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Towers Perrin Report Subj Tort Cost Trends 2007

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2007 Update on
U.S. Tort Cost Trends

2007 Update on U.S. Tort Cost Trends | 1

TABLE OF CONTENTS

INTRODUCTION..........................................................................................2
EXECUTIVE SUMMARY......................................................................................................3
Key Findings................................................................................................................3
Future Implications........................................................................................................4
FINDINGS..................................................................................................5
2006 Tort Costs................................................................................................5
Costs Relative to GDP......................................................................................5
Costs Relative to Population..........................................................................5
Split to Personal Versus Commercial....................................................................5
METHODOLOGY AND APPROACH................................................................7
Components of Tort Costs......................................................................................7
Categories of Tort Costs................................................................................8
Excluded Costs..........................................................................................9
LOOKING AHEAD....................................................................................11
APPENDICES..................................................................................................12

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 2

INTRODUCTION
TABLE OF CONTENTS

The 2007 Update on U.S. Tort Cost
Trends represents the 11th study of U.S.
tort costs published by the Tillinghast
Insurance Consulting practice of Towers
Perrin. The first study was completed
in 1985. The most recent study, incorporating results through 2005, was
published in December 2006. This
update provides results from 1950
through 2006, with projections through
2009. This study has not been funded
or subject to pre-release approval by
any outside organization and was conducted entirely by Tillinghast.
This study takes no position on whether
tort costs are too high or too low. Its
purpose is to attempt to quantify the
costs, not to support any particular
point of view regarding those costs.
Any connotation that an increase in
tort costs is undesirable is unintended.

Further, this study examines only one
side of the U.S. tort system: the costs.
No attempt has been made to measure
or quantify the benefits of the tort system. This study makes no conclusion
that the costs of the U.S. tort system
outweigh the benefits, or vice versa.
Tort costs as tabulated in this study
reflect all of the various outcomes
from an alleged tort. The tort claim
dispute resolution process may be
thought of as a continuum. An event
causes one party to believe it has
suffered damages as a result of the
negligence of another party. From that
point, the parties attempt to come to
a resolution. However, the two sides
often will not easily agree on either
the degree of negligence or the
amount of damages.

The dispute may be resolved in a
number of ways:
Ⅲ before a lawsuit is filed, by mutual
agreement or through arbitration
Ⅲ after a lawsuit is filed, but prior to
a trial
Ⅲ as a result of a verdict in a trial (as
well as potential subsequent appeal).
Parties may elect to settle their dispute
at any point along this continuum to
avoid additional expense or the potential exposure they might face by taking
the process to the next stage.
For more information on Tillinghast’s
tort cost studies, please contact
Russ Sutter at (314) 719-5834 or
russ.sutter@towersperrin.com.

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 3

EXECUTIVE SUMMARY

KEY FINDINGS
U.S. tort costs decreased by 5.5% in
2006, as shown in Table 1. This represents the first decrease in tort costs
since 1997 and the largest percentage
decrease in the 56-year period contained
in this study. A decrease in reported
claims in 2006, with no significant
increases in the cost of claims, helped
fuel the overall decline in tort costs.

TABLE 1: GROWTH OF U.S. TORT COSTS AND GDP
Years

Average Annual Increase
in Tort Costs

Average Annual
Increase in GDP

1951-1960

11.6%

1961-1970

9.8

7.0

1971-1980

11.9

10.4

1981-1990

11.8

7.6

1991-2000

6.0%

3.2

5.4

2001

14.7

3.2

The U.S. tort system cost $247 billion
in 2006, which translates to $825 per
person, or $57 per person less than in
2005.

2002

13.4

3.4

2003

5.5

4.7

2004

6.0

6.6

2005

0.4

6.4

Overall economic growth in 2006 was
6.1%. As such, the ratio of tort costs
to gross domestic product (GDP) shrank
in 2006. Since 1950, growth in tort
costs has exceeded growth in GDP by
an average of slightly more than two
percentage points.

2006

-5.5

6.1

56 years (1950-2006)

9.2%

7.0%

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 4

TABLE OF CONTENTS

FUTURE IMPLICATIONS
We are forecasting growth in U.S. tort
costs of 2.5% in 2007, with a slightly
higher growth (4.5%) in 2008 and
2009. There are several issues that
will determine the future trends in U.S.
tort costs, including:
Ⅲ Auto accidents. The frequency of auto
accidents has declined over the last
several years. However, there is some
evidence that the period of declining
frequency may be nearing an end,
putting upward pressure on tort costs.
Ⅲ Subprime mortgages. The deterioration
in the subprime mortgage market in
2007 has caused several financial
institutions to post losses. Lawsuit
activity, both from investors in these
financial institutions and homeowners
who accepted the mortgages, may
follow as a consequence.
Ⅲ Backdating of options. Several U.S.
corporations are alleged to have backdated options grants. This issue raises
the possibility of a resurgence of
directors and officers liability claims.
Ⅲ Global warming. The increased attention paid to this issue, both the causes
and effects, may lead to increased
litigation toward organizations that
may be accused of contributing to
this problem.
Ⅲ New theories of liability. The burden of
proof may be changing in some litigation. For instance, actions have
recently been brought against lead
paint manufacturers despite no tie
between the manufacturers and the
paint that is alleged to have caused
the damages.

