Reducing Medical Malpractice Loss Reserve Volatility Through Tort Reform

Abstract

This study examines how tort reform affects uncertainty in insurance markets by testing whether noneconomic damage caps influence reserving volatility for medical malpractice insurers. Using a panel of insurers from 1986 to 2009, we estimate the determinants of loss reserve error volatility and focus on how this volatility is influenced by the percent of premiums an insurer writes that are subject to noneconomic damage caps. We find empirical evidence that tort reform reduces reserve volatility over the subsequent 3- and 5-year periods, consistent with tort reform improving insurers’ loss forecasting ability. Our findings address outcomes of tort reform that are prominent concerns of legislators, regulators, and policyholders. This article contributes both to the literature examining the insurance market effects of tort reform and to the literature examining loss reserving practices.