Why does the insurance industry care about rate caps on litigation funding? And why care so much as to put the force of its multibillion dollar lobby behind efforts to get such caps passed? Has big Insurance suddenly gone pro-consumer? Let’s explore.

Using the most current data available for automobile insurance[i], here’s what I found:

In 2014, the average annual premium for auto insurance in the U.S. was $866.31[ii]. In that same year, the average recovery for an automobile accident claim for bodily injuries was $16,640[iii]. According to Forbes, the average driver makes such a claim once every 18 years[iv].

Okay, let’s run the numbers[v]:

If you dutifully paid your annual premium of $866.31 for 18 years, your total outlay would be $15,593.58. If you then made a claim in year 18, your total return would be roughly $11,000 (a gross recovery of $16,640 less attorney’s fees and case costs). So, you paid your insurance company $15,593.58 and they paid you back $11,000.00. Not feeling the pro-consumer love? There’s more.

If you had chosen[vi] to give your annual premium to a stockbroker instead of that shrew with the price gun, you’d have made roughly $47,328[vii]. By the way, that’s exactly what your insurance company did with your premiums (minus the portion spent on compensating executives and lobbying congress for favors). So, that means you gave up $47,328 in return for $11,000 worth of protection. You don’t need to be Warren Buffet to question the value of this investment.

With the numbers strongly suggesting the insurance industry has not suddenly gone pro-consumer, what explains the obsession with rate caps? Maybe it’s the fact that litigation funding allows many consumers to forgo fire sale settlements in return for the fair market value of their claims? How do rate caps prevent that, you ask? Well, the rate caps being sought are so restrictive that they’d effectively put litigation funders out of business. If that were to happen, the playing field would once again tilt heavily in favor of the mighty insurance industry. Maybe that explains their obsession with rate caps.

[i] Automobile insurance was selected over other types of insurance since many litigation funding transactions are based upon claims resulting from automobile accidents.

[ii] www.iii.org/fact-statistic/facts-statistics-auto-insurance

[iii] www.forbes.com/sites/moneybuilder/2011/07/27/how-many-times-will-you-crash-your-car/#14de5d6c4e62

[iv] The average premium will fluctuate over an 18 year span but so will the average recovery. For this calculation, I’m assuming these 2 variables will move in tandem.

[v] Too bad you don’t get to choose. If you own a car, you better own a policy.

[vi] The S&P 500 yielded an 11.8% return for the last 30 years (www.thebalance.com/stock-market-returns-by-year-2388543)