Profitability of the Medical Malpractice and General Liability Lines of Insurance

In response to a congressional request, GAO discussed the profitability of the property/casualty insurance industry, specifically the medical malpractice and general liability insurance lines. GAO found that: (1) despite substantial underwriting losses, the property/casualty industry was profitable over the 10-year period from 1976 through 1985 because of its investment gains; (2) profitability was cyclical, but in the past 10 years, the average return was comparable to other industries; (3) the medical malpractice line showed an after-tax profit from 1975 to 1985, if the industry discounted reserves for future payments to their present value; (4) although the general liability line showed an after-tax profit even with its reserves booked at their full payout value, its profitability increased significantly when the industry discounted its reserves to present value; and (5) if the established reserves proved inadequate by 10 or 20 percent, the medical malpractice and general liability lines were profitable if the reserves were discounted to present value. GAO recommended that, for tax purposes, the insurance industry establish reserves for future payments of claims on a discounted basis.