Ⅲ Medical malpractice. Several states
enacted medical malpractice reforms
earlier in this decade. Possibly as a
result, trends in medical malpractice
have moderated, significantly in some
jurisdictions.
Ⅲ Obesity. While not contributing to significant current litigation, the increased
awareness of the link between obesity
and subsequent serious health problems, such as diabetes, could lead to
a material amount of litigation activity
in the future.
Ⅲ Employment liability. Recent issues
related to age discrimination as well
as overtime rules have contributed
to significant employment practice
litigation.
Ⅲ Shareholder suits versus third parties.
The U.S. Supreme Court recently
heard the Stoneridge case, testing
the concept of whether shareholders
can bring an action against third
parties who are charged with aiding
a corporation that has defrauded its
investors.
Ⅲ Asbestos. Less of an issue in 2006
than earlier this decade, asbestos litigation continues. The ultimate outcomes of that litigation will contribute
to future trends in tort costs.

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 5

FINDINGS

2006 TORT COSTS
Tillinghast estimates that total insured
and self-insured tort costs in the U.S.
were $247 billion in 2006. This is a
decrease of $13.4 billion, or 5.5%, from
the estimated $261.4 billion of tort costs
in 2005. The decrease in 2006 costs is
the first decrease in costs since 1997.
COSTS RELATIVE TO GDP
The ratio of U.S. tort costs to (GDP)
has increased significantly since 1950.
However, as shown in Table 2, the ratio
of tort costs to GDP* decreased substantially since 2004.
The year with the highest ratio of tort
costs to GDP is 1987, at 2.33%. As
shown in Appendix 1A, the ratio generally declined from 1987 to 1999,
when it reached 1.81%.
COSTS RELATIVE TO POPULATION
Growth in U.S. tort costs since 1950
has far exceeded U.S. population growth,
as indicated in Table 3. Even after
adjusting for inflation, tort costs per
capita have risen by a factor of more
than eight between 1950 and 2006.
However, inflation-adjusted tort costs
per capita were lower in 2006 than in
the prior three years.
SPLIT TO PERSONAL VERSUS
COMMERCIAL
Table 4 (page 6) shows our estimate of
the costs of personal and commercial
U.S. torts since 1990. “Commercial”
reflects torts alleged against businesses,
including all medical malpractice.
“Personal” tort costs include torts

TABLE 2: COSTS RELATIVE TO GDP
($billions)
Year

U.S. Tort Costs

1950

$ 1.8

U.S. GDP
$

Tort Costs as
% of GDP

294

0.62%

1960

5.4

526

1.03

1970

13.9

1,039

1.34

1980

42.7

2,790

1.53

1990

130.2

5,803

2.24

2000

179.1

9,817

1.82

2001

205.4

10,128

2.03

2002

232.9

10,470

2.22

2003

245.7

10,961

2.24

2004

260.3

11,686

2.23

2005

261.4

12,434

2.10

2006

247.0

13,195

1.87

TABLE 3: COSTS RELATIVE TO POPULATION
Year

U.S. Population
(millions)

U.S. Tort Costs
($billions)

Tort Cost
per Capita

Inflation-Adjusted*
Tort Cost per Capita

1950

152

$ 1.8

$ 12

$ 99

1960

181

5.4

30

205

1970

205

13.9

68

351

1980

228

42.7

187

459

1990

249

130.2

522

805

2000

281

179.1

636

745

2003

291

245.7

845

926

2004

294

260.3

887

946

2005

297

261.4

882

910

2006

299

247.0

825

825

*Restated in year 2006 dollars, based on consumer price index

*Throughout this report, unadjusted, or nominal, GDP is used. Most
news releases on GDP rely on inflation-adjusted, or real, GDP.
© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 6

TABLE OF CONTENTS

alleged against individuals, excluding
medical malpractice. Personal tort costs
arise predominantly from automobile
accidents.
As the table indicates, the increase in
commercial tort costs since 1990 has
exceeded the increase in personal tort
costs. The difference is even greater when
measured since 2000. However, commercial tort costs experienced a greater
decline in 2006 than personal tort costs.

The fairly modest growth in personal
tort costs in recent years is due in some
part to a reduction in auto accident frequency. Table 5 shows an index of
accident frequency and claims per
vehicle for property damage auto liability
since 1991, based on industry trend data.
The decrease in commercial tort costs
is partly attributable to asbestos. Insured
asbestos losses increased approximately
$1.9 billion in 2006. This was lower
than the comparable increases in 2003,
2004 and 2005 ($10.2 billion, $7.3
billion and $7.0 billion, respectively).

Beyond asbestos, other commercial liability (excluding auto and medical malpractice) showed a significant drop in
new claims being reported in 2006
versus 2005 and 2004.
The recent decrease in commercial tort
costs also coincides with significant
reduction in insurance industry combined
ratios. Five insurance industry lines of
business that involve tort costs (commercial multi-peril, medical malpractice,
products liability, other liability and commercial auto liability) all experienced
lower direct combined ratios in 2006
than in each of the previous nine years.

