or increased relatively little. What's more, adjusted losses decreased in three major areas of commercial insurance: Commercial Multi-Peril, Commercial Auto Liability, and Medical Malpractice.
A copy of the full study is here.