The Math Underlying the Success of Tort Reforms - Florida Property Insurance and Beyond, Analyzed by Demotech, Inc.

COLUMBUS, Ohio, May 21, 2026 /PRNewswire/ -- The favorable impact of the legislative reforms enacted in Florida is now benefiting consumers and making headlines. The reforms of 2022 began at a Special Session in April convened subsequent to Demotech's open letter, which was released after the spring general session adjourned, without acting on the disparate, disproportionate litigation levels adversely impacting the availability and affordability of insurance in Florida's residential property insurance market.

The mathematics underlying the success of this tort reform and other successful reforms is actuarial.  This article explains the mathematics underlying the success of reform designed to curb litigation levels; whether the underlying litigation is opportunistic or fraudulent.

Background on Advisory Organization Premiums and Loss Costs

Until the mid-1980s, advisory organizations published rates and premiums for insurers to utilize, either as is or with a deviation.  In the mid-1980s, this changed to advisory loss costs; i.e., the average loss per policyholder without a corporate expense or pre-tax profit provision included.

Advisory loss costs are trended for inflation to adjust claim costs as well as adjusted to reflect anticipated changes in claim frequency. In simplest form, the formula underlying a loss cost is:

(Claim Frequency) x (Claim Cost) = Loss Cost.

When claims were not unduly influenced by billboards, TV, radio ads, third-party litigation funding, online tech-enabled litigation instigation, alternative business structures, or managed services organizations, an implicit assumption underlying loss costs was that an equilibrium in claim frequency between claims being reported by and settled with policyholders and claims that were litigated and negotiated with plaintiff firms.  However, with an escalation in the frequency of litigation, regardless of  cause, loss costs should have been viewed as the sum of its components:

(Claim Frequency of Claims Closed without Payment) x (Cost of Closing without Payment)
+
(Claim Frequency of Litigated Claims) x (Claim Cost of Litigated Claims)
+
(Claim Frequency of Non-Litigated Claims) x (Claim Cost of Non-Litigated Claims)
=
the Aggregate Loss Cost.

This trifurcation would not change the dollar amount of a loss cost.  However, this stratification would identify the impact of changes in the components. By doing so, rather than blurring the impact of each component of a loss cost by ignoring its contribution, trifurcation would provide stakeholders with the ability to segregate and investigate the components of a loss cost.

A numerical example clarifies this suggestion.  We simplify by assuming that claims are introduced but two ways, settled through litigation or policyholder negotiation. Assume the frequency of 5% of policyholders reporting claims, with an average claim cost of $16,000.  The loss cost would be $800 (5% times $16,000).  Further assume that a review of the data underlying the loss cost found the following regarding litigated and non-litigated claims:

• Claim Frequency of Litigated Claims is 1%, with a Claim Cost of $40,000
• Claim Frequency of Non-Litigated Claim is 4%, with a Claim Cost of $10,000.

This would create a loss cost as calculated below:

Assume that there is no change in overall loss frequency, it stays at 5%, and no change in the cost of a non-litigated claim or a litigated claim (admittedly simplifying assumptions).  However, let's say the litigated claim frequency decreased from 1% to .5% and the non-litigated frequency increased to 4.5% from 4%, because legislative reforms have transitioned behavior to encourage claims from litigated status to non-litigated status.

This would result in a revised loss cost:

In this example, as a result of the legislative reforms altering behavior and litigation frequency, the loss cost decreased from $800 to $650.  Consumers continue to have their meritorious claims addressed, i.e., overall claim frequency did not change. The cost savings emanated from the transition between litigated and non-litigated claims. 

Summary
An increase or decrease in the frequency of litigation versus the frequency of non-litigated claims has a dramatic effect on the loss cost of any line of insurance. When claim frequencies are directly impacted by billboards, TV, radio ads, third-party litigation funding, online tech-enabled litigation instigation, alternative business structures, and managed services organizations; the implicit assumption of an equilibrium between litigation frequency and non-litigated frequency masked the underlying drivers of cost and limited the information available.

The increase in litigated claim frequency originated a decade or so ago. With decades of historical claim and exposure information captured on behalf of insurers, advisory organizations might have made this change at an earlier date. The member companies of advisory organizations and the regulators who review loss costs need this type of refinement to isolate the components of a loss cost.  The best time to do this was years ago.  The second-best time is now.

About Demotech, Inc.
Established in 1985, Demotech, Inc. is a financial analysis firm located in Columbus, Ohio. Demotech has served the insurance industry by providing objective and independent Financial Stability Ratings^® (FSRs) for Property & Casualty insurance companies, Life & Health insurance companies, and Title underwriters, among others. As the first company to have its rating process formally reviewed and accepted by Fannie Mae, Freddie Mac, and HUD, Demotech has been leveling the playing field by offering FSRs to insurers of all sizes. As of July 11, 2022, Demotech is registered with the U.S. Securities and Exchange Commission as a nationally recognized statistical rating organization (NRSRO) in the class of ratings for insurance companies.

The latest FSRs of all entities reviewed and rated by Demotech, Inc. can be found at www.demotech.com. Information on the procedures and methodologies we utilized to determine and assign ratings can be found at https://www.demotech.com/wp-content/uploads/Ex2.pdf.

SOURCE Demotech, Inc.