TABLE 4: PERSONAL VERSUS COMMERCIAL TORT COSTS
TABLE 5: PROPERTY DAMAGE
FREQUENCY INDEX

($billions)
Year

Personal Tort Costs

Commercial Tort Costs

1990

$52.0

$ 78.2

1991

53.4

78.2

1992

56.4

83.8

1993

57.3

85.9

1994

60.1

87.8

1995

61.5

96.9

1996

62.7

91.9

1997

63.4

90.4

1998

66.3

98.9

1999

68.2

99.9

2000

72.3

106.8

2001

76.8

128.6

2002

80.0

152.9

2003

84.2

161.5

2004

86.8

173.5

2005

88.5

172.9

2006

87.4

159.6

(1991 = 1.000)
1991

1.000

1992

0.968

1993

0.984

1994

1.016

1995

1.013

1996

1.041

1997

1.021

1998

1.007

1999

1.016

2000

1.002

2001

1.001

2002

0.983

2003

0.960

2004

0.938

2005

0.923

2006

0.891

Average Annual Change
Since 1990

3.3%

4.6%

Since 2000

3.2%

6.9%
© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 7

INTRODUCTION
METHODOLOGY AND APPROACH

COMPONENTS OF TORT COSTS
The methodology used to develop
estimates of tort costs in this study
is similar to the methodology used in
prior Tillinghast studies of U.S. tort
costs. This study incorporates three
cost components:
Ⅲ benefits paid or expected to be paid
to third parties (hereafter referred to
as “losses”)
Ⅲ defense costs
Ⅲ administrative expenses.
It is important to note that we have
measured losses on an incurred basis,
reflecting both payments as well as
the collective change in reserves on
incurred claims. We believe it is more
appropriate to measure costs on an
incurred basis than on a paid basis
because of the greater time difference
between an event and the payment of
the claim than between the event and
the estimate of the cost of that event.
However, we recognize that more estimates of costs must be used when
measuring on an incurred basis than
when measuring on a paid basis.
Our use of incurred losses instead of
paid losses has resulted in higher
increases in tort costs in recent years.
Had paid losses been used, the costs

of asbestos-related claims included
in the study would have been lower.
However, use of incurred losses does
not overstate tort costs. To argue this,
one would have to hypothesize that
insurers knowingly set reserves too
high. We do not believe this is the
case.
Defense costs reflect costs directly
incurred in the defense and investigation of a claim, as well as general
claim handling costs. The former is
known as allocated loss adjustment
expenses (ALAE), while the latter is
often referred to as unallocated loss
adjustment expenses (ULAE).
Administrative expenses reflect
expenses, other than defense costs,
incurred by either the insurance
company or self-insured entity in
the administration of tort claims.
We take no position on the efficiency
of the insurance industry’s administrative expenses. However, we note the
following:
Ⅲ The relative share of total insured tort
costs (as defined below) attributable
to administrative expenses generally
declined during the 1950s, 1960s
and 1970s. However, the portion has
not changed materially, either up or
down, since 1980.

Ⅲ The U.S. insurance industry is not a
monopoly or a cartel. Insurers have an
incentive to be as efficient as possible in order to either strengthen their
competitive positions or maximize
their profits. The industry is subject
to the same cost and competitive
pressures that face most industries.
Ⅲ We believe administrative expenses
are a real cost of the tort system.
Their inclusion undoubtedly increases
the absolute levels of estimated tort
costs, but has a negligible impact on
recent tort cost trends and actually
lessens the long-term trends in tort
cost growth.
As detailed in Appendix 3, Table 6
shows the average administrative
expense portion of insured tort costs
by decade.
TABLE 6: TORT COSTS —
ADMINISTRATIVE EXPENSE PORTION

Time Period

Insured Tort Costs —
Administrative
Expense Portion

1950-1959

32.2%

1960-1969

29.0

1970-1979

26.0

1980-1989

22.0

1990-1999

23.0

2000-2006

23.0

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 8

TABLE OF CONTENTS

CATEGORIES OF TORT COSTS
Tillinghast computed tort costs in the
following three categories:
Ⅲ insured costs (excluding medical
malpractice)
Ⅲ self-insured costs (excluding medical
malpractice)
Ⅲ medical malpractice costs.
We derived insured costs from composite
financial data for the U.S. insurance
industry, as tabulated by A.M. Best.
These data are considered highly reliable
because they are subject to audit and
are reviewed by state regulatory agencies.
Moreover, while certain product lines
have changed over time, the data are
available as far back as 1950 and, in
some cases, even earlier.
The statutory lines of business that
we include in the insured category are
as follows:
Ⅲ private passenger auto liability
Ⅲ homeowners multi-peril
Ⅲ farmowners multi-peril
Ⅲ commercial auto liability
Ⅲ commercial multi-peril
Ⅲ other liability
Ⅲ products liability.

The following should be noted regarding
the lines of business included:
Ⅲ For both personal auto liability and
commercial auto liability, costs associated with personal injury protection
(“PIP,” also known as “no-fault”) are
excluded. PIP costs are excluded
since PIP is, in theory, a first party
coverage, not a liability coverage. This
exclusion has only a minor impact
on commercial auto costs, but is
material for personal auto liability.
Ⅲ Homeowners and farmowners multiperil are largely first-party property
coverages that have a liability (or tort)
element. We excluded 91% of the
costs for these lines. Our estimate
that 9% of the costs for these lines
are tort-related is based on our experience with these coverages.
Ⅲ Commercial multi-peril (CMP) is also
a coverage that includes both property
and liability. However, since 1992,
insurance data have been split to the
liability and property components. For
years prior to 1992, we include up to
50% of total CMP costs in this study.
Ⅲ We do not include any costs in this
study from workers compensation (in
theory, a first-party coverage), aviation
or ocean marine. The latter two coverages do have a liability component
to them; however, we excluded them
given their size and a lack of foundation for estimating the liability portion.

The insured tort costs are the sum of
the three components of losses, loss
adjustment expenses and administrative expenses. The last component
includes the following statutory
expense categories:
Ⅲ commissions and brokerage
Ⅲ other acquisition expenses
Ⅲ general expenses
Ⅲ taxes, licenses and fees.
Total tort costs from the A.M. Best data
are reduced slightly to reflect an estimate
of non-U.S. business in the data. The
reduction varies by line of business and
is approximately 2%.
Earned premiums are displayed in
Appendix 3. The actual premiums are
not considered in the total tort costs
shown in column (6). (The arithmetic in
the appendix multiplies premiums by
ratios in which earned premium is the
denominator, effectively eliminating
premiums from the resulting product.)
As such, any increase in insurance premiums without a corresponding increase
in costs has no impact on the estimated
tort costs in this study.
As shown in Appendix 3, total insured
tort costs in 2006 are estimated to be
$171.2 billion.
The second category of tort costs is
self-insured costs, excluding medical
malpractice. Appendix 4 outlines the
estimated costs for this category.

