An Empirical Analysis of the Effects of Product Liability Laws on Underwriting Risk

Loss ratio data by state and insurer group for the period 1977-1986 are used to investigate the way in which liability doctrines affect both relative prices and underwriting risk faced by commercial liability insurers. Four different performance measures are used for each state: 1. total risk, 2. relative risk, 3. systematic risk, and 4. the mean loss ratio for the state over the time period. The role of liability standards in explaining interstate variation in the 4 performance measures is isolated by regressing the measures on a set of independent categorical variables. In general, it is found that higher average state loss ratios and higher levels of systematic risk are associated with absolute liability tort standards. This association is not found for measures of total and relative risk.