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Texas Private Passenger Automobile Insurance Profitability, 1990 to 1998
This report reviews the loss ratio experience of Texas private passenger automobile insurers from 1990 through 1998 and with particular emphasis on the impact of "tort reform" on the liability insurance experience from 1996 through 1998.
Failure of "Tort Reform" to lower premiums for Texas automobile insurance consumers
The premise behind the mandatory "tort reform" rate reductions is that the benefits of "tort reform" – lower insured losses – should be passed on to consumers as lower premiums rather than insurers benefiting from lower loss ratios and higher profits. The Texas legislature sought to avoid the experience of the workers’ compensation insurance market in the early 1990’s when legislative changes led to massive reductions in workers’ compensation insurance losses but increasing rates by workers’ compensation insurers. It took a quasi-public workers’ compensation fund writing almost 30% of the market and constant challenges by the Department of Insurance over a five-year period before workers’ compensation insurers lowered rates commensurate with the reduced losses.
If "tort reform" rate reductions are being implemented correctly, we expect to see reductions in premiums while loss ratios remain steady. Under this scenario, the lower losses associated with "tort reform" are being passed on to consumers through lower rates and premiums, while insurers maintain reasonable loss ratios and profitability. However, as Table 1 shows, for private passenger automobile liability, precisely the wrong thing has happened – premiums have increased while loss ratios have dropped. Instead of "tort reform" benefits flowing to consumers, the benefits have flowed to insurers as billions of dollars of windfall profits. Liability premiums increased from the pre-tort reform 1994 and 1995 levels in 1996 and 1997. Only in 1998, fully three years after the implementation of mandatory tort reform rate reductions, did liability premiums decline from the previous year. But 1998 premium levels remained above pre-tort reform levels.
Further, overall Texas private passenger automobile insurance premiums continue to increase dramatically, suggesting that, on average, consumers are seeing no overall reduction in private passenger automobile premiums.