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 9

As shown in this appendix, we estimate
2% of personal tort costs to be in this
category. This is not to say that 2% of
the auto driving population is uninsured
or that 2% of auto accidents involve an
uninsured driver. (Actual figures for
these items would likely be far higher
than 2%.) Rather, the 2% provision
reflects our estimate of the additional
tort costs that are not included in the
insured data. Many personal auto
insurance policies include coverage for
uninsured motorists, whereby the insured
is compensated if injured in an auto
accident caused by an uninsured or
underinsured driver. As such, the
“insured” tort costs described previously
already include the costs associated
with many auto accidents involving
uninsured drivers. The 2% provision
adds $1.7 billion to our estimate of
2006 personal tort costs.
Our estimate of self-insured tort costs
is approximately $43.8 billion for commercial risks in 2006. This estimate
includes tort costs paid by various forms
of self-insurance, such as large deductibles and captive insurance programs.
The estimate also considers insurance
purchased directly from non-U.S. insurance companies, since such insured
costs are not captured in the A.M. Best
data used to estimate the insured cost
category.

To our knowledge, no source of data
exists that tabulates the losses incurred
by all self-insured entities. However,
various organizations have estimated
the size of this market. We have relied
on the various estimates available, as
well as Tillinghast’s experience in this
field, in developing the costs for this
category. We have assumed that the
administrative expense component in
this category is 10% lower than the
insured category.
Our estimate of commercial self-insured
costs does not capture certain extraordinary costs. For example, costs resulting
from the 1998 settlement between
tobacco manufacturers and various
state attorneys general are not explicitly
included in this study.
As can be seen in Appendix 4, our
estimates of commercial self-insured
costs show a long-term increase in the
portion of commercial tort costs that
are self-insured.
The third category of tort costs is
medical malpractice, both insured
and self-insured. Appendix 5 shows
the estimated medical malpractice
tort costs since 1975. A.M. Best data
have segregated medical malpractice
costs since 1975. However, the portion
of medical malpractice costs that are
insured has fluctuated significantly
since then.

Our estimate of medical malpractice
costs is not based on A.M. Best data,
but rather on Tillinghast’s internal estimates of state-by-state medical malpractice costs. The state costs per
physician and per occupied hospital
bed are multiplied by the number of
practicing physicians and occupied
beds by year to develop the estimated
medical malpractice losses and LAE.
Administrative expenses are included;
as with the self-insured estimate, we
assume a 10% lower cost than insurance data would indicate.
As shown in Appendix 5, our estimate
of medical malpractice costs in 2006 is
approximately $30.3 billion. Our analysis suggests that, since 1975, medical
malpractice costs have increased at an
annual rate of 11.1%, versus 8.2% for
all other tort costs.
EXCLUDED COSTS
Our definition of tort cost is largely governed by traditional liability insurance
coverages. We previously noted the
exclusion of tobacco settlements. For
gray areas where awards and settlements are typically (but not always)
excluded, such as punitive damages
(which are included in the insurance
contract in certain states) and certain
types of contract and shareholder litigation, the costs reflected in this study

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2007 Update on U.S. Tort Cost Trends | 10

INTRODUCTION
TABLE OF CONTENTS

are consistent with those reported by
the insurance companies themselves.
Therefore, while certain of these costs
may be included in the tort cost totals,
we are unable to separately account for
them.
We have not included costs incurred by
federal and state court systems in administering actual suits. We do not believe
the omission of these costs significantly
understates our cost index or in any
material way distorts long-term trends.

As noted previously, this study does not
attempt to quantify the benefits of the
tort system. Such benefits include a
systematic resolution of disputes,
thereby reducing conflict, possibly
including violence. Another indirect
benefit is that the tort system may act
as a deterrent to unsafe practices and
products. From this perspective, compensation for pain and suffering is seen
as beneficial to society as a whole.

Certain indirect costs are also omitted,
such as those associated with litigation
avoidance. These costs range from
potentially unnecessary and duplicative
medical tests ordered by doctors as a
defense against possible malpractice
allegations, to the disappearance of certain products or whole industries from
the marketplace because of high product liability cost.

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 11

INTRODUCTION
LOOKING AHEAD

Tort cost growth was negative in 2006,
a 5.5% decrease. This was the first
decrease in costs since 1997. The lower
growth rate is largely due to commercial
lines, as shown in Table 7.
For 2007, we do not expect either a
continuation of the decrease in costs
nor a significant increase in costs.
Specifically, we expect total tort costs
to increase approximately 2.5% in
2007, to $253.2 billion. We do not
expect the drop in claim frequency to
be as significant in 2007 as it was in
2006. Some personal auto data that we
have observed suggests that the frequency declines that have persisted for
a decade may be coming to an end. In
addition, the drop in commercial liability claims in 2006 will be difficult to
repeat in 2007 to the same degree.
The Congressional Budget Office (CBO)
anticipates an increase in GDP of 4.3%
in 2007. Combining this level of GDP
increase with our forecast on tort costs
yields a ratio of tort costs to GDP of
1.84% in 2007.
Looking ahead, we anticipate growth in
U.S. tort costs to range from 3% to 6%
in 2008, with a midpoint of 4.5%. We
expect a similar increase in 2009. CBO
forecasts call for GDP growth to be 4.8%
in 2008, and 5.0% for 2009. These
assumptions yield projected tort costs,
GDP and tort-to-GDP ratios as shown in
Table 8.

