U.S. Tort Costs Down in 2006, According to Towers Perrin Study

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December 12, 2007–U.S. tort costs totaled $247 billion in 2006, which is approximately $825 per person and $57 less per person than in 2005, according to the 2007 Update on U.S. Tort Cost Trends from the Tillinghast insurance consulting practice of Towers Perrin. Tort costs declined by 5.5% in 2006, significantly lower than the growth rate of 0.4% in 2005, 6% in 2004 and 5.5% in 2003. The $13.4 billion decrease over tort costs in 2005 marks the first downward trend since 1997. The 2007 report analyzes U.S. tort costs from 1950 through 2006, with projections through 2009.

The 5.5% decline in tort costs was markedly less than overall U.S. economic growth of 6.1%, as measured by gross domestic product (GDP). Since 1950, growth in tort costs has exceeded growth in GDP by an average of 2% to 3%. However, over the last 20 years, the ratio of tort costs to GDP has stayed within a relatively narrow range, at approximately 2%. In 2006, the ratio slipped below 2% for the first time in the last six years.

“In 2006, the modest decline in personal tort costs was combined with a significant drop on the commercial side,� said Russ Sutter, Towers Perrin Principal. “However, given several factors, including the potential fallout from the current subprime loan crisis, we anticipate a reversal in 2007. To put it bluntly, when people lose money, litigation tends to follow.�

U.S. tort cost growth since 1950 far exceeds U.S. population growth. Even after adjusting for inflation, tort costs per capita have risen by a factor of more than nine between 1950 and 2005, but inflation-adjusted tort costs per capita were lower in 2006 than in the prior three years.

Auto Costs Remain Flat

Typically the greatest contributor to overall tort costs, personal auto liability has shown a decrease in the number of reported accidents, and thus a drop in new claims, in recent years. However, there are signs that this trend may not continue.

“Between cell phones, PDAs and MP3 players, today’ s drivers are doing more behind the wheel,� said Sutter. “These distractions may mitigate any claim that as a nation we are becoming safer drivers.�

Impact of Asbestos Lessens

In recent years, specific costs related to asbestos have had a waning impact on overall commercial tort costs. In 2006, insured asbestos losses totaled $1.9 billion, as compared to $7 billion in 2005 and $7.3 billion in 2004.

“The decrease in commercial tort costs in 2006 is partly attributable to asbestos, but there are cases still active that will determine if the downward movement will continue,� said Sutter.

Medical Malpractice Costs Remain Stable

For 2006, medical malpractice tort costs totaled $30.3 billion, up from $29.4 billion in 2005. According to Tillinghast, since 1975, medical malpractice costs have increased at an annual rate of 11.1% versus 8.2% for all other tort costs.

“Medical malpractice figures have been very stable the last few years — possibly a reflection of reforms enacted by several states,â€? said Sutter.

Future Implications

Looking ahead, Tillinghast anticipates growth of U.S. tort costs to be 2.5% in 2007, with slightly higher growth of 4.5% for the following two years.

A variety of factors may have an effect on the growth of tort costs in the near future, including:

whether the declining frequency of auto accidents has bottomed out
how the recent state-level medical malpractice reforms from the past few years will affect the moderation of recent trends, particularly as Illinois tort reform was ruled by a judge to be unconstitutional last month
whether the deterioration in the subprime mortgage market in 2007 will lead to lawsuits from both investors in select financial institutions and homeowners holding mortgages from those financial institutions
the outcome of current asbestos litigation and impact on reserve amounts
potential for litigation against companies related to spotlight issues like global warming and childhood obesity.

“Looking at the list, several of the issues that will impact future trends in tort costs — from subprime mortgages to global warming to backdating of options — were not even a consideration a decade ago. Yet these factors and their prospect for continued and new lawsuits have the potential to make a major impact on overall costs in 2007 and beyond,â€? said Sutter.

Methodology

The methodology used in Tillinghast’ s report incorporates three cost components: benefits paid or expected to be paid to third parties (losses), defense costs and administrative expenses. Administrative expenses are identified separately in the report. While Tillinghast outlines why these are a real cost of the tort system, it takes no position on the efficiency of the insurance industry’ s administrative expenses.

Tillinghast has not included costs incurred by federal and state court systems in administering actual suits. Certain indirect costs are also omitted, such as those associated with litigation avoidance.The 2007 Update on U.S. Tort Cost Trends is the 11th study of U.S. tort costs published by the Tillinghast business of Towers Perrin. The 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, such as a systematic resolution of disputes, and the study makes no conclusion that the costs of the U.S. tort system outweigh the benefits or vice versa. The report is conducted entirely by Tillinghast; it is not funded or subject to approval by any outside organization. The report is available at www.towersperrin.com/tillinghast.

About Towers Perrin and Tillinghast

Towers Perrin is a global professional services firm that helps organizations improve their performance through effective people, risk and financial management. Through the Tillinghast line of business, Towers Perrin provides consulting and software solutions to insurance and financial services companies and advises other organizations on risk financing and self-insurance. Tillinghast helps clients improve business performance in areas related to their financial, risk, product, distribution and capital issues. The firm’ s other businesses are the Human Capital Group, which provides human resource consulting, and Reinsurance, which provides reinsurance intermediary services. Together these businesses have 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.
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