Adapting to an Ever-Changing and Risky World of Tort Liability
Delve into the world of tort liability, examining the dynamics of liability insurance markets in major economies such as the US, UK, and more. Explore the growth of general liability claims relative to GDP and the impact of economic trends on claim costs. Gain insights into the evolving landscape of non-life insurance loss reserves and projections for future claim cost growth post-crisis.
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Adapting to an Ever-Changing and Risky World of Tort Liability American Bar Association Magna Carta 800 Conference London, UK 12 June 2015 Download at www.iii.org/presentations Robert P. Hartwig, Ph.D., CPCU, President & Economist Insurance Information Institute 110 William Street New York, NY 10038 Tel: 212.346.5520 Cell: 917.453.1885 bobh@iii.org www.iii.org
How Big Are Liability Insurance Markets in Major Economies? The US and UK have the highest shares of liability premiums relative to GDP Premiums & GDP (USD billions) Percentage Shares Liability/Total Non-Life Rank Liability Total Non-Life Liability/GDP GDP 16'802 2'521 3'713 2'750 4'964 1'823 2'073 1'506 9'345 1'361 46'900 84.0 9.9 7.8 6.8 6.0 5.2 5.0 4.8 3.5 2.2 135 531.2 99.2 90.4 83.1 81.0 50.5 47.6 32.7 105.5 31.0 1'150 15.8% 10.0% 8.7% 8.2% 7.3% 10.3% 10.6% 14.8% 3.3% 7.0% 11.8% 0.50% 0.39% 0.21% 0.25% 0.12% 0.29% 0.24% 0.32% 0.04% 0.16% 0.29% 1 2 3 4 5 6 7 8 9 US UK Germany France Japan Canada Italy Australia China Spain Top 10 Liability premiums in China account for a much smaller share of GDP 10 World 160 1'550 61'700 10.3% 0.26% Liability insurance premiums totaled $160 billion in 2013, accounting for 0.26% of global GDP. This also equates to 10% of global non-life premiums and 23% of global commercial lines premiums 2 Source: Swiss Re, sigma, 4/2014.
General Liability Claims Incurred as a Percent of GDP Traditionally, liability claims grow faster than GDP. General liability claims incurred as a % of GDP 0.5% The decline in claims began in 2004 and was revealed by a turn in the reserves cycle. Improved safety reduced the frequency of claims. 0.4% 0.3% After 2008, underlying claims trends slowed down due to the global recession. 0.2% The question is whether economic drivers of claims costs have begun to accelerate in the US and some other countries. ? 0.1% US [1] Canada [1] UK [1] Germany France Italy 0.0% If historical trends re-emerge, then claims trends are likely to rise with stronger economic growth and at a pace greater than that of overall GDP 1975 1980 1985 1990 1995 2000 2005 2010 Question as to what will happen when the current period of reserve releases runs its course Source: Swiss Re, sigma 4/2014; Insurance Information Institute. 3
US Non-Life Insurance Loss Reserve Development, 1992 2016E* Reserve releases are expected to gradually taper off, but will continue to benefit the bottom line and combined ratio through at least 2016 Reserve Change Source: A.M. Best; Barclays research for estimates.
Some Expect Higher Claim Cost Growth to Resume in Post-Crisis Era US, Canada, and the UK have the highest GDP forecasts; France and Italy the lowest. Range of Expected Liability Claims Growth (2014- 20) vs historic growth (2007-12) 8% 6% 4% The UK and France have historically shown low growth of claims in relation to GDP. 2% 0% -2% -4% Canada and Germany have historically high correlations of claims growth to wage and CPI inflation. Historic growth (2007-2012) Expected claims growth (2014-2020) Source: Swiss Re, sigma 4/2014 5
Post-Crisis Question: Will Long-Run Pre-Crisis (1975-2007) Growth Trends Re-Emerge? Liability claims grew faster than the general economy (measured by GDP) Prior to the financial crisis (1975-2007), general liability claims rose roughly 1% for every 1% rise in GDP in the UK and France and 1.4% in Canada and Italy. The US and Germany ranked in between. This was also substantially faster than CPI inflation In the US, for example, general liability claims rose 1.9% for every 1% rise in CPI Multi-year trends in claims growth are correlated with: Medical expenditure growth (highly) in the US Consumer price and wage inflation in European countries 6
US Medical Cost Inflation vs. Overall Consumer Price Index (CPI), 1995 2014* Medical cost inflation has moderated substantially in recent years 5% 4% 3% 2% Average Annual Growth Average 1995 2014 Healthcare: 3.7% Total Nonfarm: 2.4% 1% 0% Change in Medical Cost Inflation CPI-All Items -1% 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 Sources: US Bureau of Labor Statistics; Insurance Information Institute.