TABLE 7: ONE-YEAR GROWTH IN TORT COST
Year

Personal

Commercial

Total

2001

6.2%

20.4%

14.7%

2002

4.2

18.9

13.4

2003

5.3

5.6

5.5

2004

3.1

7.5

6.0

2005

1.9

-0.4

0.4

2006

-1.3

-7.7

-5.5

TABLE 8: TORT COSTS RELATIVE TO GDP
($billions)
Tort Costs as
% of GDP

Year

U.S. Tort Costs

U.S. GDP

2005

261.4

12,434

2.10

2006

247.0

13,195

1.87

2007 (est.)

253.2

13,763

1.84

2008 (est.)

264.6

14,428

1.83

2009 (est.)

276.5

15,150

1.83

The near future of U.S. tort cost
growth will depend on several factors,
including:
Ⅲ Will personal auto liability continue to
show a negative accident frequency?
Ⅲ What litigation activity will result
from the meltdown in the subprime
mortgage market?
Ⅲ Are companies facing material litigation related to global warming?
Ⅲ Will issues surrounding the timing of
options grants generate significant
tort costs?
Ⅲ Will medical malpractice loss trends
continue to remain modest after significant growth earlier this decade?

Ⅲ Are further reserve increases for
asbestos likely?
Ⅲ Will new attempts at expanding liability of third parties be successful?

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 12

APPENDICES

Cost of the U.S. Tort System — 1950-2006 ......................................Appendix 1A
Cost of the U.S. Tort System — 1950-2006 —
Average Annual Changes by Groups of Years ..................................Appendix 1B
Summary of All Tort System Costs ....................................................Appendix 2
Insured Tort Costs ............................................................................Appendix 3
Cost of the U.S. Tort System — Comparisons of Personal Lines
to Commercial Lines Costs and Impact of Self-Insurance ..................Appendix 4
Medical Malpractice Tort Costs ..........................................................Appendix 5

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 13

APPENDIX 1A

COST OF THE U.S. TORT SYSTEM — 1950-2006
Year
(1)
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Notes:

U.S. Population
(millions)

CPI
(all items)

CPI
(medical care)

(2)

(3)

(4)

152
0.241
0.151
155
0.260
0.159
158
0.265
0.167
160
0.267
0.173
163
0.269
0.178
166
0.268
0.182
169
0.272
0.189
172
0.281
0.197
175
0.289
0.206
178
0.291
0.215
181
0.296
0.223
184
0.299
0.229
187
0.302
0.235
189
0.306
0.241
192
0.310
0.246
194
0.315
0.252
197
0.324
0.263
199
0.334
0.282
201
0.348
0.299
203
0.367
0.319
205
0.388
0.340
208
0.405
0.361
210
0.418
0.373
212
0.444
0.388
214
0.493
0.424
216
0.538
0.475
218
0.569
0.520
220
0.606
0.570
223
0.652
0.618
225
0.726
0.675
228
0.824
0.749
230
0.909
0.829
232
0.965
0.925
234
0.996
1.006
236
1.039
1.068
239
1.076
1.135
241
1.096
1.220
243
1.136
1.301
245
1.183
1.386
247
1.240
1.493
249
1.307
1.628
252
1.362
1.770
255
1.403
1.901
258
1.445
2.014
260
1.482
2.110
263
1.524
2.205
265
1.569
2.282
268
1.605
2.346
270
1.630
2.421
273
1.666
2.506
281
1.722
2.608
285
1.771
2.728
288
1.799
2.856
291
1.840
2.971
294
1.889
3.101
297
1.953
3.232
299
2.016
3.362
(2) From U.S. Census Bureau
(3)-(4) From U.S. Department of Labor, Bureau of Labor Statistics

Gross Domestic
Product ($billions)

Tort System
Costs ($billions)

(5)

(6)

$294
339
358
379
380
415
437
461
467
507
526
545
586
618
664
719
788
833
910
985
1,039
1,127
1,238
1,383
1,500
1,638
1,825
2,031
2,295
2,563
2,790
3,128
3,255
3,537
3,933
4,220
4,463
4,739
5,104
5,484
5,803
5,996
6,338
6,657
7,072
7,398
7,817
8,304
8,747
9,268
9,817
10,128
10,470
10,961
11,686
12,434
13,195

$1.8
2.3
2.7
3.0
3.1
3.4
3.9
4.5
4.9
5.2
5.4
5.7
6.0
6.6
7.3
7.9
8.7
9.6
10.6
12.0
13.9
15.0
15.7
15.2
16.5
20.0
23.4
28.0
32.7
37.0
42.7
49.2
56.7
64.4
66.9
83.7
101.7
110.5
114.0
126.2
130.2
131.6
140.2
143.2
147.8
158.4
154.5
153.8
165.2
168.1
179.1
205.4
232.9
245.7
260.3
261.4
247.0

Tort Costs
as % of GDP
(7)
0.62%
0.67
0.75
0.78
0.81
0.82
0.89
0.98
1.04
1.03
1.03
1.04
1.02
1.07
1.10
1.11
1.11
1.15
1.17
1.22
1.34
1.33
1.27
1.10
1.10
1.22
1.28
1.38
1.42
1.44
1.53
1.57
1.74
1.82
1.70
1.98
2.28
2.33
2.23
2.30
2.24
2.20
2.21
2.15
2.09
2.14
1.98
1.85
1.89
1.81
1.82
2.03
2.22
2.24
2.23
2.10
1.87

