Liability Trends, Issues
and Jury Verdicts:
Liability & Excess Casualty
Markets in the Post-Katrina World
Insurance Information Institute
October 20, 2006
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  bobh@iii.org  www.iii.org
Presentation Outline
•
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•
•
•
•
•
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•
•
P/C Financial Overview & Outlook: Post-Katrina Perspective
Profitability
Underwriting Performance
Mega-CATS: Post-Katrina Casualty Spillover?
TRIA Extension
Investments
Capacity/Capital: New & Old
Pricing Trends
Financial Strength & Ratings
Legal Liability & Tort System




Overview of Tort System Costs & Jury Awards & Trends
By-Line Issues
The High Cost of Litigation & Class Actions
Excess Casualty Capacity & Pricing
• Q&A
POP QUIZ
•
P/C insurer profits in 2006
a)
b)
c)
d)
•
$25-$35 billion
$35-$45 billion
$45-$55 billion
$55-$60+ billion
Insurers will generate their lowest combined
ratio since:
a)
b)
c)
d)
Since the Woodrow Wilson was president
Since Dwight D. Eisenhower was president
Since Jimmy Carter was president
Since Ronald Reagan was president
P/C PROFIT
OVERVIEW
Awash in Profits,
Starved for Growth
P/C Net Income After Taxes
1991-2006E ($ Millions)*
$70,000
$60,000
$50,000
2001 ROE = -1.2%
2002 ROE = 2.2%
2003 ROE = 8.9%
2004 ROE = 9.4%
2005 ROE= 10.5%
2006 ROAS1,2 = 13.0%
2006 Net Income
may shatter
previous records
$43,013
$38,501
$36,819
$30,773
$40,000
$30,000
$20,000 $14,178
$10,000
$19,316
$24,404
$20,598
$56,668
$30,029
$21,865
$20,559
$10,870
$5,840
$3,046
06F
05
04
03
-$6,970
01
00
99
98
97
96
95
94
93
92
91
-$10,000
02
$0
*ROE figures are GAAP; 1Return on avg. surplus. 2005 ROAS = 9.8% after adj. for one-time special
dividend paid by the investment subsidiary of one company. 2Based on H1 results; Sources: A.M. Best,
ISO, Insurance Information Inst.
ROE vs. Equity Cost of Capital:
US P/C Insurance:1991-2006E
18%
The p/c insurance industry
achieved its cost of capital in 2005
16%
+5.9 pts
14%
12%
6%
4%
+1.0 pts
-13.2 pts
8%
+0.2 pts
-9.0 pts
10%
04
05
US P/C insurers missed their
cost of capital by an average
6.7 points from 1991 to 2002,
but on target 2003-05
2%
0%
-2%
-4%
91
92
93
94
95
96
97
98
*Based on 2006:H1 ROAS of 13.0%
Source: The Geneva Association, Ins. Information Inst.
99
00
01
02
ROE
03
06E
Cost of Capital
ROE: P/C vs. All Industries
1987–2006:H1
20%
Insurers will outperform only
if CAT losses are “normal”
2004/5 ROEs excl. hurricanes
15%
10%
Sept. 11
5%
Hugo
Katrina,
Rita, Wilma
Lowest CAT
losses in 15 years
0%
Andrew
Northridge
4 Hurricanes
-5%
87
88
89
90
91
92
US P/C Insurers
93
94
95
96
97
98
All US Industries
*2006 P/C insurer ROE based on annualized H1 results.
Source: Insurance Information Institute; Fortune
99
00
01
02
03
04
05 06*
P/C excl. Hurricanes
WALL STREET:
MAINTAINING THE
CONFIDENCE OF WALL
STREET IS CRITICAL FOR
MANY INSURERS
Change in YTD Stock Performance by
Sector Pre- & Post-Katrina/Rita/Wilma
4.9%
5.0%
2.9%
2.8%
2.6%
3.4%
3.2%
2.2%
-1.3%
-5.6%
-5.6%
-5.3%
-6.0%
Wilma landfall
Oct. 24
-6.2%
3.9%
4.8%
3.3%
2.1%
2.7%
3.6%
-5.8%
-4.5%
Rita comes
ashore Sept. 24
-5.7%
2.2%
-0.6%
-2.7%
-4.8%
-4.1%
-5.5%
-10%
-3.5%
-6.4%
-5%
-4.0%
-5.5%
0%
-5.3%
3.8%
4.5%
4.0%
5%
4.2%
10%
2.5%
1.9%
Katrina:
Aug. 29
13.3%
15%
9.3%
Brokers
-0.5%
Reinsurers
8.7%
7.0%
P/C
P/C & reinsurer stocks hurt but now fully
recovered. Brokers rose on expectation of
tighter conditions and demand for broker
services; closure of Spitzer issues.
