This is in response to your editorial (Aug. 21), "Bring Back Insurance Sanity."
It's true that, as the editorial states, ending the current liability insurance crisis will take some concerted effort. Such things as more reasonable court and jury awards, increased use of mediators, regulating contingency fees, and returning to a fault-based, rather than ability-to-pay, system, are proposals that could make a difference.
However, the editorial also states that the uncompetitive environment in which the insurance industry operates is the major cause of the crisis.
The insurance business is one of the most highly competitive industries in California. The system of rate-setting through open competitions is the most beneficial system to the consumer that exists. Competition among companies in the marketplace is much more effective in keeping rates down than tougher state regulation or prior approval of rates by the Department of Insurance.
California's control of insurance rates is presently provided for by law, which specifies that insurance rates shall not be excessive, inadequate, or unfairly discriminatory. The law empowers the insurance commissioner to enforce those provisions.
The editorial expresses doubt that a liability crisis actually exists. If one is skeptical of insurance industry data showing there is a lawsuit crisis, then consider data from physician-owned insurance companies, which indicate that lawsuits have risen from a national average of 12.2 claims per 100 physicians in the late 1970s, to 20.3 claims per 100 physicians in 1984. Data from New York City, which is self-insured, shows that claim payments increased more than fivefold, from $23 million in 1978 to $118 million in 1985.
Claim losses in commercial liability insurance increased 43% in 1985, and 25% in 1984. In the prior five years, the average annual increase in claim losses was 7%.
The editorial is correct in its statement that there should be a relationship between rates charged and claims paid. That, precisely, is why rates are high. They are a direct result of the tremendous amounts the companies have been paying out in claims. Those figures are readily available to the insurance commissioner for review and examination.
Watts is president of the Western Insurance Information Service.