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Tort Reform Does Not Lower Insurance Premiums

— May 6, 2015
Lower costsImage: Public Domain


Last week, we talked about the original goal of tort “reform.” This week, we’ll cover how it missed its mark because tort reform does not lower insurance premiums. The proponents of this ultimately useless effort insist that by reducing tort filings and limiting what they call “jackpot justice” or inflated damages awards means fewer insurance payouts and lower insurance rates. They’re wrong.

As I mentioned before, the number of tort filings reduced due to the imposed damages caps, but the story doesn’t end there. Various studies have been conducted on the effect of tort reform on insurance rates and the news may surprise you. Patricia Danzon and team found a 6% reduction in rates in 2003 that was attributable to noneconomic damages caps.

W. Kip Vicusi and Patricia Born studied the impact of noneconomic damages caps on insurance rates in 2004. They found a 6.2% reduction in short run premiums and a 19.7% reduction in long run premiums. Another group, Kilgore, Morrisey and Nelson found the same thing in 2006 with slightly different numbers. Their study indicated an overall reduction in insurance premiums of 17.3%. Wait! What? There wasn’t supposed to be a reduction!

Well, another study, conducted by Mark Paul Guis in 1998, told a different story. Guis controlled his study for differences caused by state-level regulatory actions. The other studies didn’t. Guis’ study showed absolutely no impact on insurance rates due to tort reform. Yet another study, this one done by J. Robert Hunter and Joanne Doroshow in 2002, resulted in similar findings.

Interestingly, Guis’ study makes the claim that those showing a reduction in insurance rates due to tort reform are actually showing reductions brought on by state-level regulation.

Think of it like calculating the unemployment rate. It’s a “simple” formula:

Unemployment Rate =

Employed + Unemployed

However, consider this statement on the weaknesses of the formula:

“The unemployment data have a number of problems that lead to an understatement of unemployment. For example, the data count as employed all people who are working part time but who would like to work full time. Since these people represent unused labor effort that is available, the unemployment rate understates the extent of unemployed resources in the economy. Another problem that causes the unemployment rate to understate the extent of unemployed resources is the ‘discouraged-worker’ effect. If someone wants to work, but becomes so convinced that there are no jobs available that he makes no effort to find work, he will be counted as ‘not in the labor force.’ Since there will be more discouraged workers the more severe the recession, this factor will tend to dampen the fluctuations in the unemployment rate.”

In other words, by not controlling for non-tort reform related reductions, these studies may be incorrect. So, there actually isn’t a reduction!

So, if tort reform can’t be proven to have had an impact on insurance premiums, what has it actually accomplished? Another goal was to have increased the supply of doctors. The theory goes that once tort reform is successful, insurance rates will drop and doctors will find that moving to states with tort reform in place is very attractive. Thus, there will be more doctors in these states and more medical care for their residents.

Next week, we’ll take a look at just how well that theory works when put into practice.

See you then!



Unemployment Rate

Weaknesses of Unemployment Statistics

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