5- 12- 19- 26- 29- 16- 23- 30- 7- 14- 21- 28- 04- 31Aug Aug Aug Aug Sep Sep Sep Sep Sep Oct Oct Oct Oct Nov Dec
Source: SNL Securities; Insurance Information Institute
P/C Insurance Stocks: Slow
Start, Strong Finish in 2006
Total YTD Returns Through September 30, 2006
P/C insurer stocks now
up in 2006. Investors
less worried about
potential hurricane
losses.
S&P 500
7.01%
8.91%
9.09% Reinsurers
6.84%
P/C
2.69%
1.15%
-4.73%
-10.0%
-5.0%
Life/Health
0.0%
All Insurers
Broker stocks
hurt by weak
earnings
5.0%
Source: SNL Securities, Standard & Poor’s, Insurance Information Institute
10.0%
Multiline
Brokers
UNDERWRITING
Surprisingly Strong in
2005, Stage is Set for a
Good 2006!
P/C Industry Combined Ratio
120
115.8
110
2005 figure reflects heavy
use of reinsurance which
lowered net losses, but still
a substantial deterioration
from first half 2005
2006 is could
produce the best
underwriting
result since the
94.9 combined
ratio in 1955
107.4
100.7
100.1
100
98.3
94
92.7
92.0
90
01
02
03
04
05H1
Sources: A.M. Best; ISO, III. *III forecasts/estimates for 2006 full year.
05
06H1
06F III
Forecast*
03
04
111.1
112.3
109.7
110.2
96
100
105.1
105
103.9
107.6
110
110.2
112.5
115
110.3
120
102.5
125
Outside CATaffected lines,
commercial
insurance is doing
fairly well. Caution is
required in
underwriting longtail commercial lines.
102.0
122.3
Commercial Lines Combined
Ratio, 1993-2006E*
2006 results will benefit from
relatively disciplined underwriting
and low CAT losses
95
90
85
93
94
95
96
97
Source: A.M. Best; Insurance Information Institute
98
99
00
.
01
02
05
06F
$30
$25
$20
$15
$10
$5
$0
($5)
($10)
($15)
($20)
($25)
($30)
($35)
($40)
($45)
($50)
($55)
Insurers sustained a $5.9 billion underwriting loss in
2005. First half 2006 underwriting gain was $15.1B
implying a record gain of about $30B for full-year
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
$ Billions
Underwriting Gain (Loss)
1975-2006F*
Source: A.M. Best, Insurance Information Institute *2006F of $30.2B is annualized H1 gain of $15.1B
A 100 Combined Ratio Isn’t What it
Used to Be: 95 is Where It’s At
Combined Ratio
15.9%
105
Combined Ratio
14.3%
100.6
100
18%
ROE*
16%
15.3%
100.7
100.1
98.3
97.5
14%
13.0%
95
90
Combined ratios
today must be below
95 to generate
Fortune 500 ROEs 9.4%
92.7
9.4%
92.0
10.4%
12%
10%
85
8%
80
6%
1978
1979
2003
2004
* 2006 figure is return on average statutory surplus.
Source: Insurance Information Institute from A.M. Best and ISO data.
2005:H1
2005
2006:H1
Retrun on Equity*
110
Impact of Reserve Changes on
Combined Ratio
6.5
$22.7
$0
3
1.9
$0.4
2000
2001
2002
2003
2004
Source: A.M. Best, Lehman Brothers for years 2005E-2007F
2
1.1
2005E
$5.0
0.1
4
$8.0
$5
5
2.4
$13.9
$10
6
3.6
3.5
$9.9
$15
7
Reserve adequacy
is improving
substantially
$20
$10.8
Reserve Development ($B)
$25
Combined Ratio Points
0.4
2006E
2007E
1
$2.0
0
Combined Ratio Points
PY Reserve Development
2004 Prior Year Reserve
Development by Line ($ Millions)
($799)
($1,156)
($1,686)
($1,779)
Special Prop.
