Ten Challenges for the Year Ahead Overview & Outlook for the P/C Insurance Industry Inland Marine...
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the Year Ahead Overview & Outlook for the P/C Insurance Industry Inland Marine Underwriting Association Orlando, FL April 14, 2003 Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
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Transcript of Ten Challenges for the Year Ahead Overview & Outlook for the P/C Insurance Industry Inland Marine...
Ten Challenges for theYear Ahead
Overview & Outlook for the P/C Insurance Industry
Inland Marine Underwriting AssociationOrlando, FL
April 14, 2003
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance Information Institute 110 William Street New York, NY 10038
Tel: (212) 346-5520 Fax: (212) 732-1916 [email protected] www.iii.org
Presentation Outline
• Improve Profitability• Improve Underwriting
Inland Marine Issues
• Reserving Issues• Solvency Issues• Improve Pricing• Efficient Allocation of Capital• Improve Investment Performance• The Challenge of Terrorism• Courts & Torts: Abuse of the Civil Justice System• Mold• Q & A
IMPROVE PROFITABILITY
P/C Net Income After Taxes1991-2002E ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865$20,559
-$6,970
$12,419
-$10,000
-$5,000
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02*
*I.I.I. estimate based on first 9 months of 2002 data.Sources: A.M. Best, ISO, Insurance Information Institute.
2001 was the first year ever with a full year net loss
2002 9-Month ROE = 4.4%
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02E 03F
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2003F*
Source: Insurance Information Institute; Fortune
-5%
0%
5%
10%
15%
20%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
ROE Cost of Capital
ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2002
Source: The Geneva Association, Ins. Information Inst.
There is an enormous gap between the industry’s cost of capital and its rate of return
14.6
pts
6.8.
pts
US P/C insurers have missed their cost of capital by an
average 6.6 points since 1991
IMPROVE UNDERWRITING
($60)
($50)
($40)
($30)
($20)
($10)
$0
$101
97
51
97
61
97
71
97
81
97
91
98
01
98
11
98
21
98
31
98
41
98
51
98
61
98
71
98
81
98
91
99
01
99
11
99
21
99
31
99
41
99
51
99
61
99
71
99
81
99
92
00
02
00
12
00
2
Underwriting Gain (Loss)1975-2002*
*Annualized estimate based on first 9 months of 2002 data.Source: A.M. Best, Insurance Information Institute
$ B
illi
ons
P-C insurers paid $22 billion more in claims & expenses than they collected in premiums
in 2002
95
100
105
110
115
120
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02*
P/C Industry Combined Ratio
2001 = 115.7
2002E = 106.3*
2003F = 103.2*
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.7
2000s: 110.4
*Based on January 2003 III survey of industry analysts.
Sources: A.M. Best; III
110.
5
105.
0 113.
6
119.
2
104.
8
100.
8
100.
5
114.
3
106.
5
121.
3
108.
8 115.
8
106.
9
108.
5
106.
5
105.
8
101.
6
105.
6
107.
7
110.
0 115.
7
105.
0
126.
5
162.
5
90
100
110
120
130
140
150
160
170
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002*
Reinsurance All Lines Combined Ratio
Combined Ratio: Reinsurance vs. P/C Industry
*Figure for first 9 months of 2002 for all lines; Reinsurance is RAA Full-year figure
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers
2002 was bad as well
U.S. InsuredCatastrophe Losses
$7.5
$2.7$4.7
$22.9
$5.5
$16.9
$8.3 $7.3
$2.6
$10.1$8.3
$4.3
$28.1
$5.8
$0
$5
$10
$15
$20
$25
$30
89 90 91 92 93 94 95 96 97 98 99 00 01 02
*Estimate.Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims.Source: Property Claims Service/ISO; Insurance Information Institute
$ BillionsCAT losses continue to be a problem,
though 2002 was much better than 2001
Outlook for Commercial Lines:2002 - 2004
121.
7 130.
2
115.
8
118.
5
153.
3
100.
3
116.
6 125.
3
111.
9
103.
6
155.
3
98.8
113.
2 120.
2
108.
3
99.1
158.
1
95.2
113.
0
113.
6
106.
7
99.5
165.
0
92.8
90
100
110
120
130
140
150
160
170
WorkersComp
GL & Prod.Liab
CommercialAuto
CommercialPackage
Med Mal InlandMarine
2001 2002E 2003F 2004F
Sources: A.M. Best, Conning & Co.
