The Insurance Crisis
The term “insurance crisis” is a concept put forth by insurance companies who seek to increase profits by encouraging legislation to limit damage awards in personal injury cases. Insurance was devised and is a way to distribute the risk of injury/damages among a large pool of policyholders, whether they be individuals such as doctors or lawyers, or businesses such as hospitals or insurance companies themselves. Insurance companies employ individuals and models to judge the risk of loss for an individual or business and set ‘premiums’ (the cost of the insurance) to sell a product known as an insurance policy.
The goal of insurance sale from the perspective of the insurance company is profit. The goal from an individual buyer’s (or business buyer’s) perspective is to reduce the risk of financial ruin from one’s own malfeasance (negligence, malpractice, errors and omissions, etc.). The cost of insurance should take into account the risk in a given policy ‘pool.’ When the risk is high, the cost is high. When the risk is low, the cost should be low. Mathematical models and predictions are not perfect, and sometimes insurance companies get it wrong. This is the genesis of the so-called ‘crisis’ which occurs when insurance companies pull their product from the marketplace due to lack of profitability.
Insurance Crisis in Colorado
In Colorado, there was an abundance of medical malpractice claims against physicians delivering babies in rural Colorado and insurance companies withdrew their products from large portions of the market, mainly in rural areas where small numbers of policyholders (insureds) were insufficient to distribute the risk of loss and create sufficient profit for the insurance companies. When some doctors were unable to obtain insurance to protect their own risk of financial loss, they chose to relocate to urban areas and refused to practice in some rural areas. This was often referred to as an ‘insurance crisis’ in Colorado, and it played a large role in the passing of legislation to limit or cap damage awards in medical malpractice cases, known as the Health Care Availability Act.