December 06, 2003

Malpractice insurers' investments

The tort lawyers have been arguing that the crisis in malpractice insurance is largely caused by the fact that insurance companies are not getting the fat returns on investments they were getting in the 1990's and thus have to charge more to break even. I have seen this offered up several times on TV news shows while the interviewing reporter nods sagely in the cutaways and says nothing. But it is obviously nonsense. For one thing, insurance companies are greatly restricted as to what they can invest their reserves in -- no startup dot-coms for them, but treasuries, triple-A bonds, real estate mortgages, etc. And with integrated financial markets (which have been around since the telegraph), interest rates are uniform throughout the country. So, if this were the problem, and not fast-rising costs, insurance rates would have risen uniformly across the country. They didn't. They have risen far less in states such as California (of all places) with strict limits on pain and suffering. -- John Steele Gordon, North Salem, N.Y. (see also Jan. 24-26)

Posted by Walter Olson at December 6, 2003 11:42 AM