The Distribution of the Insurance Market Effects of Tort Liability Reforms

This paper considers the effect of tort liability reforms on medical malpractice and general liability insurance markets. The primary reforms analyzed were damages caps and other liability reforms. These reforms decreased premiums, reduced losses, and improved the profitability of insurance companies based on evidence using detailed individual company by state data from the National Association of Insurance Commissioners. Liability reforms reduce losses by much more than they diminish premiums. Moreover, the increase in profitability is concentrated disproportionately among the least profitable firms in the industry, thus limiting the role of competition in promoting the pass-through of cost reductions during this sample period. 21. The Impetus for Liability Reforms The mid-1980s marked a period of tremendous escalation in liability insurance premiums1. Particularly for medical malpractice, product liability, and environmental liability there was a dramatic surge in premium costs. Whereas some insurance lines, such as automobile insurance, were comparatively stable, premiums for general liability and medical malpractice insurance doubled in a two-year period from 1984-1986.2 Increased prices were accompanied b