Reforms, Profits Swallow Up Insurance Crisis

WASHINGTON —  Whatever happened to the liability insurance crisis?

A year ago, it was compared to the oil embargo that devastated the world economy. A lack of insurance for municipalities threatened the elimination of services such as police and fire protection. Unable to afford coverage for malpractice lawsuits, some obstetricians stopped delivering babies.

Newspapers overflowed with stories of day-care centers and bars, midwives and manufacturers, accountants and truckers who were unable either to afford a doubling or tripling of their insurance premiums or to obtain coverage at any price. Some businesses were forced to close down; others kept going without insurance, hoping they wouldn’t be sued.

Blame for the crisis, in the insurance industry’s version, was laid on juries and judges who made multimillion-dollar awards to plaintiffs suing everyone in sight. Economists, on the other hand, faulted the carriers for engaging in cutthroat rate competition during the early 1980s until mounting losses caused them to jack up premiums.

Seeking to cut its losses, the industry lobbied state legislatures vigorously to restrict the scope of liability. Consumer advocates demanded that tort reform be accompanied by a rollback in rates. Dozens of bills were introduced in Congress to deal with tort reform and product liability. Yet, by fall, the great liability insurance crisis had vanished from the headlines.

The emergency, it seems, has dissolved in a flood of insurance company profits.

According to the Insurance Services Office, which advises carriers on rate setting, operating profits tripled during the first nine months of 1986, compared to the same period in 1985. Earnings rose to $3.6 billion from $1.2 billion in 1985. Underwriting losses will be cut back by almost one-third to $12.2 billion for 1986.

A major factor in the renewed profitability has been huge rate increases. Premium income for all types of property-casualty insurance during the first three quarters rose 24.5% to $131.5 billion from $106.1 billion, according to A. M. Best Co., the authoritative source on industry data.

Premiums for commercial liability insurance--which had accounted for 25% of the losses but just 12% of the revenue--went up an average of 79% in 1985, after only nominal increases in the early 1980s. Best’s projects that 1986’s premium increases will amount to 72.5%.

While the shock of premium increases that often topped 100% in 1985 has made the 20% to 30% increases of 1986 seem mild by comparison, rates still appear to be going up briskly.

A benefit of returning profitability has been increased availability. A report issued at a meeting earlier this month of the National Assn. of Insurance Commissioners stated: “Problems with insurance availability may have eased since 1985 and early 1986 in certain lines or coverages, yet problems continue in several lines.” Last May, 43 of the 50 states, the District of Columbia and Puerto Rico reported availability problems with insurance for municipalities, and 42 reported difficulty with professional insurance for physicians.

By December, 55% of reporting states indicated slight improvement, while 43% saw no significant change in availability for day care, nurse-midwives, liquor shops, governmental entities and truckers. Three states found the situation greatly improved, while one judged it worse.

However, availability is sometimes a trade-off for affordability. The Northern Virginia Regional Juvenile Detention Center, which had been paying $1,400 annually for $1 million in general liability coverage, contacted 50 companies to replace its canceled policy before finding one that was willing to write $500,000 in coverage--at a $12,268 annual premium, a hike of 1,500%.

Besides higher premiums for lower coverage, companies are tightening underwriting requirements by charging higher deductibles, limiting defense legal costs and loading policies with exclusions. As a result of widespread publicity about physical abuse, the average annual premium per child at day-care centers has risen from $7 in 1984 to between $8 (in Wyoming) and $153 (in New York City), according to James Strickland of Austin, Tex., chairman of the Day Care Liability Task Force. By excluding abuse as an insurable event, one company has “reduced” the average cost per child to $50 annually, he said.

The industry hopes that future profitability will be enhanced as the result of limits on the breadth and depth of legal liability. Although Congress failed to pass insurance legislation in 1986, many states took action. The American Tort Reform Assn. counts 20 states in which “significant” changes took place in 1986, while the Insurance Information Institute lists 32.

Of those states that acted, just seven--Colorado, Connecticut, Florida, Michigan, New York, Washington and West Virginia--went the whole way and limited joint and several liability, sewing up the “deep pockets” of corporations and municipalities into which plaintiffs were thrusting their hands, or set caps on the amount they could recover in damages.

“The industry pressed hard but got only bits and pieces of what it wanted,” said Richard M. Page, chairman of the insurance brokerage Fred S. James & Co. in New York. The Florida experience has dampened the cry for more tort reform in other states.

There the industry’s efforts misfired. The legislature in Tallahassee voted to limit joint and several liability and cap awards. At the same time, it mandated a rollback to 1984 rates unless companies could prove hardship. The industry sued the state, claiming the law was unconstitutional. The case will soon be decided by the Florida Supreme Court.

Uncertainty on Tort Reform

Tort reform has made a difference for nurse-midwives in states that have enacted caps on recovery, said Karen Bodenhorn, acting director of the American College of Nurse-Midwives. Whereas their colleagues elsewhere must pay $3,500 annually for $1 million coverage, as compared to $800 to $1,000 three years ago, a few midwives will need only $500,000 coverage.

Tort reform advocates had expressed hope that its enactment would reduce rates. In general, however, it is too early to make an accurate assessment of tort reform’s impact; some laws have not yet gone into effect, and insurance rates are calculated on past experience, not projections.

Jay Angoff, general counsel of the National Insurance Consumer Organization, reported that interviews with insurance commissioners in 15 states revealed no difference in availability or rates because of tort reform.

Insurance commissions were contacted in 10 states, half of which had passed some version of tort reform. Panels in New York and Florida said there were smaller increases in premiums than would have occurred had there been no legislation in their states. For example, Florida’s general liability rates will go up 5% in January, instead of 10% to 12%. Michigan, which enacted significant modifications in liability law, indicated that rates had stabilized, as did Nevada, which made no legal changes.

Increasingly, the insured are seeking alternatives to commercial insurance in the form of self-insurance and insurance pools. Arlington, Tex., facing annual liability premiums more than triple the $209,000 it paid three years ago, established a nonprofit corporation to insure itself and proceeded to raise $9 million in bonds for a loss reserve.

Risk manager Peter Potemkin estimated the annual cost of insurance will be $550,000 to $600,000 for $3 million in coverage, substantially less than the $760,000 demanded by its commercial insurers.

Self-insurance is an option for about one-fifth of the largest trucking companies. But for an estimated 16,000 small trucking firms, about one-third of the industry, the solution has been to lease their rigs to larger companies that have insurance, according to Kenneth Pierson, director of the office of motor carrier standards of the Transportation Department. Meanwhile, the industry is still waiting for the Interstate Commerce Commission to approve pool coverage.

Although there is scant data on self-insurance, Page estimates that it now amounts to $34 billion annually. If the current trend continues, he expects that figure to climb to $77 billion annually by 1989. That would mean 35% of the business community is self-insured, up from about 20% in 1980.

“And these clients are not eager to go back to that marketplace,” he added, noting that self-insurance provides protection against availability crises. So, while the insurance industry is enjoying prosperity once again, it may end up a loser as its market share shrinks, Angoff warned.