Tort reform critics use flawed assumptions
By the end of 2000, tort reform – legislation clamping down on unnecessary and costly lawsuits – will have saved Texas consumers and businesses $2.9 billion in liability insurance premiums since the law took effect in 1995.
Unfortunately, with an election campaign under way, some partisan, longtime critics of tort reform are trying to cloud that accomplishment with political rhetoric based on remarkably flawed assumptions.
The facts are as follows: More than half of the savings, or about $1.9 billion over five years, benefited professionals, such as doctors, nurses and engineers, and Texas businesses of every size. That’s because they were the most likely targets for lawsuit abuses prior to the reforms.
But the largest single category of savings was Texas drivers. They paid $1.06 billion less in auto liability premiums because of tort reform.
These numbers are known due to extensive analysis and verification by actuaries at the Texas Insurance Department, which is charged by law with making sure tort reform savings are passed on to consumers. In each of the first five years of tort reform the insurance commissioner held a public hearing and set mandatory rate reduction factors that insurers applied to their rates. Insurers must report the policyholders’ savings under oath, subject to review by department actuaries.
Unfortunately, some tort reform opponents ignore facts in order to make wild and biased attempts to discredit the state’s and Gov. George W. Bush’s successful campaign against lawsuit abuse.
These charges, in effect, question the honesty and professionalism of the department. The two principal attackers so far have been J. Robert Hunter, who served as insurance commissioner under Democratic Gov. Ann Richards, and Birny Birnbaum, who was Mr. Hunter’s chief economist.
Messrs. Hunter and Birnbaum are pushing the unfounded notion that insurers are pocketing tort reform savings rather than passing them on to consumers. They offer no reasonable evidence but rather hunches and suspicions based on misconceptions of how tort reform’s success should be measured.
The basis for recent attacks on Texas tort reform is a study that Mr. Hunter released several weeks ago. Our actuaries have found the study to be based on seriously flawed assumptions. First, it assumes there are no savings from tort reform unless there is an absolute drop in total premiums paid. But just because total premiums have not gone down doesn’t mean the cost per unit has not gone down. For example, if a family buys a second car, total insurance premiums paid by the family go up even though the cost per car goes down.
Second, and more significantly, the report ignores Texas’ huge economic growth, which was stimulated in part by tort reform. From 1995-98, the Texas economy grew 40 percent faster than the rest of the country. That meant more families adding a second or third car, more new businesses starting up and more established businesses adding assets and expanding operations. For these reasons, more liability insurance was purchased and total premiums paid rose, too.
Taking all this into account, even using Mr. Hunter’s methodology, total liability insurance premiums in Texas dropped more than twice as fast as the rest of the country.
Texas liability insurance policyholders have paid out almost $3 billion less in premiums than they would have paid without tort reform. These facts are not as exciting as groundless and undeserved criticism, but they are obvious to anyone who can get past blind opposition.
Bottom line: Tort reform works, and its savings have gone into the pockets of Texas insurance policyholders.
JosÃ© Montemayor is Texas commissioner of insurance.