Casualty Insurance: Troubled Industry

February 11, 1977

Report Outline
Causes of Insurers' Problems
State and Federal Regulation
Changes in Management Practices
Special Focus

Causes of Insurers' Problems

Losses Attributed to Jury Awards, Inflation

Ajury in Brooklyn, N.Y., awarded singer Connie Francis $2.5-million as compensation for being raped in a Howard Johnson's motel room. In Alaska, a jury awarded $2-million to a man who had been shot in the ankle by a defectively designed revolver. In California, a jury awarded $4-million in punitive damages for a company's failure to pay a disputed auto liability insurance claim. A 19-year-old boy in California won $3-million after being paralyzed following a dive off a railroad trestle—a jury found the railroad company liable for not posting a “no driving” sign.

Those cases made headlines in 1976. They reflect a phenomenon that insurance companies call “social inflation,” the tendency of judges and juries to make larger monetary awards in civil suits and for a greater number of causes. Social inflation has hit the property-casualty insurers—firms that insure automobiles, homes and businesses against accidental losses—especially hard. It contributed heavily to the companies' underwriting deficit of some $2.6-billion in 1974. The next year's losses totaled $4.2-billion, making 1975 the “worst year in the industry's 225-year history,” according to William A. Pollard, president of Reliance Insurance Co. A. M. Best Co., which compiles the industry's statistics, reported that in 1976 casualty insurers sustained underwriting losses of some $2.3-billion. Best said the industry last year paid out nearly $103 in claims and expenses for every $100 it earned in premiums. For the five-year period of 1972–1976, underwriting losses amounted to $8.17-billion.

Industry observers cite economic inflation as another basic reason for the loss figures. Automobile insurers were particularly hurt. Best reported that expenses resulting from automobile bodily injuries doubled from 1967 to 1976 and that costs of physical damage to cars tripled. From mid-1973 to mid-1975, prices on grilles, radiators, water pumps, trunk lids, bumpers and other parts most often damaged rose by more than 47 per cent. In the same two-ear period, the Consumer Price Index for all items increased by 20.7 per cent and new-car prices by 14 per cent.

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