Homeowners
PP Auto
Auto PD
($617)
($103)
($27)
$27
$148
$241
$850
$1,109
$1,729
$2,118
$3,513
$6,320
Reserve
Strengthening
Source: A.M. Best, Lehman Brothers.
Other
Special Liab.
Finl. Guaranty
International
Med Mal
Comml. Auto
Fidelity/Surety
Comml. MP
Prod. Liab.
Work. Comp
Reinsurance
Reserve Releases
Other Liability
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
($1,000)
($2,000)
($3,000)
Longer-tail casualty
coverages have been
the source of most
reserve problems in
recent years
REINSURANCE
MARKETS
Higher Reinsurance Costs
Squeezing Insurers, Pushing
Property CAT Prices Upward
Global Number of
Catastrophic Events, 1970–2005
250
200
The number of natural
and man-made
catastrophes has been
increasing on a global
scale for 20 years
Record 248 manmade CATs &
record 149 natural
CATs in 2005
150
100
50
Natural catastrophes
Man-made disasters
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
0
Man-made disasters: without road disasters. Source: Swiss Re, sigma No. 1/2005 and 2/2006.
Combined Ratio:
Reinsurance vs. P/C Industry
Reinsurance
All Lines Combined Ratio
259.0
270
Katrina,
Rita, Wilma
250
Sept. 11
4 Florida
Hurricanes
210
00
100.7
99
123.3
98
98.3
97
125.8
107.4
100.5
105.9
96
115.8
100.8
101.9
94
106.5
110.1
104.8
106.0
93
114.3
108.0
113.6
108.5
119.2
106.7
110
Hurricane
Andrew
105.0
106.9
130
110.5
108.8
150
126.5
115.8
170
162.4
190
111.0
100.1
230
90
91
92
95
01
02
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
03
04
05
Share of Losses Paid by
Reinsurers, by Disaster*
70%
60%
50%
40%
30%
Reinsurance is playing
an increasingly
important role in the
financing of megaCATs; Reins. Costs are
skyrocketing
30%
25%
60%
45%
20%
20%
10%
0%
Hurricane Hugo Hurricane Andrew
Sept. 11 Terror
2004 Hurricane
2005 Hurricane
(1989)
(1992)
Attack (2001)
Losses
Losses
*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer,
which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at
$3.85 billion for 2004 and $4.5 billion for 2005.
Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.
Reinsurance Prices Surged in 2006
Following Record CATs in 2005
40%
In hurricane-prone
areas, property CAT
reinsurance prices
are up 100-300%+
US cat reinsurance price index:
1994 = 100
125
30%
25%
100
21%
20%
16%
75
11%
10%
2%
50
0%
-4%
-5%
-10%
-11%
-4%
-9% -8%
-6%
25
0
-20%
94
95
96
97
98
99
'00 '01 '02 '03 '04 05E 06F
rate changes [left]
Sources: Swiss Re, Cat Market Research; Insurance Information Institute estimate for 2006.
index level [right]
A Look Ahead to Reinsurance
Markets for 2007
• Despite lack of major hurricane in 2006, reinsurance
pricing strong in US for 2007
 New capital entry not sufficient to fully meet demand
 Reinsurance prices flat at best outside peak CAT zones
• Retrocessional market still tight
• Softening in European p/c reinsurance markets
• Softening in US casualty reinsurance markets
 More pronounced if property cat reinsurers shift emphasis
• Capital market role expanding
 Hedge funds, private equity
 Securitization: Insurance Linked Securities
 Some concern over staying power, (lack of) regulation
 Complement or competitor to traditional reinsurance?
Sources: Insurance Information Institute.
Summary of Nonadmitted &
Reinsurance Reform Act (HR 5637)
• NRRA Passed by House 9/28/06 by unanimous 417-0
vote; Senate prospects uncertain.
