Sources of the Crisis in Liability Insurance: An Economic Analysis

Abstract

The existence, nature, and causes of a "crisis" in the market for property-casualty insurance in the United States remain the subject of extensive debate. Two alarming features of current markets, unaffordability and unavailability, are cited as evidence that something is amiss. Premiums charged for several lines of property-casualty insurance coverage have soared over the past several years. Stories detailing two to three hundred percent rate increases for daycare centers, five thousand percent increases for asbestos removal firms, and fifty to one hundred percent increases for medical malpractice coverage for obstetricians have become commonplace. Yet, if higher premiums were the only remarkable characteristic of the current crisis, it would be difficult to differentiate these developments from many other instances of rapid price inflation that have occurred in insurance and other businesses over the last decade. The most worrisome feature of present difficulties in property-casualty insurance is the current unavailability of certain liability insurance products, regardless of the premium offered for their purchase. Liability coverages that are currently almost unavailable from property-casualty insurers include policies that protect against environmental pollution and certain lines of coverage that insure governmental units against citizen suits for failure to provide protective services such as police protection, roadway maintenance, or traffic signals.