HOW DOES THIS HARD MARKET STACK UP TO
PREVIOUS HARD MARKETS?
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Source: A.M. Best, Insurance Information Institute
Hard Markets Since 1970
There have been 3 hard markets since 1970:
1975-1978
1985-1987
2001-200?
1975-78 1985-87 2001-03
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Current $ Real $
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by Real NWP Growth
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1985-87: 14.5%
2001-03: 9.1%
1975-78 1985-87 2001-03
100
125
150
175
200
225
250
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
E
20
03
F
Cumulative GDP GrowthCumulative NWP Growth
Note: Shaded area denotes hard market.Source: Insurance Information Institute
GDP Growth vs. Net Written Premium Growth (1987=100)
The gap between cumulative GDP and Net Written Premium growth
hit a maximum of 52.5 pts or 33.7% in 2000. In 2003, the
estimated gap is 29.0 pts or 15.2%.
Hard Market
52.5
pts
29.0 pts
INLAND MARINE
Combined Ratio:Inland Marine vs. Commercial Lines
97.3
101.6
100.9
100.8
91.9
97.3
95.7
97.1
101.9
92.9
100.3
95.2
92.8
110.2
118.8
109.6
112.1
109.4
106.7
103.4
108.6
111.3
110.1
120.7
109
107
80 90 100 110 120 130 140
91
92
93
94
95
96
97
98
99
00
01
02E
03F
Inland Marine Commercial Lines
Source: A.M. Best, Insurance Information Institute
Change in Net Premiums Written:Inland Marine vs. Commercial Lines
-1.0%
7.8%
7.6%
4.3%
7.1%
2.5%
1.6%
3.8%
6.9%
2.7%
-1.9%
6.7%
3.7%
1.9%
1.3%
0.4%
-0.5%
1.8%
7.2%
8.7%
16.0%
13.0%
-4% -2% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
92
93
94
95
96
97
98
99
00
01
02E
03F
Inland Marine Commercial Lines
Source: A.M. Best, Insurance Information Institute
Combined Ratio:Ocean Marine vs. Commercial Lines
119.4
109.5
107.9
92.4
89.6
102.2
110.6
115.8
107.5
102.4
92.2
118.8
109.6
112.1
109.4
106.7
103.4
108.6
111.3
110.1
120.7
109
107
80 90 100 110 120 130 140
92
93
94
95
96
97
98
99
00
01
02E
03F
Ocean Marine Commercial Lines
Source: A.M. Best, American Inst. Of Marine Underwriters, Insurance Information Institute
Change in Net Premiums Written:Ocean Marine vs. Commercial Lines
22.9%
18.4%
9.0%
2.8%
-5.6%
-3.0%
-6.4%
-0.4%
13.8%
9.5%
6.7%
3.7%
1.9%
1.3%
0.4%
-0.5%
1.8%
7.2%
8.7%
16.0%
13.0%
-10% -5% 0% 5% 10% 15% 20% 25%
93
94
95
96
97
98
99
00
01
02E
03F
Ocean Marine Commercial Lines
Source: A.M. Best, American Inst. Of Marine Underwriters, Insurance Information Institute
Inland Marine: Better Than Most, but Challenges Remain
• Trucking Market: Bad Results Reduced CapacityWeak economy Low or negative exposure growth2002 renewal up 15 – 30% for many trucking cos.
• Cargo Theft: Cost $3.5B to $12B annually (American Trucking Association/Natl. Cargo Security Council)
• Cargo: Very vulnerable to terrorism threatHundreds of thousands of points of entry to system globally
• Fine Art/Collectibles:Market hardening pre-9/11Post-9/11 even more difficult
RESERVING ISSUES
Reserve Deficiency, by Line(AY 1992-2001, as of 12/01)
-$0.8-$1.8
-$4.1
-$6.2
-$9.1
-$3.8
-$0.8
-$17.8 -$18.0
-$1.9
-$20
-$18
-$16
-$14
-$12
-$10
-$8
-$6
-$4
-$2
$0HO PPA Liab CA Liab WC CMP Med Mal*
SpecialLiab
OtherLiab*
XS LiabReins
ProdLiab*
*Occurrence and claims madeSource: Morgan Stanley
Estimated Deficiency
Total Excluding A&E: $64 Billion
A&E Deficiency: $55 Billion
Total Including A&E: $120 Billion
Points (Reduced)/Increased
(2.0)
5.66.4
1.4
(3.0)
(2.0)
(1.0)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1999 2000 2001 2002
Combined Ratio: Average Impact of Prior-Year Reserve Changes (Points)
Source: Merrill Lynch universe of 22 publicly-traded companies; Insurance Information Institute.