• Gives exclusive regulatory authority to insured’s home state for
placement of nonadmitted insurance
• Establish uniform system for collection/allocation of premium
tax obligations related to nonadmitted insurance
• Estabishes uniforms standards for surplus lines eligibility
• Pre-empts state diligent search requirements for sophisticated
commercial buyers
• Makes ceding insurer’s state of domicile the single point of
regulation with respect to credit for resinsurance
• Prevents states from applying laws in extra-territorial manner
• Creates uniformity in reinsurer solvency regulation based on
NAIC accreditation requirements
Source: LeBoeuf, Lamb, Greene & MacRae LLP, Oct. 4, 2006.
UNDERWRITING
AFFECTS FINANCIAL
STRENGTH
Is There Cause
for Concern?
Reasons for US P/C Insurer
Impairments, 1969-2005
2003-2005
Affiliate
Problems
8.6%
Catastrophe
Losses
8.6%
1969-2005
Deficient
Loss
Reserves/Inadequate
Pricing
62.8%
Deficient
Loss
Reserves/Inadequate
Pricing
38.2%
Investment
Problems*
7.3%
Alleged
Fraud
11.4%
Rapid
Growth
8.6%
Reinsurance
Sig. Change
Failure
in Business
3.5%
4.6%
Misc.
9.2%
Deficient
reserves,
CAT losses
are more
important
factors in
recent years
Affiliate
Problems
5.6%
Catastrophe
Losses
6.5%
Alleged
Fraud
8.6%
Rapid
Growth
16.5%
*Includes overstatement of assets.
Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;
Historical Ratings Distribution,
US P/C Insurers, 2000 vs. 2005
2000
C/CC++/C+ 0.6%
1.9%
B/B6.9%
D
0.2%
E/F
2.3%
2005
A++/A+
11.5%
Vulnerable*
12.1%
B++/B+
26.4%
B++/B+
28.3%
A/A48.4%
A++/A+
shrinkage
A++/A+
9.2%
Ratings agencies increasing
emphasis on multiple
eventsrequire more capital
A/A52.3%
Source: A.M. Best: Rating Downgrades Slowed but Outpaced Upgrades for Fourth Consecutive Year, Special Report,
November 8, 2004 for 2000; 2006 Review & Preview for 2005 distribution. *Ratings ‘B’ and lower.
Ratings Agencies Tightening
Requirements for CATs
2006 SRQ CAT Model Reqs.*
•All Property Exposure
•Auto Physical Damage
•Reinsurance Assumed
•Pools & Assessments
•All Flood Exposure
•WC Losses from Quake
Best currently
•Fire Following estimates
PML for
wind & 250•Storm Surge 100-yr.
yr. quake to
capital
•Demand Surge determine
adequacy
•Secondary Uncertainty
*SRQ = Supplemental Rating Questionnaire
Source: A.M. Best Review & Preview, January 2006.
ALSO “A.M. Best will
perform additional
“stress-tested” riskadjusted capital analysis
for a second event in
order to determine the
potential financial
condition of an entity post
a severe event.”
IMPLICATION: Some
insurers may be required
to carry more capital to
maintain the same rating.
COMPETITIVE
PRESSURE
Non-CAT Pricing
Momentum Slows
Strength of Recent Hard Markets
by NWP Growth*
25%
1975-78
1984-87
2001-04
2006-2010 (post-Katrina)
period could resemble 1993-97
(post-Andrew)
20%
15%
10%
5%
0%
-5%
2005: biggest real drop in
premium since early 1980s
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
2006F
2007F
2008F
2009F
2010F
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
*2006-10 figures are III forecasts/estimates. 2005 growth of
0.4% equates to 1.8% after adjustment for a special one-time
transaction between one company and its foreign parent. 2006
figure of 2.9% is based on 2006:H1 data.
Property Catastrophe Price Index*
1994 - 2006
US CAT prices are
continue to rise faster
than anywhere else in
the world
120
100
80
60
40
Worldwide
US
European Storm
Rest of the World
20
0
94
95
96
97
98
99
00
01
02
03
*Insurance Information Institute figure of 13.8% for 2005 based estimated 2005 DPE of $417.7B
and insured CAT losses of $57.7B. Includes primary and reinsurance coverage.
Sources: ISO, A.M. Best, Swiss Re Economic Research & Consulting; Insurance Information Institute.
