THE INSURANCE CRISIS AND-THE PUBLIC RESPONSE I BY KRAG UNSOELD ILLUSTRATION BYJ.R. WILLIAMS he message from Portland’s Birth Home Ma te rn ity Cen ter was terse. “ This letter is the bearer of very sad news. The Birth Home will have to close its doors after four years and 398 families. We have become another unhappy statistic in the malpractice crisis.” Yet another victim was added to what’s become known as the casualty insurance crisis. Skyrocketing premiums and cancelled coverage have forced countless businesses and public entities radically either to curtail their activities and ser- vibes, or else drop out of the market altogether. Gynecologists, day care centers, public parks departments, roofing contractors, school districts, truckers, municipalities, tavern owners—indeed all of us have felt the pinch. So it is to be expected that a broad coalition has emerged to push for political solutions to the problem. Largely guided by the insurance industry, this coalition has zeroed in on the nation’s civil liability, or tort, system as being the culprit. It cites frivolous lawsuits in record numbers, generous juries and, of course, greedy lawyers as responsible. To curb these alleged abuses, proposals to limit damage awards, apportion liability differently, limit lawyers’ contingency fees and eliminate punitive damages have been offered in virtually every state. Legislatures in 40 states had approved some sort of response to the casualty crisis before adjourning last summer. On the other side of the issue, trial lawyers and citizen groups have joined to This cycle o f cash flow underwriting during periods of high return, followed by the massive premium hikes as the chickens come home to roost, is very common in the property and casualty insurance market. stave off what they believe is an assault on victims’ rights to fair compensation. Former Federal Insurance administrator under President Ford, Robert Hunter, founder and president of the National Insurance Consumer Organization commented, “ (The crisis] is a self-inflicted problem. The insurance companies caused it and now they’re trying to correct it by jacking the rates up to excessive levels.” With high rates and the threat of massive cancellations to buttress their demands, insurers are blatantly attempting to limit their liability and restrict the recovery of damages for injuries, thus boosting their profits. The other side believes the solution is to implement more stringent regulation of the insurance industry. This is not the fairest of matches, however. The insurance industry is one of the richest, most powerful, most unregulated and most unscrupulous coalitions in the U.S. In 1944, for instance, a federal court in the Southwest ruled that existing insurance cartels were in flagrant violation of anti-trust laws. The next year, with the approval of the McCarren-Ferguson Act, Congress exempted insurance from all anti-trust provisions. In 1979, after the Federal Trade Commission published a study that was critical of the life insurance industry, Congress stepped in once more and barred the FTC from ever again studying any part of the industry. In most instances to date, government has tended to provide greater protection for the insurance industry than for the public. LIABILITY CRISIS: MYTH OR REALITY? here are countless anecdotes to i illustrate what’s referred to as the judicial system run amok. For instance, there was a $1.5 million settlement for the drownings of three men fish- ing in a storm which the National Weather Service had failed to predict. Or the $500,000 collected by someone injured while trying to use a power lawn mower to trim a hedge. Another case resulted in a $260,000, plus $1,200 a month for life, award to someone who was injured while allegedly “ breaking and entering” a public school. The industry has used examples like these to explain the $46 billion industry underwriting loss experienced between 1975 and 1984 and to justify the casualty insurance premiums increase of $25 billion in 1985—that’s $100 for every woman, man and child in the United States. The total U.S. insurance bill for 1985 was more than $300 billion—$160 billion for property and casualty alone. But little, if any, of the industry’s evidence to justify the assault on the legal system holds up under closer scrutiny. The National Center for State Courts looked at the data from the 13 states that keep records of tort filings. The Center found that from 1978 to 1984 there was a 9 percent increase in lawsuits filed. Population in these states had grown by 7 percent, leaving a per capita tort filing increase of only 2 percent. Insurance companies and, among others, the federal Justice Department’s Tort Policy Working Group, have argued that the growth is 758 percent over the past decade. This rate actually is accurate for suits filed in federal courts. But 95 percent of all tort cases are brought in state courts. Tales of skyrocketing jury settlements are similarly suspect. A representative of Jury Verdicts Research, Inc. recently told a Congressional subcommittee that “our studies do not support any claim of recently escalating jury verdict awards.” Iq fact, a Rand Corporation study showed that the median award in liability cases has remained essentially steady at $8,000 (constant 1979 dollars) between 1960 and 1984. The federal General Accounting Office (GAO) reported that offsetting the reported $46 billion industry underwriting losses—the difference between premiums collected and benefits paid—was $121 billion of investment returns. By putting the hundreds of billions of dollars it has at its disposal to work, the industry cleared $75 billion during the 10 years leading up to 1984. Not only did the industry pay no federal taxes on this profit, but it also received $125 million in tax rebates. Even in 1985, during the worst phase of the supposed crisis, the insurance industry reported a net profit of $2 billion— a very modest rate of return of about 6 percent. This did not include the $2.2 billion of dividends that were paid out to stockholders. All other industries report such dividends as part of profits. The property and casualty insurance stock index in turn voted a resounding endorsement of the industry’s condition by sending the index up by 50 percent in 1985—almost twice the rise of the Dow Jones Industrial index. Even the outrageous anecdotes fail to hold water. The foolish hedge-mower, conceded leading tort reform lobbyist Victor Schwartz in Business Week, was a locker room invention. The National Weather Service was knowingly using faulty equipment. And the individual injured while supposedly “ breaking and entering” was really a student who fell through a skylight which the school had been court ordered to cordon off. As Business Week editorialized on January 12, 1987, what insurance crisis? Consumer advocate Ralph Nader was right on the mark when he called the crisis “ the greatest commercial hoax that I have ever observed in the United States, both in terms of its size—tens of billions of dollars—and in terms of its manufactured figures and phony anecdotes.” FAST AND LOOSE UNDERWRITING GAMBLES t ’s true that the insurance industry suffered a slump in its profits with 1985 and 1985 being the low point. But even the Insurance Service Organization and the National Association of Independent Insurers, both industry trade groups, were candid enough to blame their industry for its financial dilemma. The late ’70s and early ’80s were a heady time for insurers. Investment returns soared as high as 25 percent. So it was little wonder that the industry engaged in what the National Association of Independent Insurers characterized as a “ brutal price war.” There was such a race to secure investment capital within the industry that the MGM Grand Hotel was able to purchase $75 million of retroactive fire insurance in 1981 after its devastating 1980 conflagration. The underwriters gambled that investment returns during the time that the suits were dragged out in court would far exceed their liabilities. (MGM quickly settled out of court and had to sue the underwriters who resisted paying the settlements.) This binge of price cutting—what economists call “ cash flow underwriting” — went on for six years beginning in 1978. By 1984, the combination of the Federal Reserve Bank’s hard nosed monetarism and the worst recession since the 1930s swept inflation and high interest rates right out of the system. Investment returns plummetted to 3-4 percent. People attending the National Qon- vention of Independent Insurance Agents of America in September 1984 were warned to brace themselves for sharp premium hikes. At this meeting there was no mention of a liability crisis. But premiums quickly rose by as much as 1000 percent. This cycle of cash flow underwriting during periods of high return, followed by the massive premium hikes as the chickens come home to roost, is very common in the property and casualty insurance market. Most industry observers agree that it has operated on a 10 year boom and bust cycle for the past 50 years. Richard Marquardt, Washington State Insurance Commissioner, believes that 12 Clinton St. Quarterly—Spring, 1987
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