Only 1 major insurer released reserves in 2002; 1 had virtually no change.
Other 20 had charges that added up to 27 points to the CY2002 Combined
104.3
113.5
97.7
106.3
100.6
108.0
91.3
102.0
70
80
90
100
110
120
1999 2000 2001 2002
Reported Combined Ratio Accident Year Combined Ratio
Average Combined Ratio:Calendar vs. Accident Year*
Both CY & AY results improved in 2002 for most major companies
2002 reserves charges added 6.4 points to the CY combined ratio
*Not market cap weighted.Source: Merrill Lynch universe of 22 publicly-traded companies; Insurance Information Institute.
(IN)SOLVENCY ISSUES
P/C Company Insolvency Rates,1993 to 2002
Source: A.M. Best; Insurance Information Institute
1.20%
0.58%
0.21%0.28%
0.79%
0.60%
0.23%
1.02% 1.03%
1.33%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
•Insurer insolvencies are increasing•10-yr industry failure rate: 0.72%
•Failure rating for B+ or better rating: 0.49%•Failure rate for D through B rating: 1.29%
383030
10-yr Failure Rate
= 0.72%
Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)
Unidentified17%
Impaired Affiliate3%
Overstated Assets2%
Change in Business
3%
CAT Losses3%
Reinsurer Failure0%
Rapid Growth10%
Discounted Ops8%
Alleged Fraud3%
Deficient Loss Reserves
51%
Source: A.M. Best, Insurance Information Institute
Reserve deficiencies account for
more than half of all p/c insurers
insolvencies
Ratings Downgrades: “Swarms” of Downgrades Stinging Insurers
Reasons for Recent Downgrades
of Insurers Worldwide
• Asbestos
• Reserve Deficiencies
• Management Issues (e.g., transitions)
• Reinsurance Uncollectibles
• Investment Write-Downs
• Adverse Development
• Missed/Shifting Earnings Targets
Need to do business with quality, highly-rated companies
IMPROVE PRICING
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
*Estimate/forecast based on January 2003 III survey of industry analysts.Source: A.M. Best, Insurance Information Institute
Growth in Net Premiums Written (All P/C Lines)
2001: 8.1%
2002: 14.2% (est.)*
2003: 12.7% (forecast)*
The underwriting cycle went AWOL in the 1990s.
It’s Back!
Council of Insurance Agents & Brokers Rate Survey
Fourth Quarter 2002Rate Increases By Line of BusinessRate Increases By Line of Business
No Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%
Comm. Auto 6% 14% 42% 25% 8% 1% 0%
Workers Comp 8% 17% 25% 24% 10% 2% 2%
General Liability 7% 13% 29% 37% 11% 0% 0%
Comm. Umbrella 8% 3% 21% 21% 26% 10% 5%
D&O 6% 4% 22% 23% 18% 9% 3%
Comm. Property 8% 16% 25% 25% 18% 3% 0%
Construction Risk 4% 8% 17% 18% 23% 9% 4%
Terrorism 12% 5% 8% 12% 5% 0% 6%
Business Interr. 13% 19% 36% 14% 4% 0% 0%
Surety Bonds 8% 16% 16% 15% 6% 1% 1%
Med Mal 1% 5% 6% 6% 12% 12% 16%
100110
120130
140150
160170
180190
200210
220230
240250
260
89 90 91 92 93 94 95 96 97 98 99 00 01 02*
Rate On Line Index(1989=100)
Source: Guy Carpenter * III Estimate
Prices rising, limits falling: ROL up significantly
Urban Legend Insurance is More
Expensive than Ever and is Putting Companies Out of
Businesses
Commercial Lines Net Written Premium as % of GDP
2.3%
2.1%2.1%
2.0%
1.9%1.9%
1.9%1.8%
1.7%
1.6%
1.5%1.5%1.5%
1.6%
1.8%
1.0%
1.2%
1.4%
1.6%
1.8%
2.0%
2.2%
2.4%
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02E
Sources: Insurance Information Institute, calculated from U.S. Bureau of Economic Analysis and A.M. Best data.