(5) From U.S. Department of Commerce, Bureau of Economic Analysis
(6) From Appendix 2, column (5)
© 2007 Towers Perrin
(7) = (6) / (5)

2007 Update on U.S. Tort Cost Trends | 14

APPENDIX 1B

COST OF THE U.S. TORT SYSTEM — 1950-2006
Average Annual Changes by Groups of Years

Year

U.S.
Population
(millions)

CPI
(all items)

CPI
(medical care)

Gross
Domestic Product
($billions)

Tort
System Costs
($billions)

Tort Costs
as % of GDP

(1)

(2)

(3)

(4)

(5)

(6)

(7)

1951-2006

1.2%

3.9%

5.7%

7.0%

9.2%

2.0%

1951-1960
1961-1970
1971-1980
1981-1990
1991-2000
2001
2002
2003
2004
2005
2006

1.7
1.3
1.1
0.9
1.2
1.2
1.2
0.9
1.0
1.0
1.0

2.1
2.7
7.8
4.7
2.8
2.8
1.6
2.3
2.7
3.4
3.2

4.0
4.3
8.2
8.1
4.8
4.6
4.7
4.0
4.4
4.2
4.0

6.0
7.0
10.4
7.6
5.4
3.2
3.4
4.7
6.6
6.4
6.1

11.6
9.8
11.9
11.8
3.2
14.7
13.4
5.5
6.0
0.4
-5.5

5.3
2.6
1.4
3.9
–2.0
11.2
9.7
0.8
–0.6
-5.6
-11.0

1951-2000
2001-2006

1.2
1.0

4.0
2.7

5.9
4.3

7.3
5.1

9.6
5.5

2.2
0.4

Note: Based on figures in Appendix 1A

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 15

APPENDIX 2

SUMMARY OF ALL TORT SYSTEM COSTS
Liability
Insured Cost
(2)

Year
(1)
1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Notes:

$

1,723,059
2,177,633
2,557,353
2,828,158
2,950,051
3,250,829
3,719,824
4,293,067
4,624,008
4,971,526
5,186,101
5,394,567
5,704,594
6,299,547
6,924,227
7,570,265
8,322,529
9,150,869
10,102,273
11,413,351
13,208,732
14,304,768
14,933,112
14,621,296
15,837,813
17,914,909
20,687,521
24,073,405
27,616,588
30,934,883
34,057,943
38,929,780
44,438,093
49,946,629
51,208,738
64,455,656
78,167,587
85,112,183
88,462,814
97,030,370
100,602,676
101,016,143
106,652,899
108,560,517
112,042,831
118,478,058
115,362,594
113,561,713
121,428,366
122,863,786
129,528,854
146,177,700
165,841,657
173,873,885
181,954,952
181,971,396
171,228,466

Medical
Malpractice
(3)
$

N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1,158,476
1,420,786
1,811,894
2,241,760
2,745,213
3,376,381
4,065,717
4,845,214
5,802,016
6,768,896
6,740,227
6,892,127
7,314,182
7,622,786
8,498,791
9,202,873
10,077,004
10,599,730
11,511,556
12,484,159
13,285,645
14,106,400
15,474,060
16,429,936
17,898,229
19,596,842
21,723,960
24,152,742
26,484,564
28,189,883
29,391,286
30,251,502

Last three 0s omitted
(2) From Appendix 3 [1975-2006 excludes medical malpractice]

Self- (Un)
Insured
(4)
$

86,153
108,882
127,868
141,408
147,503
162,541
185,991
214,653
231,200
248,576
259,305
269,728
285,230
314,977
346,211
378,513
416,126
457,543
505,114
570,668
660,437
715,238
746,656
563,240
623,535
960,444
1,245,574
2,081,899
2,814,504
3,358,083
5,235,693
6,245,906
7,432,699
8,676,935
8,966,786
12,484,152
16,627,514
18,087,846
17,925,304
20,639,237
20,357,363
20,522,153
22,915,896
23,127,472
23,307,639
26,602,720
25,068,233
24,767,144
27,374,427
27,339,281
29,955,242
37,453,893
42,924,460
45,333,244
50,197,025
50,057,650
45,529,106

Total Cost
(5)
$

1,809,212
2,286,515
2,685,221
2,969,566
3,097,553
3,413,370
3,905,815
4,507,720
4,855,208
5,220,102
5,445,407
5,664,295
5,989,824
6,614,525
7,270,438
7,948,778
8,738,655
9,608,413
10,607,387
11,984,019
13,869,169
15,020,007
15,679,768
15,184,535
16,461,347
20,033,829
23,353,881
27,967,198
32,672,853
37,038,178
42,670,017
49,241,403
56,716,006
64,425,580
66,944,420
83,680,035
101,687,229
110,514,210
114,010,903
126,168,398
130,162,912
131,615,300
140,168,525
143,199,545
147,834,629
158,366,422
154,537,227
153,802,916
165,232,729
168,101,297
179,080,939
205,355,553
232,918,858
245,691,693
260,341,861
261,420,332
247,009,075

(3) From Appendix 5
(4) From Appendix 4 [Prior to 1973, .05 x (2)]

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 16

APPENDIX 3

INSURED TORT COSTS

Year

Earned Premium

Loss & LAE Ratio

Expense Ratio

Combined Ratio

Insured Tort Costs

(1)

(2)

(3)

(4)

(5)

(6)

