Corporate CEOs Call Tort Costs a National Economic Problem

January 16, 2004

The high cost of the U.S. tort system makes products more expensive for all Americans and inhibits investment that can create jobs. It is not an insurance industry problem, but a national economic problem, industry leaders told insurance executives attending the eighth annual Property/Casualty Joint Industry Forum, held this week in New York City.

“The cost of the tort system is the equivalent of taxation without representation at its most basic level,” said Ronald Pressman, president of GE Insurance and chairman, president and CEO of GE Employers Reinsurance Corporation, attributing a large part of the increase in health care costs to abuses of the medical malpractice system.

Describing the exorbitant cost of the system as a cancer on the industry, Lord Peter Levine, chairman of Lloyd’s of London, said that insurers, along with the rest of the business community, must help the public understand how tort costs affect everyone.

“We should make sure that the public understands that the impact of the current system on the business community is like a five percent payroll tax,” he said.

“Every American must become engaged in tort reform,” said Edward M. Liddy, chairman, president and chief executive officer of The Allstate Corporation and Allstate Insurance Company. “This is not just an insurance issue. Getting meaningful tort reform passed by Congress would help prevent another asbestos-type crisis which would benefit everyone,” he said.

Catherine Rein, president and CEO of MetLife Auto & Home said that the medical malpractice situation in Pennsylvania, for example, is helping consumers understand the connection between excessive tort system costs and their own personal lives.

“People are finally seeing that this is having an impact on them as individuals,” she emphasized. “They are beginning to feel it in their guts because the money is coming out of their own pockets.”

Jay Fishman, chairman, president and CEO of The St. Paul Companies, warned that fear of liability could have dire consequences for society. Because corporations are afraid of being sued, the country has fewer manufacturers of essential products that help keep people safe and protected.

“There are now only three vaccine manufacturers left in this country,” he said. “Last year, we could not come to an agreement on smallpox vaccinations because of liability concerns.”

Edward Rust, Jr., chairman of the board and CEO of State Farm Mutual Automobile Insurance Company, who moderated the panel, suggested that passage of reform legislation was closer than ever before.

“The good news is that the bad news is getting so bad that it is getting people’s attention, including the attention of the media,” he indicated.

The CEOs were generally optimistic about the state of the industry, despite the prolonged record-low interest-rate environment which has reduced investment returns in recent years. While this has had a negative effect on the industry, some saw a silver lining, noting that it was having a positive impact on pricing discipline.

“If the low investment environment persists, it will make the change in underwriters’ behavior permanent,” said Michael McGavick, chairman, president and CEO of Safeco. Liddy agreed with the general premise, suggesting that not being able to rely on investment income would make insurers improve their business operations.

On the topic of state versus federal regulation of insurance, some CEOs favored an optional federal charter because the industry needed to have a knowledgeable body to represent the insurance industry at the federal level and because having to get the approval of 51 jurisdictions for any new product idea was time-consuming and cumbersome. However, that view was not unanimous.

W.G. Jurgensen, CEO of Nationwide, who came to the company from the banking industry, said that a different regulatory mindset might be needed.

“In the banking industry, the focus of regulators is on safety and soundness,” he said. “They are interested in how profitable the bank is. They count on competition, not regulation, to protect the consumer.”

Topics Legislation

Was this article valuable?

Here are more articles you may enjoy.