August 1998

This report reviews the loss ratio experience of Texas private passenger automobile insurers from 1990 through 1997 and with particular emphasis on the impact of "tort reform" on the experience in 1996 and 1997.

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.

Excess Premiums and Profits in 1996 and 1997: Table 2 shows exactly how the benefits of "tort reform" have flowed to insurers as windfall profits. The table compares actual 1996 and 1997 Texas private passenger automobile loss ratio experience to loss ratios determined by the Commissioner, in his 1997 benchmark rate order, to be reasonable. 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 and even more excessive in 1997. Liability premiums were 18.5% excessive in 1996 and 22.8% excessive in 1997. Stated in dollars, liability premiums were $928 million excessive in 1996 and $1.187 billion excessive in 1997 for a total of about $2.1 billion for the two years.

The dramatic excesses of the liability coverages led to excessive premiums for all private passenger automobile coverages combined. Total premiums were 9.3% excessive in 1996 and 14.5% excessive in 1997. Stated in dollars, total premiums were $729 million excessive in 1996 and $1.193 billion excessive in 1997 for a total of about $1.9 billion for the two years.

Some insurers did return some premium to Texas consumers as policyholder dividends for 1996 and 1997. Table 3 shows total policyholder dividends of $49.0 million in 1996 and $221.9 million in 1997. Even after deducting policyholder dividends from the excess premium figures, Texas private passenger automobile insurers reaped windfall profits in 1996 and 1997 of $1.95 billion for liability coverages alone and $1.65 billion for all private passenger coverages combined. Assuming ten million insured vehicles, Texas automobile insurance consumers were overcharged an average of $165 per vehicle for 1996 and 1997.