04
05
06
Average Commercial Rate Change,
All Lines, (1Q:2004 – 3Q:2006)
0%
-0.1%
-2%
-4%
-6%
-8%
Magnitude of rate
decreases has diminished
greatly since mid-2005 but
is growing again
-3.2%
-2.7%-3.0%
-4.6%
-5.9%
-7.0%
-5.3%
-8.2%
-10%
-9.4%-9.7%
-12%
1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Average Commercial Rate
Change by Line
Commercial accounts
trended downward from
early 2004 to mid-2005
though that trend
moderated post-Katrina
Source: Council of Insurance Agents & Brokers
Average Commercial Rate
Change by Account Size
Accounts of all sizes
are renewing
downward and more
quickly than in 06Q2
Source: Council of Insurance Agents & Brokers
Percent of Commercial Accounts Renewing
w/Positive Rate Changes, 2nd Qtr. 2006
80%
70%
Commercial Property
Business Interruption
71%
Largest increases for Commercial
Property & Business Interruption are
in the Southeast, smallest in Midwest
63%
60%
48%
50%
40%
32%
35%
28%
30%
21%
20%
21%
12%
10%
Northeast
Midwest
10%
0%
Southeast
Southwest
Pacific NW
Source: Council of Insurance Agents and Brokers
Commercial Accounts Rate Changes,
2nd Qtr. 2005 vs. 2nd Qtr. 2006
10%
2Q05
2Q06
9.3%
Only commercial
property is
renewing up in 2006
5%
0%
-5%
-10%
-15%
-4.5%
-6.0%
-3.6%
-6.9%
-7.3%
-5.6%
-9.1%
-2.3%
-6.6%
-8.4%
-13.3%
Commercial Workers Commercial General Umbrella Average
Auto
Comp Property Liability
Source: Council of Insurance Agents and Brokers
Commercial Accounts Rate Changes,
2nd Qtr. 2006 vs. 3rd Qtr. 2006
10%
8%
6%
4%
2%
0%
-2%
-4%
-6%
-8%
2Q06
3Q06 9.3%
Even commercial
property is now
renewing down in 2006
-1.4%
-4.5%
-6.5%
-6.8%
-6.9%
-2.3%
-5.6%
-6.9%
-3.6%
-5.5%
-5.4%
Commercial Workers Commercial General Umbrella Average
Auto
Comp Property Liability
Source: Council of Insurance Agents and Brokers
Average Rate Increase/Decrease
by Industry Class
September 2005
10%
5%
August 2006
7%
5%
Largest increases are
in the energy
4% sector
0%
0%
1%
0%
0%
-1%
-3%
-5%
-10%
-2%
-4%
-5%
-6%
-8%
Energy
Source: MarketScout.com
Contracting Public Entity Transport. Habitational
Service Manufacturing
CATASTROPHE
LOSS
MANAGEMENT
Insurers Have Done a Fairly Good
Job at Managing CAT Risk
$61.8
$6.2
$27.5
$12.9
$4.6
00
$5.9
$8.3
99
$26.5
$10.1
$2.6
97
98
$7.4
96
$4.7
91
$8.3
$2.7
90
95
$7.5
89
$40
$16.9
$60
$5.5
$80
$22.9
2005 was by far the worst
year ever for insured
catastrophe losses in the US,
but the worst has yet to come.
$100
$20
$100 Billion
CAT year is
coming soon
$ Billions
$120
$100.0
U.S. Insured
Catastrophe Losses ($ Billions)*
*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. ** As of Sept. 30, 2006.
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. Non-prop/BI losses = $12.2B.
Source: Property Claims Service/ISO; Insurance Information Institute
20??
06**
05
04
03
02
01
94
93
92
$0
Insured Loss & Claim Count for
Major Storms of 2005*
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
Claims
Hurricanes Katrina,
Rita, Wilma & Dennis
produced a record 3.3
1,047
million claims
1,744
$40.6
383
104
$1.1
Dennis
$10.3
$5.0
Rita
Wilma
Katrina
Size of Industry Loss ($ Billions)
*Property and business interruption losses only. Excludes offshore energy & marine losses.
Source: ISO/PCS as of June 8, 2006; Insurance Information Institute.
