premium deceit or judicial delusion: does tort reform cut insurance premiums? martin grace ty...

Premium Deceit or Judicial Premium Deceit or Judicial Delusion: Delusion:

Does Tort Reform Cut Does Tort Reform Cut Insurance Premiums?Insurance Premiums?

Martin GraceMartin Grace Ty Leverty Ty Leverty Georgia State University Georgia State University University of IowaUniversity of Iowa

Outline of PresentationOutline of Presentation

MotivationMotivation Related LiteratureRelated Literature Methodology & Methodology & DataData

ResultsResults ConclusionConclusion

Tort reform is an Tort reform is an “insidious public “insidious public relations scam” relations scam” (Doroshow and Hunter, 1999, (Doroshow and Hunter, 1999,

2002)2002)

Motivation Related Literature Methodology & Data Results Conclusion

Insurers uncertain about Insurers uncertain about the longevity of tort reform the longevity of tort reform

Prices should reflect this Prices should reflect this uncertaintyuncertainty

Main IdeaMain Idea


Our Testing Philosophy:Our Testing Philosophy: Two-step procedure: Two-step procedure:

1.1.Estimate a Peltzman (’76) style Estimate a Peltzman (’76) style multiple interest group model to multiple interest group model to predict the likelihood & duration predict the likelihood & duration of tort reformof tort reform

2.2.Use estimated duration to examine Use estimated duration to examine the effect of tort reform on state the effect of tort reform on state medical malpracticemedical malpractice market market


ConclusionsConclusions Tort Reform initially lowers lossesTort Reform initially lowers losses

States with more certain tort States with more certain tort reforms reforms Lower per-unit priceLower per-unit price Increased supplyIncreased supply

Insurers forecast the likelihood Insurers forecast the likelihood that a tort reform will be voidedthat a tort reform will be voided


Literature ReviewLiterature Review No change in claiming behavior over No change in claiming behavior over

timetime Black et al. (2006)Black et al. (2006)

Tort reform decreases insurers’ loss Tort reform decreases insurers’ loss ratioratio Born & Viscusi (‘94 & ‘98); Viscusi & Born Born & Viscusi (‘94 & ‘98); Viscusi & Born

(‘95 & ‘05), and Viscusi, (‘95 & ‘05), and Viscusi, et al.et al. (‘93) (‘93)

Long-run effects of tort reforms are Long-run effects of tort reforms are greater than insurers’ initial expectation greater than insurers’ initial expectation Born, Viscusi, and Baker (‘06)Born, Viscusi, and Baker (‘06)


Methodology - 1Methodology - 1stst Step Step Peltzman (‘76) style multiple Peltzman (‘76) style multiple

interest group model of political interest group model of political decision making to examine: decision making to examine: Likelihood of tort reformLikelihood of tort reform Likelihood tort reform is invalidatedLikelihood tort reform is invalidated Duration of tort reform Duration of tort reform

Relevant Interest Groups: Lawyers, Relevant Interest Groups: Lawyers, Physicians, Insurance Industry, Physicians, Insurance Industry, Corporate Sector, Citizens, & JudgesCorporate Sector, Citizens, & Judges


DataData Tort reforms (ATRA) - 1985 – 2005 Tort reforms (ATRA) - 1985 – 2005 State gross state product (GSP) State gross state product (GSP) Corporate & Insurance share of GSPCorporate & Insurance share of GSP Democratic Majority in LegislatureDemocratic Majority in Legislature Citizens’ ideology (Berry Citizens’ ideology (Berry et alet al., 1998)., 1998) Lawyers Per Capita (ABA)Lawyers Per Capita (ABA) Physician Per CapitaPhysician Per Capita (Statistical (Statistical

Abstract)Abstract) Judicial Selection (Hansen, ‘04)Judicial Selection (Hansen, ‘04)



VariableIntercept -7.368 -2.942 -10.857 -8.026 Ln Insurance GSP -1.254 -1.117 -1.152 -1.928 **Ln Corporate GSP -17.132 ** -17.780 ** -19.744 ** -21.335 **Ln GSP per Capita -2.400 *** -2.374 *** -2.060 ** -1.928 **Democratic Majority -0.542 ** -0.481 * -0.523 * -0.476 *Lawyers per Capita 2.135 -13.420 ** 2.537 -14.147 **Physicians per Capita 24.511 *** 25.871 *** 24.496 *** 26.042 ***Citizen Ideology Index 0.003 0.004 0.003 0.005 Partisan Election 15.872 *** 8.497 *** 15.796 9.033 Nonpartisan Election 14.898 *** 9.876 *** 15.271 10.109 Appoint 13.970 *** 9.745 *** 14.131 10.178 Lawyer X Partisan 29.751 *** 27.359 ***Lawyer X Non-Partisan 16.614 ** 17.910 ***Lawyer X Appoint 14.377 * 14.671 *Prior 0.215 0.149 -0.237 -0.305 Joint 0.478 0.528 Punitive -0.898 ** -0.863 **Nonecon -0.439 -0.401

Log Likelihood Pseudo R2

Reform-State-Years 2653 2653 2653 26530.112 0.123 0.137 0.148

-504.517 -498.265 -490.417 -484.149

Table 3: Likelihood of Tort Reform

The Dependent Variable is equal to 1 if the state enacts a tort reform in year t and 0 otherwise.The years under analysis are 1985 to 2006. State fixed effects are omitted from the table.(*** Significant at one percent level, ** Significant at five percent level ,* Significant at 10 percentlevel).

