Failure of Reform

Excess Premiums and Profits in 1996, 1997 and 1998: Table 2 shows exactly how the benefits of "tort reform" have flowed to insurers as windfall profits. The table compares actual 1996, 1997 and 1998, Texas private passenger automobile loss ratio experience to loss ratios determined by the Commissioner, in his 1997 benchmark rate order, to be reasonable. Briefly, the Commissioner determines what portion of the premium dollar should go for variable expenses (agent commissions, premium taxes, profit), fixed expenses (administrative overhead, underwriting), and ULAE. The remainder of the premium dollar goes for losses and ALAE. In his 1997 benchmark decision, the Commissioner determined that losses and ALAE should be about 74% of the premium dollar for liability coverages and about 71% of the premium dollar for physical damage (comprehensive, collision) coverages. At these target loss ratios, insurance companies would earn a reasonable profit. In actual fact, the loss and ALAE ratio for liability coverages in 1996, 1997 and 1998 ranged from 55% to 59% -- dramatically below the target loss ratios. The technical notes accompanying this report provide details on data sources and methodology.

The premiums and rates for liability coverages were substantially excessive in 1996, 1997 and 1998. Liability premiums were excessive by 18.5%, 22.8% and 18.6% in 1996, 1997 and 1998, respectively. Stated in dollars, liability premiums were $928 million excessive in 1996, $1.187 billion excessive in 1997 and $946 million excessive in 1998 for a total of about $3.0 billion for the three years.

The dramatic excesses of the liability coverages led to excessive premiums for all private passenger automobile coverages combined. Total premiums were 9.3%, 14.5% and 11.3% excessive in 1996, 1997 and 1998 respectively. Stated in dollars, total premiums were excessive by $729 million excessive in 1996, $1.193 billion excessive in 1997 and $960 million in 1998 for total of about $2.9 billion for the three years.

Some insurers did return some excess premium to Texas consumers as policyholder dividends for 1996 and 1997. Table 3 shows total policyholder dividends of $49.0 million in 1996, $221.9 million in 1997 and $387.2 in 1998. Even after deducting policyholder dividends from the excess premium figures, Texas private passenger automobile insurers reaped windfall profits from 1996 to 1998 of about $2.7billion for liability coverages alone and $2.2 billion for all private passenger coverages combined. Assuming ten million insured vehicles, Texas automobile insurance consumers were overcharged an average of $220 per vehicle for the period 1996 through 1998.

More Detailed Data Confirm the Failure of "Tort Reform Rate Reductions" to Benefit Consumers: The Annual Statement Page 14 data used in Table 2 shows calendar year results for a number of coverages grouped into the liability category – bodily injury, property damage, medical payments, uninsured/underinsured motorist bodily injury and uninsured/underinsured motorist property damage. It also groups voluntary market business for both rate-regulated and county mutual insurance companies with the involuntary market, or assigned risk, business.

Statistical data published by the Texas Department of Insurance allows us to examine the experience for bodily injury liability alone to see how the "tort reform rate reductions" assigned to that specific coverage worked.

These data come from the Annual Aggregate Experience Report (AAE) submitted by all insurance companies writing private passenger automobile insurance in Texas to TDI each year. These data are accident year data. Accident year data assign claims to the year in which the claim occurred. Consequently, the AAE accident year data should be a more accurate indicator of insurer experience for the policies in effect in a particular year than would the page 14 calendar year data.

The AAE data from TDI shows that the loss plus ALAE ratios for voluntary market, rate-regulated business were only 48.0% and 48.2% in 1996 and 1997, respectively. Table 4 shows that for rate-regulated voluntary market business in 1996 and 1997, bodily injury liability premiums were 41.7% and 41.5% excessive, respectively. Thus, when we use the more detailed AAE data to drill down to the results of just bodily injury liability – the coverage specifically targeted for "tort reform rate reductions" – we find even greater overcharges to consumers and windfall profits to insurers that indicated by the Annual Statement Data.