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Auto Insurance Overcharges 1997
Texas auto insurers continued to earn record windfall profits in 1997, topping the excess profits in 1996. After keeping $900 million in windfall profits in 1996, Texas auto insurers in 1997 reaped $1.2 billion in additional windfall profits on liability insurance. So far, the result of tort reform has been a $2 billion windfall to Texas auto insurers.
Losses Have Dropped: After the legislature passed so-called tort reform legislation in 1995, the amount insurers paid for losses on auto liability insurance dropped dramatically. Although the legislature intended that insurers pass those savings on to consumers, insurers kept the money. CEJ performed a loss ratio analysis to calculate the estimate of the overcharges. CEJ used data provided by insurers to the Texas Department of Insurance. The loss ratio measures the percentage of the premium dollar that actually benefits consumers through the payment of losses. The Department of Insurance has set 74% as a reasonable loss ratio.
1996 Overcharges: Although the loss ratios for liability coverages -- the coverages affected by tort reform legislation -- was a dismal 56%. Insurers paid out only 56% of the premiums to consumers. This resulted in a $900 million windfall profit to insurers in 1996 alone because insurers could have charged substantially lower rates to earn a resonable profit with a 74% loss ratio.
1997 Overcharges: Although the loss ratios for private passenger auto insurance hit record lows in 1996, the loss ratios in 1997 were even lower. In 1997, the loss ratio for liability insurance dropped to 52%. This means that Texas consumers were overcharged $1.2 billion in 1997 for auto liability insurance. The combined effect of the first two years of tort reform legislation was a $2 billion windfall profit to Texas insurers.
Tort reform legislation affects the liability portion of an auto insurance policy. Thus, the Center for Economic Justice analyzed the loss ratios of liability coverages after tort reform. CEJ also analyzed the loss ratios of auto insurers for all coverages. While these other coverages showed more reasonable profit levels, the profitability of these other coverages did not offset the $2 billion overcharge.
Insurers with the most excessive auto liability insurance profits in 1997 alone: