How Tort Reform Affects Insurance Markets

The impact of a statute that is currently in effect depends on expectations about its future constitutionality. We investigate the effect of tort reform by segmenting reforms into those that are eventually declared unconstitutional (temporary) and those that are unchallenged or upheld (permanent). We find permanent tort reforms lower medical malpractice insurance losses and premiums and increase insurer profitability. In contrast, the effects of temporary reforms are never statistically significant. Measures that combine temporary and permanent reforms, the norm in the literature, significantly misestimate the impact of tort reform. Our results suggest that examining the effect of a current law without accounting for its future treatment produces misleading results.