Model 1 Model 2 Model 3 Model 4

Likelihood of Tort Likelihood of Tort ReformReform

More LikelyMore Likely Physicians Per Physicians Per

CapitaCapita

Elected JudgesElected Judges

Less LikelyLess Likely Democrat MajorityDemocrat Majority

Lawyers Per Lawyers Per CapitaCapita

GSP Per CapitaGSP Per Capita


VariableIntercept 103.961 *** 109.015 *** 101.208 *** 107.412 ***Ln Insurance GSP 5.741 *** 5.873 *** 6.243 *** 6.337 ***Ln Corporate GSP -4.805 -9.106 -3.309 -7.820 Ln GSP Per Capita -8.819 *** -9.203 *** -8.243 *** -8.738 ***Democratic Majority -0.175 0.022 0.127 0.282 Lawyers per Capita -6.530 -13.873 * -10.037 * -18.177 *Physicians per Capita 41.866 ** 43.431 ** 39.913 ** 42.248 **Citizen Ideology Index -0.115 ** -0.114 ** -0.111 ** -0.112 **Partisan Election 2.766 *** -0.605 2.947 *** -0.589 Nonpartisan Election 4.000 *** 2.261 3.884 *** 1.804 Appoint 0.504 10.863 0.516 6.321 Lawyer X Partisan 12.237 12.747 Lawyer X Non-Partisan 6.671 8.020 Lawyer X Appoint -43.478 -24.834 Prior -1.429 ** -1.443 ** -2.022 *** -2.033 ***Joint -0.893 -0.873 Punitive -0.612 -0.582 Nonecon 1.010 0.947 Probability of Reform 1.742 1.936 4.821 4.702

Log Likelihood Pseudo R2

Reform-Years 149 149149 1490.445 0.4530.406 0.417

-36.497 -35.980-39.071 -38.343

Table 4: Logit Regressions - Likelihood Tort Reform is Determined Unconstitutional

Dependent Variable is equal to 1 if the tort reform is ruled unconstitutional in state s and 0otherwise. The analysis is conducted at the time the tort reform is enacted. The years underanalysis are 1985 to 2006. White standard errors adjusted to account for possible within statedependence (*** Significant at one percent level, ** Significant at five percent level ,* Significant at10 percent level).

Model 1 Model 2 Model 3 Model 4

Likelihood Reform is Likelihood Reform is InvalidatedInvalidated

More LikelyMore Likely Physicians Per Physicians Per

CapitaCapita

Insurance share of Insurance share of GSPGSP

Elected JudgesElected Judges

Less LikelyLess Likely Citizen Ideology Citizen Ideology

IndexIndex

Lawyers Per Lawyers Per CapitaCapita

GSP Per CapitaGSP Per Capita

PriorPrior

Mean Predicted Probability that Reform Mean Predicted Probability that Reform is Determined Unconstitutionalis Determined Unconstitutional

ALASKA – 0%ALASKA – 0%

OHIO – OHIO – 33.16% 33.16%

WISCONSIN – 95.02%WISCONSIN – 95.02%


State N Prob.Alabama 4 33.95%Alaska 6 0.00%California 1 0.03%Florida 8 13.57%Georgia 3 25.02%Hawaii 4 0.30%Idaho 6 46.07%Illinois 6 63.47%Kentucky 3 10.35%Massachusettes 1 0.00%Michigan 4 10.86%Minnesota 4 44.52%Mississippi 4 7.00%Missouri 5 0.78%Montana 6 11.91%Nevada 3 0.04%New York 2 1.58%Ohio 9 33.16%Oklahoma 4 0.99%Oregon 4 18.35%Pennsylvania 3 38.29%Wisconsin 2 95.02%

Total 149 16.11%

Predicted Median Log Survival Time Predicted Median Log Survival Time (from date the reform is enacted)(from date the reform is enacted)


N TimeAlaska 6 547.542Alabama 4 4.41604California 1 121.761Florida 6 104.05Georgia 3 6.95494Hawaii 4 25.2559Idaho 6 9.47252Illinois 6 1.51587Kentucky 3 6.48134Louisiana 1 7.65192Michigan 4 5.92498Minnesota 4 3.32184Missouri 5 28.154Mississippi 4 5.4323Montana 6 4.50138Nevada 3 26.0888New York 2 22.4219Ohio 9 2.76001Oklahoma 4 27.154Oregon 4 5.49665Pennsylvania 3 2.29179Wisconsin 2 1.20054

