Tort Liability, Insurance Rates, and the Insurance Cycle

Abstract

exhibit soft-market periods, where premium rates are stable or falling and coverage is readily available, and subsequent hard-market periods, where premium rates and insurers’ reported profits significantly increase and less coverage is available. Conventional wisdom among practitioners and other observers is that soft and hard markets occur in a regular “underwriting cycle.” Like price fluctuations in equity markets, fluctuations in insurance premium rates and coverage availability are difficult to explain fully by standard economic models that assume rational agents and few market frictions. The mid-1980s “liability insurance crisis” remains the most infamous hard market in the United States. The dramatic increases in commercial liability insurance premiums and reductions in coverage availability for some sectors received enormous attention, motivating extensive research on those specific problems and on fluctuations in insurance prices and coverage availability more generally. Large losses from natural catastrophes in the United States during the late 1980s and early 1990s spurred further interest in and research on the dynamics of pricing in reinsurance and primary insurance markets following large, industry-wide losses. The hard market for commercial property and casualty insurance that began in late 2000 and accelerated following the destruction of the World Trade Center in September 2001 focused renewed attention on markets for commercial