Background

Tort Reform Rate Reductions: In 1993 and 1995, the Texas Legislature, at the urging of Governor Bush and a number of organizations lobbying on behalf of Texas businesses, passed a series of laws changing the rules for lawsuits in Texas. These changes were called "tort reform" by their proponents. The changes included limits on awards for injured parties for exemplary (punitive) damages, for example.

In 1995, when the majority of the "tort reforms" were passed, the Texas Legislature also included a provision for mandatory "tort reform rate reductions." The legislature required the Commissioner of Insurance, starting in 1995 and continuing annually for five years, to establish rate reductions for insurance coverages. The Commissioner was charged with estimating the savings from "tort reform" on insurance losses in the future and requiring insurance companies to lower rates to pass those savings to insurance consumers through lower rates.

Legislative Intent: 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.

TDI Actions: The statute created by the Texas Legislature requiring mandatory rate reductions – Texas Insurance Code Art. 5.131 – was effective September 1, 1995 and required the Commissioner to hold a public hearing to establish "the percentage of equitable across-the-board reductions in insurance rates" by line and sublines of coverage. The law also provided that, if the Commissioner had not issued an order establishing the rate reductions by January 1, 1996, rates would be automatically reduced by certain percentages relative to rates in effect on April 1, 1995. For the private passenger automobile bodily injury liability coverage, the reduction specified in the statute was 15% of premium.

The Commissioner has held hearings in August of each year from 1995 through 1999 and has established "tort reform rate reductions." Instead of specifying reductions in overall rates, the Commissioner specified reductions in loss and allocated loss adjustment expenses. Since loss and loss adjustment expenses should be a little less than 75% for bodily injury liability coverage, the reduction in premium for this coverage should be, on average, a little less than 75% of the reduction in loss and loss adjustment expenses. The table below shows the Commissioner’s loss and ALAE reduction decisions by year, the premium impact and the dollar savings to consumers estimated by TDI. Note that even the theoretical rate impact never approached the 15% set out by the Legislature.

A summary with more recent data is available.

Notwithstanding TDI’s claims of savings to consumers, the actual operating results of Texas private passenger automobile insurance companies show that Texas consumers have not seen any of the "savings" from "tort reform." Rather, any reductions in insurance losses resulting from "tort reform" have flowed directly to insurance company profits.

Insurers Profit from Tort Reform: Premiums Increase while Loss Ratios Decrease: 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 alleged 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.