Commercial insurance premiums as a % of GDP fell 35% between 1988 and 2000 and remains far
below late 1980’s levels
More Cover for Less Money: Terms & conditions broadened
significantly during the soft market, even as prices fell
Cost of Risk per $1,000 of Revenues: 1990-2002E
$6.10
$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71
$5.20$4.83
$5.55
$6.94
$4
$5
$6
$7
$8
$9
$10
90 91 92 93 94 95 96 97 98 99 00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
•Cost of risk to corporations fell 42% between 1992 and 2000
•Estimated 15% increase in 2001, 25% in 2002
Cost of risk is still less than it was a decade ago!
EFFICIENT ALLOCATION OF
CAPITAL
$0
$50
$100
$150
$200
$250
$300
$350
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Policyholder Surplus: 1975-2002*
*As of September 30, 2002Source: A.M. Best, Insurance Information Institute
Bil
lion
s
(US
$)
Surplus (capacity) peaked at $336.3 Billion in mid-1999 and has fallen by 18.7% ($63 billion) to $273.3 billion since then.
•Surplus fell 5.6% during first 9 months of 2002
•Surplus is now lower than at year-end 1997.
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
Global P/C Insurance Capacity is Falling Dramatically
$920
$690
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
$1,000
2000:I 2002:IV (est.)
$ B
illi
ons
Sources: Insurance Information Institute, Swiss Re
Global non-life capacity is down
25% over the past 2 years
Capital Myth: US P/C Insurers Have $300 Billion to Pay Terrorism Claims
"Target" Commercial*$100 billion
33%
Other Commercial$50 billion
17%
Personal$150 billion
50%
Total PHS = $298.2 B as of 6/30/01
= $273.3 B as of 9/30/02
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must also back-up on non-terrorist related property/liability and WC claimsSource: Insurance Information Institute
Only 33% of industry surplus backs up “target” lines
Capital Raising by P/C Insurers Since September 11, 2001*
$20,492
$11,442
$16,437
$4,872
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
2001 2002*
($ M
illi
on
s)
Completed Pending
$25.4 Billion$27.9 Billion
*As of September 13, 2002.
Source: Morgan Stanley, Insurance Information Institute.
14 Pending 38 Pending
40 Completed 33 Completed
Capital Raising by P/C Insurers Since 9/11 Totals $53.2B
258
280287 290
313299
277 271 272 273 276263
240
220204
194181
162151
138128 127
0
50
100
150
200
250
300
350
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
Source: Texas Coalition for Affordable Insurance Solutions from A.M. Best data; Insurance Information Institute
Number of HomeownersInsurers in Texas
The number of insurers writing HO coverage in Texas
has been declining steadily.
IMPROVE INVESTMENT
PERFORMANCE
$0
$9
$18
$27
$36
$45
75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02
Net Investment Income
Facts
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002E* = $35.2B
Bil
lion
s
(US
$)
Investment income in 2002 is expected to fall 5 to 6% due primarily to historically low interest rates
*Annualized estimate based on first 9 months of 2002 data.Source: A.M. Best, Insurance Information Institute
0%
2%
4%
6%
8%
10%
12%
14%
16%
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
*
3-Month T-Bill 1-Yr. T-Bill 10-Year T-Note
Interest Rates: Lower Than They’ve Been in Decades
*As of February 2003.Source: Board of Governors, Federal Reserve System; Insurance Information Institute
1. Historically low interest rates are the primary driver behind lower investment yields. Nevertheless, overall insurer investment performance outpaces all major market indices and almost every major category of mutual fund.
2. 66% of the industry’s invested assets are in bonds
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
Large Company Stocks*As of April 11, 2003.Source: Ibbotson Associates, Insurance Information Institute
Total Returns for Large Company Stocks: 1970-2003*
2002 was 3rd consecutive year of decline for stocks
Will 2003 be the 4th?