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Claims (thousands)
Insured Loss ($ Billions)
Insured Loss
2005 Was a Busy, Destructive, Deadly
& Expensive Hurricane Season
All 21 names
were used for the
first time ever, so
Greek letters
were used for the
final storms
Source: WeatherUnderground.com, January 18, 2006.
2005 set a new record for the
number of hurricanes &
tropical storms at 28, breaking
the old record set in 1933.
2006 Hurricane Season:
Much Less Active Than Expected
What a difference a
year makes! Just 9
named storms
through Oct. 20,
2006 vs. 22 as of
same date in 2005!
Source: WeatherUnderground.com, October 20, 2006.
TRIA
EXTENSION
The Burden Grows, and the
Clock is Ticking
Terrorism Coverage Take-Up
Rate Continues to Rise
Terrorism take-up rate for
non-WC risk rose steadily
through 2003, 2004 and 2005
64%
59%
54%
48% 47%
46%
44%
44%
33%
24%
26%
TAKE UP RATE FOR WC
COMP TERROR
COVERAGE IS 100%!!
03Q2 03Q3 03Q4 04Q1 04Q2 04Q3 04Q4 05Q1 05Q2 05Q3 05Q4
Source: Narketwatch: Terrorism Insurance 2006, Marsh, Inc.; Insurance Information Institute
Insurance Industry Retention
Under TRIA ($ Billions)
$35
$30
$ Billions
$25
$20
•Individual company
retentions rise to 17.5%
in 2006, 20% in 2007
•Above the retention,
federal govt. pays 90% in
2006, 85% in 2007
Extension
$27.5
$25.0
$15.0
$15
$12.5
$10.0
Congress &
Administration
want TRIA dead
$10
$5
$0
Year 1
(2003)
Year 2
(2004)
Source: Insurance Information Institute
Year 3
(2005)
Year 4
(2006)
Year 5
(2007)
Insured Loss Estimates:
Large CNBR Terrorist Attack ($ Bill)
Type of Coverage
Group Life
General Liability
Workers Comp
Residential Prop.
Commercial Prop.
Auto
TOTAL
New York
Washington
San
Francisco
Des
Moines
$82.0
$22.5
$21.5
$3.4
14.4
2.9
3.2
0.4
483.7
126.7
87.5
31.4
38.7
12.7
22.6
2.6
158.3
31.5
35.5
4.1
1.0
0.6
0.8
0.4
$778.1
$196.8
$171.2
$42.3
Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April
26, 2006.
Insured Loss Estimates:
Truck Bomb Terrorist Attack ($ Bill)
Type of Coverage
New York
Washington
San
Francisco
Des
Moines
$0.3
$0.2
$0.3
$0.1
General Liability
1.2
0.4
0.7
0.2
Workers Comp
3.5
2.8
3.9
1.5
Residential Prop.
0.0
0.0
0.0
0.0
Commercial Prop.
6.8
2.1
3.9
1.2
Auto
0.0
0.0
0.0
0.0
$11.8
$5.5
$8.8
$3.0
Group Life
TOTAL
Source: American Academy of Actuaries, Response to President’s Working Group, Appendix II, April
26, 2006.
Potential Insured Losses from Terrorist
Attack on Major Corporate HQ
in Houston* ($Billions)
Liability,
$1.0
Life, $0.5
Potential losses in
TX are large
Workers
Comp, $4.6
Property,
$3.9
*Break down is based on $10 billion loss estimate.
Range of estimates is $10 - $12 billion.
Source: RMS.
Surplus Under TRIA/TRIEA
Covered Lines
(Billions of Dollars)
$175
$170
$169
$ Billions
$165
$160
$155
Shrinkage in 2006 (-11%)
surplus is due to elimination
of several lines covered under
TRIA though 2005 but
dropped under the Act’s
extension effective 1/1/06
$151
$150
$145
$140
2004
2006E
*2006 figure uses 2005 estimated year-end surplus and premiums by line as basis for calculations.
Source: Insurance Information Institute.
INVESTMENTS
Does Investment
Performance Affect
Discipline?
