Tort Reform Remains Key Issue to Insurance Industry / Says Arnold

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Losses in the insurance industry generated by court actions are out of control, according to David Arnold, assistant regional manager for the Insurance Information Institute in Atlanta, Ga.

Civil justice reform, therefore, remains a key issue in the industry, he said.

The court system has greatly expanded liability and fault, Arnold said. Consumers are paying the price through higher premiums to compensate for claim losses.

"As the pendulum of justice springs back and forth, the fairness issue comes up," he said. "In the past, the pendulum swung against consumers because they had very little recourse because of the way the justice system was set up."

Tort law developed as a system to dispense justice to the injured and compensate them from their injuries. Yet the size amounts awarded by juries nationwide and the annual total of $1 million verdicts are showing consistent growth, he said.

According to the Institute for Civil Justice, total expenditures for tort litigation terminated in state and federal courts of general jurisdiction in 1985 ranged between $29 billion and $36 billion, he said. Of that amount, $16 billion to $19 billion was paid for various costs of the tort system, above and beyond the net compensation to plaintiffs.

With claims rising, premiums have been increased. Premiums charged in the past, however, were artificially low, Arnold said. Consumers who have been charged higher premiums in recent years are actually paying the suggested price, provided to the insurance industry by services.

In the past, premiums were kept below the suggested rate with discounts, Arnold said, but the industry can no longer afford them.

"Over the marketplace, insurance consumers' premiums have gone back up to suggested levels. These huge percentage increases have to be compared to what had occured in the market in the past," Arnold said. "Somebody was paying a low premium in the first place."

Consumers now at the suggested price are paying 50 percent to 100 percent more for insurance because their premuims were too low over the last few years, he said.

Investment income has declined since the Carter administration, when interest rates were 20 percent, Arnold said. During the Reagan administration, interest rates on investments dropped to 10 percent.

Insurance companies are still making money on investments, but the rate of return is lower and not enough to offset losses from claims.

The insurance industry has not made a profit from premiums since 1978. When it is profitable overall, from earnings plus investment income, it is required through regulation to keep down rates charged to consumers. …