P/C Industry Investments,by Type (as of Dec. 31, 2001)
Other5%
Bonds66%
Real Est. & Mortgages
1%
Common Stock21%
Cash & ST Secs.6%
Preferred Stock1%
Bond Holdings, by Type
Industrial & Misc. 32.5%
Special Revenue 30.5%
Governments 18.0%
States/Terr/Other 15.4%
Public Utilities 3.1%
Parents/Subs/Affiliates 0.5%
Source: A.M. Best, Insurance Information Institute
Common stock accounts for about 1/5 of invested
assets
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$39.5
$57.9
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 2002E
*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.Source: Insurance Services Office; Insurance Information Institute estimate annualized as of 9/30/02.
Investment gains are simply returning to “pre-bubble” levels
THE CHALLENGE OF TERRORISM
Sept. 11 Industry Loss Estimates($ Billions)
Life$2.7 (7%)
Aviation Liability$3.5 (9%)
Other Liability
$10.0 (25%)
Biz Interruption$11.0 (27%)
Property -WTC 1 & 2$3.5 (9%)
Property - Other
$6.0 (15%)
Aviation Hull$0.5 (1%)
Event Cancellation
$1.0 (2%)
Workers Comp
$2.0 (5%)
Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute
Industry Losses Under Proposed Federal Backstop Using 9/11 Scenario
(as interpreted on date of enactment, Nov. 26, 2002)
$8.75$12.50
$18.75$1.125
$10.
575
$15.
75
$18.
00
$0
$5
$10
$15
$20
$25
$30
Year 1 Year 2 Year 3
($ B
illi
ons)
Industry Retention Surcharge Layer Co-Reinsurance Layer
Source: Insurance Information Institute.
$1.75B Industry Co-Share
Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPE
$2.0B Industry Co-Share
$0.925B Industry Co-Share
$0.125B Industry Co-Share
Total Ind. Loss: $10.875B $14.25B $19.675B
Property Market ResponseTerrorism Market is Inconsistent
Moderate take-up rate among small risksVery low take-up rate for larger risks
Carriers/brokers report take-up rate of just 15% - 25 % for larger risksPrices cited varied from 0% to 1,000% of property premiums but quotes in
the 2% - 8% range typical as insurers sought to distribute max loss under TRIA loss across policyholder base
Could change substantially for 2003 renewal: more indiv. ratingReasons Businesses Decline Coverage
Expense Want to bargain with insurer; attempt to change terms/conditions Feel likelihood of an attack impacting them is remote Believe government will bail them out Feel“Fire Following” provision will compel coverage Will try self insurance; investigate alternative risk transfer options
Source:Marsh, Inc.; Insurance Information Institute.
Property Market Response• Problems
Low take-up rate => possible adverse selection problemInsurability of terrorism still question despite TRIA12/31/05 sunset date will cause market to unravel in 2004
• Stand-alone terrorism marketSome quotes being sought for certified and non-certified lossesThose treaties that existed are expiring and capacity for 2003 is uncertainSome insurers have reallocated resources
• Reinsurance MarketSome property catastrophe treaty renewals at Jan 1 were renewed
including “non-certified” terrorism but still excluding nuclear, biological and chemical
Reinsurers cautious about risk accumulation (e.g., zip code buckets)Insurers are seeking reinsurance to buy down their retentions
Source:Marsh, Inc.; Insurance Information Institute.
ABUSE OF THE U.S. CIVIL JUSTICE
SYSTEM
TORT-ure
• Asbestos• “Toxic” Mold• Medical Malpractice• Construction Defects• Lead• Fast Food• Arsenic Treated Lumber • Guns• Genetically Modified Foods (Corn)• Pharmaceuticals & Medical Devices• Security exposures (workplace violence, post-9/11 issues)• What’s Next?• Slavery• Sept. 11??
Average Jury Awards1994 vs. 2001
419187 333
7591,185 1,140
1,7441,365
323789
1,727
2,288
3,902
9,113
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
Overall VehicularLiability
PremisesLiability
BusinessNegligence*
WrongfulDeath
MedicalMalpractice
ProductsLiability
($00
0)
1994 2001
*Figure is for 2000 (latest available)Source: Jury Verdict Research; Insurance Information Institute.
Trends in Million Dollar Verdicts*
4%
10%
8%
21%
21%
36% 42
%
4%
11%
11%
27%
25%
43%
59%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VehicularLiability
PersonalNegligence
PremisesLiability
BusinessNegligence
GovernmentNegligence
MedicalMalpractice
ProductsLiability
95-97 98-99 2000-2001
*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.
Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants
Probability of Plaintiff Verdict is Rising
Source: Jury Verdict Research, 2002 Current Award Trends
1994 1997 2001
Premises Liability 43% 45% 57%
Business Negligence NA 57% 66%
Vehicular Liability 58% 59% 68%
Products Liability 39% 39% 56%
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin. 2005 forecasts from Tillinghast.
$129 $130$141 $144 $148
$159 $156 $156$167 $169 $180
$205
$298
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01 05F
Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!
Per capita “tort tax” expected to rise to $1,000 by 2005, up from $721 in 2001
Even a modest reduction in tort costs would be more stimulative than the $674 billion Bush tax/spending plan
Where the Tort Dollar Goes(2000)
Source: Tillinghast-Towers Perrin
Awards for Non-Economic
Loss22%
Claimants' Attorney Fees
17%Awards for
Economic Loss20%
Defense Costs16%
Administration25%
Tort System is extremely inefficient:
Only 20% of the tort dollar compensates victims for economic losses
At least 58% of every tort dollar never reaches the victim
Tort Costs as a % of GDP*
0.4%
0.6%
0.8%
0.8%
0.8%
0.9%
1.0%
1.1%
1.1%
1.3%
1.7%
1.9%
0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%
Denmark
U.K.
France
Japan
Canada
Switzerland
Spain
Australia
Belgium
Germany
Italy
U.S.
*1998 (latest available)Source: Tillinghast-Towers Perrin
High tort costs put the U.S. economy at a significant disadvantage.
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0
$49.1 $57.2$17.1
$51.0
$70.9
$5.4
$20.1
$29.6
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
1980 1990 2000
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.5 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin
Total = $120.2 Billion
Total = $157.7 Billion
There is a Glimmer of Hopefor Tort Reform
Best Chance for Tort Reform in Years
• Medical MalpracticeStates—already happening
Federal reform is possible (but increasingly unlikely)
• General Federal Tort ReformBroad support across all industries
But only 3 previous examples of federal tort limits Light aircraft (GARA), vaccines, implantable med devices
• Asbestos Reform (Supreme Court no help)
• Punitive Damages—What’s ReasonableSupreme Court ruled favorably in Campbell v. State Farm
Are We Finally Seeing Punitives Reigned In by the Supreme Court?
10:1 ??
145:1
500:1
0
100
200
300
400
500
1996 2003 The Future?
Rat
io o
f Pun
itiv
e A
war
d to
Com
pens
ator
y
Sources: Insurance Information Institute
In Campbell v. State Farm (2003) the Supreme Court ruled in a 22-year old Utah case that punitive awards that were 145 to 1 were
excessive (actual damages in the case, which involved insurer bad faith were $1
million)
In BMW of North America v. Gore (1996)the Supreme Court ruled in an Alabama case that
punitive awards that were 500 to 1 were excessive (actual damages in the case, which involved the repainting of a car, were $4,000 but the jury awarded the plaintiff $2 million)
In Campbell v. State Farm the Court added that “…few awards exceeding a single- digit ratio between punitive and compensatory damages will satisfy due process…Single digit multipliers are
more likely to comport with due process, still achieving the State’s deterrence and
retribution goals…”
Categories of Liability With Highest % of Punitive Awards
31%
20% 19%
10%
6% 5%
9%
0%
10%
20%
30%
40%
BusinessNegligence
VehicularLiability
PersonalNegligence
ProductsLiability
PremisesLiability
PoliceNegligence
OtherLiabilities
Source: Jury Verdict Research; Insurance Information Institute.
The Supreme Court’s Campbell v. State Farm ruling that a ratio of punitive to compensatory damages “single digits” is excessive is especially important for these categories of liability which are hit with punitives with above-average frequency.
Median Punitive Award for Most Frequent Categories of Liability, 2001
$30,000$38,250 $40,000
$90,000
$133,400 $134,500
$0
$50,000
$100,000
$150,000
$200,000
VehicularLiability
PersonalNegligence
PoliceNegligence
PremisesLiability
BusinessNegligence
Overall ProductsLiability
Source: Jury Verdict Research; Insurance Information Institute.