Net Investment Income
$50
$ Billions
$40
$30
Growth History
2002: -1.3%
$20
2003: +3.9%
2004: +3.4%
$10
2005: +23.7%**
2006H1***: - 3.5%
$0
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
Source: A.M. Best, ISO, Insurance Information Institute;
**Includes special dividend of $3.2B. Increase is 15.7% excluding dividend. ***Annualized H1:06 figure.
Total Returns for Large Company
Stocks: 1970-2006*
S&P 500 is up 9.51% so far in 2006*
40%
30%
20%
10%
0%
Source: Ibbotson Associates, Insurance Information Institute.
*Through October 19, 2006.
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1978
1976
1974
1972
-30%
1970
-20%
1980
Markets are moving up
as energy prices and LT
interest rates fall
-10%
Property/Casualty Insurance
Industry Investment Gain*
$ Billions
$57.9
$60
$52.3
$40
$51.9
$48.9
$47.2
$50
$59.2
$56.9
$36.0
$35.4
$30
$45.3
$44.4
$42.8
$50.8
Investment gains are up
but are only now
comparable to gains
seen in the late 1990s
$20
$10
$0
94
95
96
97
98
99
00
01
02
03
04 05** 06E
*Investment gains consist primarily of interest, stock dividends and realized capital gains and losses.
2006 estimate based on actual annualized 2006:H1 result of $25.375B.
**2005 figure includes special one-time dividend of $3.2B. Source: ISO; Insurance Information Institute.
UNDERWRITING
CAPACITY
Can the Industry
Efficiently Employ Its
Increasing Capital?
U.S. Policyholder Surplus:
1975-2006*
$500
$450
$400
Capacity TODAY is $445.5B,
4.3% above year-end 2005, 56%
above its 2002 trough and 33%
above its 1999 peak.
$ Billions
$350
$300
$250
$200
$150
Foreign reinsurance
and residual market
mechanisms absorbed
45% of 2005 CAT
losses of $62.8B
$100
$50
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$0
7576 77 7879 80 8182 8384 85 8687 88 8990 9192 93 9495 96 9798 9900 01 0203 04 0506
Source: A.M. Best, ISO, Insurance Information Institute
*As of 6/30/06.
Announced Insurer Capital Raising*
($ Millions, as of December 1, 2005)
$3,500
As of Dec. 1, 19 insurers announced
plans to raise $10.35 billion in new
capital. Twelve start-ups plan to
raise as much as $8.75 billion more
for a total of $19.1 billion. Actual
total higher as Lloyd’s syndicates
have added capacity for 2006.
$3,000
$2,500
$ Millions
$3,200
$2,000
$1,500
$1,500
$1,000
$400 $450
$500
$38
$600
$710
$620
$600
$300
$100$140
$297
$129
$490
$124$202 $150
$299
xi
s
du
r
E v an c
e
er
es
Fa t R
e
irf
ax
Fi
G
nl
la
cie .
H
C
r
C
In Re
su
ra
nc
IP
e
C
H
ld
gs
K
iln
PL
M C
M
ax
on
tp Re
el
ier
R
N
e
av
ig
at
O
dy ors
ss
ey
R
Pa
e
rt
ne
rR
e
Pl
at
in
um
PX
R
X
E
L
C
ap
ita
l
A
En
sp
en
ut
A
na
rg
o
A
A
ce
L
td
.
$0
*Existing (re) insurers. Announced amounts may differ from sums actually raised.
Sources: Morgan Stanley, Lehman Brothers, Company Reports; Insurance Information Institute.
Announced Capital Raising by
Insurance Start-Ups
($ Millions, as of April 15, 2006)
As of April 15, 14 startups plan to raise as
much as $10 billion.
$1,600 $1,500
$1,400
$1,200
$ Millions
$1,000$1,000$1,000$1,000$1,000$1,000
$1,000
$800
$600
$500 $500 $500 $500
$400
$220 $180
$200
$100
V
al
id
u
sH
ol
di
La
ng
nc
s
as
hi
re
Re
**
A
ug
sb
ur
g
Re
A
rie
lR
H
isc
e
ox
Be
rm
ud
N
a
ew
C
as
tle
R
A
e
rr
ow
C
ap
ita
X
l
L/
H
ig
hf
iel
ds
G
re
en
lig
ht
O
m
Re
eg
a
Sp
ec
ia
lty
A
sc
en
de
nt
R
e
ne
Re
a
st
o
Fl
ag
Be
rm
ud
m
lin
A
H
ar
bo
r
Po
i
nt
*
$0
*Chubb, Trident are funding Harbor Point. Announced amounts may differ from sums actually raised. **Stated amount is $750 million to $1 billion. ***XL
Capital/Hedge Fund venture. Arrow Capital formed by Goldman Sachs.