1950
1951
1952
1953
1954
1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

$ 1,752,857
2,083,720
2,515,153
2,981,588
3,155,435
3,337,773
3,619,255
4,035,199
4,442,849
4,951,128
5,276,984
5,504,507
5,819,378
6,224,657
6,688,473
7,379,531
8,187,339
8,947,529
9,768,188
10,957,402
12,715,930
14,273,904
15,144,973
14,360,195
14,908,953
16,500,824
20,090,047
24,973,118
28,692,720
31,088,697
32,194,946
32,838,195
34,170,095
36,235,619
39,843,449
50,372,373
68,516,069
78,337,490
81,771,490
83,745,030
87,971,533
89,311,786
92,659,338
96,562,526
101,730,356
105,299,103
108,378,052
110,525,049
113,325,370
111,429,324
113,589,472
124,411,884
140,996,964
161,077,976
173,673,135
179,195,243
181,766,485

Notes:

(2), (6) Last three 0s omitted

64.3%
71.1
69.3
63.2
61.4
64.9
70.1
74.0
72.6
69.9
67.7
67.1
67.3
70.5
73.4
73.5
73.4
74.1
75.6
76.9
77.5
74.1
71.8
74.8
78.5
81.5
77.3
71.4
70.5
73.1
78.7
90.7
101.5
109.2
101.1
102.9
90.7
84.8
83.7
89.7
89.1
87.0
89.9
87.6
85.7
87.6
81.7
77.4
81.2
83.7
87.4
92.5
93.2
83.9
80.2
77.3
69.3

All data reflect direct revenues and costs from
Best’s Aggregates and Averages

34.0%
33.4
32.4
31.6
32.1
32.5
32.7
32.4
31.4
30.6
30.6
30.9
30.8
30.7
30.1
29.1
28.3
28.1
27.8
27.2
26.4
26.1
26.8
27.0
27.7
27.0
25.7
25.0
25.8
26.4
27.1
27.8
28.6
28.6
27.4
25.1
23.3
23.9
24.5
26.1
25.2
26.1
25.2
24.8
24.4
24.9
24.8
25.4
25.9
26.5
26.6
25.0
24.5
24.1
24.6
24.3
24.9
Prior to 1975, medical malpractice is included;
for 1975-2006, it is excluded.
(6) = (2) x (5)

98.3%
104.5
101.7
94.9
93.5
97.4
102.8
106.4
104.1
100.4
98.3
98.0
98.0
101.2
103.5
102.6
101.7
102.3
103.4
104.2
103.9
100.2
98.6
101.8
106.2
108.6
103.0
96.4
96.2
99.5
105.8
118.6
130.0
137.8
128.5
128.0
114.1
108.6
108.2
115.9
114.4
113.1
115.1
112.4
110.1
112.5
106.4
102.7
107.2
110.3
114.0
117.5
117.6
107.9
104.8
101.5
94.2

$ 1,723,059
2,177,633
2,557,353
2,828,158
2,950,051
3,250,829
3,719,824
4,293,067
4,624,008
4,971,526
5,186,101
5,394,567
5,704,594
6,299,547
6,924,227
7,570,265
8,322,529
9,150,869
10,102,273
11,413,351
13,208,732
14,304,768
14,933,112
14,621,296
15,837,813
17,914,909
20,687,521
24,073,405
27,616,588
30,934,883
34,057,943
38,929,780
44,438,093
49,946,629
51,208,738
64,455,656
78,167,587
85,112,183
88,462,814
97,030,370
100,602,676
101,016,143
106,652,899
108,560,517
112,042,831
118,478,058
115,362,594
113,561,713
121,428,366
122,863,786
129,528,854
146,177,700
165,841,657
173,873,885
181,954,952
181,971,396
171,228,466

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 17

APPENDIX 4

COST OF THE U.S. TORT SYSTEM

Comparisons of Personal Lines to Commercial Lines Costs and Impact of Self-Insurance
P ersonal Lines
Year

Insured

Self- (Un)
Insured

(1)

(2)

(3)

1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006

$ 8,521,899
8,921,581
10,336,734
11,609,756
12,902,054
14,381,293
15,985,767
17,084,039
18,892,570
20,828,903
22,945,067
25,615,607
29,695,287
34,460,827
38,092,590
41,783,652
46,424,500
50,967,722
52,338,179
55,274,662
56,164,851
58,857,222
60,222,560
61,414,886
62,097,411
64,995,727
66,807,453
70,866,341
75,245,057
78,405,888
82,522,939
85,077,876
86,731,770
85,645,991

Notes:

2.0%
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0
2.0

Total

(4)
$ 8,695,815
9,103,654
10,547,688
11,846,690
13,165,362
14,674,789
16,312,007
17,432,692
19,278,133
21,253,983
23,413,333
26,138,375
30,301,313
35,164,110
38,869,990
42,636,380
47,371,939
52,007,879
53,406,306
56,402,716
57,311,072
60,058,389
61,451,592
62,668,251
63,364,705
66,322,170
68,170,870
72,312,592
76,780,671
80,006,008
84,207,081
86,814,159
88,501,806
87,393,869

Insured

Commercial Lines
Self- (Un)
Insured

Total

Self- (Un)
Insured

(5)

(6)

(7)

(8)

$ 6,099,397
6,916,232
7,578,176
9,077,764
11,171,351
13,235,295
14,949,116
16,973,905
20,037,210
23,609,190
27,001,563
25,593,130
34,760,369
43,706,759
47,019,592
46,679,161
50,605,870
49,634,954
48,677,963
51,378,237
52,395,666
53,185,609
58,255,497
53,947,707
51,464,302
56,432,639
56,056,333
58,662,514
70,932,643
87,435,769
91,350,946
96,877,076
95,239,627
85,582,475