$1,300,000
‘TOXIC’ MOLD
U.S.: Documented Toxic Mold SuitsFormer
Owners of Sold Homes
10%Bad Faith
Against Insurers
50%Builder for
Construction Defects
20%
HO Associations for Improper Maintenance
20% Source: www.toxlaw.com; Guy Carpenter
1,000 Cases
2,000 Cases
5,000 Cases
2,000 Cases
TX: Annual Losses from Mold Claims*
$320$417
$1,002
$2,279
$0
$500
$1,000
$1,500
$2,000
$2,500
1999 2000 20001 2002E
Mold claim costs rose 612% between 1999 and 2002
$ Millions
Source: Texas Department of Insurance;*2002 III estimate is annualized figure based on data through September 2002.
Texas: Estimated Total Number of Mold Claims, 1999-2002E*
115,182
128,271
169,982
237,299
100,000
150,000
200,000
250,000
1999 2000 2001 2002E
Source: Texas Department of Insurance;*2002 III estimate is annualized figure based on data through September 2002.
The number of mold claims rose 106% between 1999 and 2002
Texas Accounted for the Vast Majority of New Mold Cases in 2001
Claims Arising Inside
TX70%
Claims Arising
Outside TX 30%
Source: Insurance Information Institute
California: Surging Water Claim Frequency and Costs:
Symptom of Growing Mold Problem
$206.1
$276.5$286.6
$383.7
$430.6
24%
29%
27%
32%
31%
$100
$150
$200
$250
$300
$350
$400
$450
1997 1998 1999 2000 2001
20%
22%
24%
26%
28%
30%
32%
34%
Paid Water Losses ($ Mill) Water Claims as % of All Homeowners Claims
Source: Insurance Information Network of California; Insurance Information Institute
•Water losses paid rose 109% from 1997 to 2001 and 50% since 1999
•Water claims accounted for less than 1/4 of all HO claims in 1997, now they account for nearly 1/3.
California may be in a drought, but homeowners say they’re drowning
Sharply Rising Average Water Claim Cost: Mold Symptom
$2,537$2,631
$3,339
$3,719
$4,730
$2,000
$3,000
$4,000
$5,000
1997 1998 1999 2000 2001
Source: Insurance Information Institute based on data from the Insurance Information Network of California;
The cost of the average water loss in CA surged 27% in 2001 and 80% since 1998
Construction Defect Litigation Destroying CA Condo Market
$1.87
$2.95
$1.00
$1.25
$1.50
$1.75
$2.00
$2.25
$2.50
$2.75
$3.00
1998 2000
Source: ISO, Insurance Information Institute
Condo construction in parts of CA has come to a virtual stop.
Insurer costs rose 58% in just 2 years!
Ratio of Losses Paid Out to Premiums Taken In
“Right-to-Cure” laws now in 5
states: AZ, CA, NV, TX, WA
16 considering such laws.
Where are the Next Battlefields for Mold?
• Homeowners issue probably crested in 2003• Migration to commercial area affects many lines:
Commercial Property Commercial LiabilityProducts Liability Builders Risk/Construction DefectsWorkers Comp…
• Hot Spots: Apartments/Condos/Co-ops Office Structures Schools Municipal BuildingsCars? (GM case in NC)
• Trend toward class actions since science doesn’t support massive individual non-economic damagesMuch more lucrative for trial lawyers to form class
Source: Insurance Information Institute.
CRISIS IN CORPORATE
GOVERNANCE
Accounting Problems are Getting Many Companies into Trouble
•Enron was tip of an iceberg
•Major implications for insurers (p/c and life)
Financial Restatements Filed
116
160
215233
270
0
50
100
150
200
250
300
1997 1998* 1999* 2000 2001
*ApproximateSources: Huron Consulting Group
The number of financial restatements is rising
even thought the number of publicly traded
companies is falling.
Shareholder Class Action Lawsuits*
*Securities fraud suits filed in U.S. federal courts.**Suits of $100 million or more.Source: Stanford University School of Law; Insurance Information Institute
164202
163
231188
110
178
236209 216
487
258
0
100
200
300
400
500
600
91 92 93 94 95 96 97 98 99 00 01 02
Shareholders typically recover just 2.56% of amount lost; 1/3 of that
goes to lawyers & expenses**
Summary• Economics of the industry suggest hard market
should continue into 2004If it doesn’t, it will end badly for some insurersCombined ratio remains unacceptably high given
current investment environmentTop line improvement outpacing bottom line
improvementReserve hangover still enormous
• US courts still out of controlHopes for significant tort reform probably too high
• Mold situation probably crested in 2002
Insurance Information Institute On-Line
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