Myth #8: If We Could Only Reduce The Number Of Personal Injury And Wrongful Death Lawsuits, We Could Reduce Insurance Premiums, Buy Better Cars And Houses, And Enjoy Cheaper Products Overall

March 30, 2015 | Personal Injury

The Actual Reality: Why have insurance premiums gone up so much?

The question is obviously a hotly debated one – and a crucial one. But the idea that we can blame premium hikes on personal injury and wrongful death lawsuits just does not fit with the evidence. Take a look again at that New York Times quote: “tort filings are declining.”

If the number of personal injury and wrongful death lawsuits are declining, and insurance rates are going up, Goliath’s argument here completely falls apart! Even if lawsuits had been spiking – and you could correlate that spike in personal injury and wrongful death lawsuits with a spike in insurance premiums – that still would not give you enough information to make a statement of causality.

As anyone who studies statistics will tell you, just because two factors are correlated does not mean that they are causally related to one another. Here is an example to illustrate this. Say you find a statistical correlation between people who sleep with their boots on and people who wake up with headaches. Would you conclude that wearing boots gives you headaches? Nope. You would want to look for another factor. For instance, maybe people who sleep with boots on are more likely to have consumed alcohol prior to falling asleep. So you could blame “overdrinking and carousing” for causing people to fall asleep with their clothes on and to experience a headache the morning afterwards.

But again, that argument is totally unnecessary, because there is not even a correlation between the rate of tort filings and insurance premium prices. In fact, the relationship is inversely correlated. If anything, you could try to build a case that the decline in personal injury and wrongful death lawsuits has caused the spike in premiums. But, of course, that narrative would certainly not jive with the myth Goliath is just trying to push down everyone’s throats.

What many savvy industry experts believe is this: insurance companies have behaved in a risky fashion over the past several years. They have taken in premiums from risky customers and invested those premiums in risky investments. Much like the big Wall Street companies who invested in crazy financial instruments and caused the “Great Recession” of 2008 to 2010, insurance companies gambled their money recklessly. And they lost, big time.

If we really want to deal with the skyrocketing premiums problem, how about we start by regulating Goliath’s gambling habit?

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