Although efforts to ease the liability-insurance squeeze have largely focused on tort reform, industry analysts say insurance companies must accept some responsibility for the problem. In the late 1970s and early '80s, insurance firms were eager to sell as many policies as possible -- even if it meant slashing prices and covering high-risk industries. With interest rates at record highs, the premiums that companies accumulated were invested for tidy profits. But then interest rates began to drop.
Last year, investment income was no longer sufficient to cover claims that are still coming in on discount policies sold five years ago. As insurance companies dip into their reserve accounts, maintained to pay future claims, they compensate by cutting back on coverage.
Insurance stocks continue to perform well on Wall Street, even though companies are posting record losses.-- Cheryl Sullivan