Total 147 27037.3

StateAll Reforms

Methodology - 2Methodology - 2ndnd Step Step

Medical Malpractice Loss RatioMedical Malpractice Loss Ratio XXi i ::

Log of DPE Medical MalpracticeLog of DPE Medical Malpractice Medical Malpractice HHIMedical Malpractice HHI Crisis State Indicator (AMA Crises)Crisis State Indicator (AMA Crises) Rank of litigation environment ( Hunter, Rank of litigation environment ( Hunter,

2007)2007)


1 1 11

Log Median Reform Duration + ReformN

it it j jit itj

Log LR X


Model 3Intercept 2.600 ** 1.865 1.772 1.260

(1.257) (1.275) (1.161) (1.164)Log of DPE Medical Malpractice -0.154 ** -0.153 ** -0.133 ** -0.132 **

(0.071) (0.071) (0.065) (0.065)Log of the Median Reform Duration 0.009 ** 0.009 ** 0.011 ** 0.011 **

(0.004) (0.004) (0.005) (0.005)Indicator for Reform -0.644 *** -0.274 ***

(0.025) (0.026)Probability of Reform -0.492 -0.493

(0.515) (0.515)HHI for Medical Malpractice -0.240 -0.229 -0.264 -0.253

(0.565) (0.569) (0.544) (0.548)AMA Crisis State -0.170 *** -0.243 **

(0.021) (0.111)State Ranking of Legal Climate 0.017 *** 0.024 ***

(0.000) (0.001)R2 0.1635 0.1619 0.1662 0.1645N 1058 1037 1058 1037

Model 1 Model 2

Dependant Variable is the State's Loss Ratio (Direct Losses Incurred to Direct Premiums Earned)in Medical Malpractice Insurance. Regressions are estimated with state and year fixed effectsweighted by Med Mal Premiums Earned. The years under analysis are 1985 to 2006. Whitestandard errors adjusted to account for possible within state dependence are reported inparentheses. (*** Significant at one percent level, ** Significant at five percent level ,* Significant at10 percent level).

Table 8: Impact of Tort Reform on State's Loss Ratio for Medical Malpractice Insurance

Model 4

Impact of Tort Reform on Impact of Tort Reform on Med Mal Loss RatioMed Mal Loss Ratio

Tort Reform Indicator is NegativeTort Reform Indicator is Negative

Predicted Duration of Reform is Predicted Duration of Reform is PositivePositive


Intercept -20.466 *** -24.116 *** -13.134 ***Log of the Median Reform Duration 0.002 0.009 * 0.009 **Lag of Log of DPE Medical Malpractice 0.502 ***Lag of Log of LR Medical Malpractice -0.004 0.357 *** 0.400 ***Factor1 -p -7.218 *** -7.638 *** -4.308 ***Factor2 - p -13.573 *** -16.274 *** -9.950 ***Factor3 - p 4.574 *** 5.023 ** 3.311 HHI for Medical Malpractice -0.262 -0.339 -0.167 AMA Crisis State 0.017 0.082 0.075 State Ranking of Legal Climate -0.045 *** -0.034 *** -0.011 *Log of Population 2.857 *** 3.071 *** 1.589 ***N 987 975 975R2 0.945 0.842 0.854

Table 10: Influence of Tort Reform on Premiums Earned and Losses Incurred

Dependent Variables are (1) Log of Total Premiums Earned Net of Dividends (Premiums ); and(2) Log of Losses Incurred (Losses ). The examination is conducted at the state level formedical malpractice insurance. Regressions are estimated with state weighted by Med MalPremiums Earned. The years under analysis are 1985 to 2006. Factors_p are the factorsresulting from a factor analysis on the probability of reform for the various reforms from Model 4in Table 3. White standard errors adjusted to account for possible within state dependenceare reported in parentheses. (*** Significant at one percent level, ** Significant at five percentlevel ,* Significant at 10 percent level).

Premiums Losses Losses


Influence of Tort Reform on Influence of Tort Reform on

Med Mal Premiums & Med Mal Premiums & LossesLosses Probability of Reform Factors Probability of Reform Factors

are:are: Negatively Related to PremiumsNegatively Related to Premiums Negatively Related to LossesNegatively Related to Losses

Predicted Duration of Reform is:Predicted Duration of Reform is: Not Related to PremiumsNot Related to Premiums Positively Related to LossesPositively Related to Losses

ConclusionsConclusions Tort Reform initially lowers lossesTort Reform initially lowers losses

States with more certain tort States with more certain tort reforms reforms Lower per-unit priceLower per-unit price Increased supplyIncreased supply

Insurers forecast the likelihood Insurers forecast the likelihood that a tort reform will be voidedthat a tort reform will be voided


premium deceit or judicial delusion: does tort reform cut insurance premiums? martin grace ty...

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