6.0%
6.0
9.0
10.0
14.0
16.0
16.9
22.4
22.6
22.9
23.3
24.8
25.5
26.7
26.9
26.8
28.0
28.0
28.6
29.8
29.6
29.4
30.3
30.6
31.3
31.6
31.7
32.7
33.6
32.1
32.3
33.3
33.6
33.8

$

6,488,720
7,357,694
8,327,665
10,086,405
12,989,943
15,756,304
17,980,958
21,860,944
25,897,553
30,616,810
35,210,231
34,037,149
46,638,495
59,630,991
64,330,038
63,751,737
70,297,668
68,952,159
68,131,990
73,166,079
74,376,917
75,292,080
83,629,186
77,762,576
74,964,151
82,480,623
82,032,197
87,171,504
106,850,923
128,760,109
135,000,048
145,337,818
143,527,240
129,363,704

$

563,240
623,535
960,444
1,245,574
2,081,899
2,814,504
3,358,083
5,235,693
6,245,906
7,432,699
8,676,935
8,966,786
12,484,152
16,627,514
18,087,846
17,925,304
20,639,237
20,357,363
20,522,153
22,915,896
23,127,472
23,307,639
26,602,720
25,068,233
24,767,144
27,374,427
27,339,281
29,955,242
37,453,893
42,924,460
45,333,244
50,197,025
50,057,650
45,529,106

Last three 0s omitted
(2), (5) From Best’s Aggregates and Averages (excludes medical malpractice)
(3) Based on internal Tillinghast interviews
(4) = (2) / [1.0 – (3)]
(6) Based on various studies estimating the size of the self-insured market and estimates by Tillinghast
(7) = (5) / [1.0 – (6)]
(8) = [(4) – (2)] + [(7) – (5)]

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 18

APPENDIX 5

MEDICAL MALPRACTICE TORT COSTS

Year

Hospital

(1)

(2)

1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Notes:

$

378,619
465,814
567,845
690,917
848,193
1,051,838
1,290,927
1,576,183
1,890,801
2,181,499
2,129,009
2,175,976
2,268,904
2,363,708
2,456,483
2,572,981
2,692,628
2,841,396
2,967,300
3,049,164
3,162,980
3,284,839
3,481,942
3,658,590
3,997,582
4,393,333
4,904,910
5,559,553
5,963,951
6,164,095
6,245,734
6,470,009

Loss and LAE Costs
Physicians
Other
(3)
$

554,171
680,949
875,367
1,084,047
1,363,543
1,690,090
1,998,159
2,350,909
2,772,834
3,272,719
3,418,252
3,433,666
3,581,822
3,757,656
4,013,665
4,468,082
4,966,450
5,481,304
5,863,791
6,322,753
6,796,529
7,364,371
7,917,420
8,656,884
9,528,191
10,579,339
12,093,338
13,437,948
14,787,711
15,637,546
16,519,377
16,858,642

(4)
$

83,951
107,337
140,488
179,693
232,868
300,238
374,557
465,101
574,426
698,675
710,593
718,584
749,467
784,135
828,813
901,947
981,113
1,066,122
1,131,246
1,200,524
1,288,552
1,391,562
1,504,483
1,641,645
1,821,007
2,035,964
2,334,513
2,635,178
2,878,501
3,024,146
3,157,791
3,235,960

$

Total

U/W Expense Ratio

(5)

(6)

(7)

12.2
11.7
12.6
12.8
11.0
9.9
9.9
9.3
9.7
9.1
7.2
8.2
9.8
9.4
14.1
13.7
14.3
11.4
13.5
15.3
15.3
14.6
16.6
15.1
14.3
13.2
11.0
10.4
10.8
11.9
11.8
12.2

$ 1,158,476
1,420,786
1,811,894
2,241,760
2,745,213
3,376,381
4,065,717
4,845,214
5,802,016
6,768,896
6,740,227
6,892,127
7,314,182
7,622,786
8,498,791
9,202,873
10,077,004
10,599,730
11,511,556
12,484,159
13,285,645
14,106,400
15,474,060
16,429,936
17,898,229
19,596,842
21,723,960
24,152,742
26,484,564
28,189,883
29,391,286
30,251,502

1,016,742
1,254,100
1,583,700
1,954,658
2,444,605
3,042,166
3,663,643
4,392,193
5,238,060
6,152,893
6,257,854
6,328,226
6,600,193
6,905,499
7,298,961
7,943,010
8,640,192
9,388,822
9,962,337
10,572,441
11,248,061
12,040,772
12,903,845
13,957,119
15,346,779
17,008,636
19,332,761
21,632,680
23,630,163
24,825,787
25,922,902
26,564,611

Total Cost

Last three 0s omitted
(2), (3), (4) From internal Tillinghast study
(5) = (2) + (3) + (4)
(6) From Best’s Aggregates and Averages; the ratio of underwriting expenses to all losses and expenses combined, multiplied
by 0.90 to reflect lower costs in alternative market. Adjusted downward for 2005 and 2006 due to jump in industry ratio
(7) = (5) / [1.0 – (6)]

© 2007 Towers Perrin

2007 Update on U.S. Tort Cost Trends | 19

ABOUT TOWERS PERRIN

Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial
management. The firm provides innovative solutions in the areas of human
capital strategy, design and management. It also provides solutions in the
areas of risk and capital management, reinsurance intermediary services
and actuarial consulting. The Tillinghast practice of Towers Perrin provides
consulting to the insurance industry.

Towers Perrin has offices and business partner locations in the United
States, Canada, Europe, Asia, Latin America, South Africa, Australia and
New Zealand. More information about Towers Perrin is available at
www.towersperrin.com.

© 2007 Towers Perrin

www.towersperrin.com

 

 

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