US National Health Care Expenditures as a Share of GDP, 1965 2022F* % of GDP Current Period 20% { Health care expenditures as a share of GDP rose from 5.8% in 1965 to 18.0% in 2013 and are expected to reach 19.9% of GDP by 2022 18% 2022 19.9% 16% 2010: 17.9% 14% 12% 2000: 13.8% 10% 1990: 12.5% Since 2009, heath expenditures as a % of GDP have flattened out at about 18%--the question is why and will it last? 8% 6% 1980: 9.2% 4% 1965 5.8% 2% 0% 65 66 67 68 69 70 71 72 73 74 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 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics- Trends-and-Reports/NationalHealthExpendData/NationalHealthAccountsProjected.html accessed 3/14/14; Insurance Information Institute.
US Tort Cost Trends: 1933-Current Era Examination of Long-Term Escalation of Tort Costs and Evidence of a Bending in the Cost Curve 9 9
Tort Costs: Rising for Eight Decades Growth in Tort Costs, Current (Nominal) Dollars,1933-2011 300 250 2011 (est.): $253 billion (770 times more than 1933) 200 Billions of Dollars 150 A clear flattening of tort cost has occurred in recent years after 7 decades of increases 100 50 1933: $343 million 1961 2005 2007 1933 1935 1937 1939 1941 1943 1945 1947 1949 1951 1953 1955 1957 1959 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2009 2011 * * Projected Sources: Trends in Tort Costs, Towers Watson; Insurance Information Institute. 10
Over the Last Three Decades, Total Tort Costs as a % of GDP Appear Somewhat Cyclical, 1980-2013E ($ Billions) $300 2.50% Tort Sytem Costs Tort Costs as % of GDP 2.21% of GDP in 2003 = pre-tort reform peak $250 Tort Costs as % of GDP 2.25% Deepwater Horizon Spike in 2010 $200 Tort System Costs $150 2.00% $100 1.75% 1.68% of GDP in 2013 Tort costs in dollar terms have remained high but relatively stable since the mid-2000s., but are down substantially as a share of GDP $50 $0 1.50% 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12E Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A 11
The Nations Judicial Hellholes: 2014/2015 (Are Now Fewer in Number) Illinois Watch List West Virginia Madison County Atlantic County, New Jersey Mississippi Delta Montana Nevada Newport News, Virginia Philadelphia, Pennsylvania California Dishonorable Mention New York City Asbestos Litigation AL Supreme Court PA Supreme Court Florida Source: American Tort Reform Association; Insurance Information Institute 12
Commercial Lines Tort Costs: Insured vs. Self-(Un)Insured Shares, 1973-2010 Percent 2010: $138.1B 56.6% insured, 44.4% self-(un)insured (distorted by Deepwater Horizon event with most losses retained by BP) 100% 90% 80% 70% 1973: 94% was insured, 6% self- (un)insured 1985:74.5% insured, 25.5% self- (un)insured 60% 2005: 66.4% insured, 33.6% self- (un)insured 1995: 69.5% insured, 30.5% self- (un)insured 50% 40% 30% Self (Un) Insured Share Insurer Share 20% 10% 0% 73747576 7778798081828384 85868788899091 92939495969798 9900010203040506 07080910 Commercial Risks Are More Comfortable Retaining Tort Risks. The Question is Why? Sources: Towers Watson, 2011 Update on US Tort Cost Trends, III Calculations based on data from Appendix 4. 13 13
List of Emerging Risks Future Tort Cost Drivers is Endless New Risks Emerge Every Day Can They Be Contained and Managed? 14 14
A Few Concerns Return of Historical Tort Cost Trends Based on Historical Cost Drivers Reversal of Current Favorable Loss Development in Casualty Line Emergence of New Risks Fracking Cyber Risk Autonomous Vehicles GMOs New Generation of Environmental Risks Climate Change Litigation Reversal/Erosion of Tort Reforms in US Export of Mass Tort/Class Action/Collective Redress to Europe, Asia Third-Party Financing of Litigation Old Issues: Asbestos, Hurricane Katrina, Hurricane Sandy (flood litigation) 15
Data Breaches 2005-2014, by Number of Breaches and Records Exposed # Data Breaches/Millions of Records Exposed Millions 222.5 783 800 220 200 700 662 656 619 180 600 160 498 140 500 127.7 447 446 120 419 87.9 85.6 100 400 66.9 321 80 300 35.7 60 22.9 40 16.2 19.1 17.3 200 157 20 100 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 # Data Breaches # Records Exposed (Millions) The Total Number of Data Breaches Rose 28% While the Number of Records Exposed Was Relatively Flat (-2.6%) 16 * 2014 figures as of Jan. 12, 2014 from the ITRC. Source: Identity Theft Resource Center.
Data/Privacy Breach: Many Potential Costs Can Be Insured Costs of notifying affecting individuals Costs of notifying regulatory authorities Defense and settlement costs Data Breach Event Regulatory fines at home & abroad Lost customers and damaged reputation Forensic costs to discover cause Cyber extortion payments Business Income Loss 17 Source: Zurich Insurance; Insurance Information Institute
Insurance Information Institute Online: www.iii.org Thank you for your time and your attention! Twitter: twitter.com/bob_hartwig Download at www.iii.org/presentations 18