Sources: Investment Bank Reports; Insurance Information Institute.
Legal Liability &
Tort Environment
Definitely Improving But
Not Out of the Wood
Cost of U.S. Tort System
($ Billions)
Tort costs will consume an estimated 2.24% of GDP in 2005
$350
$300
Per capita “tort tax” was $845
in 2003, up from $680 in 2000
$233
$250
$262
$246
$279
$297
$205
$200
$150
$129$130
$141 $144 $148
$159 $156$156
$167 $169
$180
Reducing tort costs relative to GDP by
just 0.25% (to about 2%) would
produce an economic stimulus of $27.5B
$100
$50
$0
90
91
92
93
Source: Tillinghast-Towers Perrin.
94
95
96
97
98
99
00
01
02
03 04E 05F 06F
Personal, Commercial &
Self (Un) Insured Tort Costs*
$250
Commercial Lines
Personal Lines
Self (Un)Insured
Total = $219.2 Billion
Billions
$200
$45.3
Total = $157.7 Billion
$150
Total = $120.2 Billion
$29.6
$20.1
$100
$70.9
Total = $39.5 Billion
$51.0
$50
$0
$82.5
$91.4
$5.4
$17.1
$17.0
$49.1
$57.2
1980
1990
2000
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin
2003
Tort System Costs,
2000-2010F
2.5%
2.22% 2.23% 2.23% 2.24%2.27% 2.25% 2.21%2.20% 2.20%
2.03%
Tort System Costs
$300
1.83%
$262 $269
$250
$232
$288
$279 $282 $283
$295
$245
2.0%
1.5%
$206
$200
1.0%
$179
After a period of rapid
escalation, tort system costs as %
of GDP appear to be stabilizing
$150
0.5%
$100
0.0%
00
01
02
03
04
Tort Sytem Costs
05E
06F
07F
08F
09F
Tort Costs as % of GDP
Source: Insurance Information Institute estimates from Tillinghast-Towers Perrin methodology.
10F
Tort Costs as % of GDP
$350
COMMERCIAL
MULTI-PERIL &
COMMERCIAL
AUTO
Commercial Multi-Peril Combined
85
93.8
101.9
97.7
104.9
Liab. Combined 1995 to 2004 = 114.6
89.0
95
90
116.1
116.2
121.0
117.0
115.0
115.0
122.4
CMP- has
improved recently
100
CMP-Liability
CMP-Non-Liability
97.3
105
100.7
110
113.1
115
108.5
113.6
120
119.0
125
119.8
116.8
130
115.3
125.0
(Liability vs. Non-Liability Portion)
Non-Liab. Combined = 107.1
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
Commercial Auto Liability
& PD Combined Ratios
120.1
Average Combined:
Liability = 110.2
122.5
85
93.3
90.7
87.1
Commercial Auto has
improved dramatically
90
96.6
92.1
95
99.4
95.9
106.6
102.3
103.6
PD = 97.1
99.0
99.7
100
96.7
105
99.0
102.2
110
113
112
115
112.1
120
120.5
Comm Auto PD
115.9
Comm Auto Liab
125
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
MEDICAL
MALPRACTICE
Medical Malpractice
Combined Ratios
160
90
137.6
142.5
133.7
111.0
Reforms/Award Caps and higher
rates have helped to improve
med mal dramatically
95.5
100
106.6
110
99.8
120
129.7
121.3
115.7
130
150
107.9
140
Average Med Mal
Combined Ratio
1995-2005
154.7
97
05
80
95
96
Sources: A.M. Best; III
98
99
00
01
02
03
04
PRODUCTS
LIABILITY
Products Liability
Combined Ratios
380
355.2
Average Combined Ratio
1995-2005
330
Improvements
in the tort
environment,
rates have
contributed to
performance
176.7
280
230
215.4
189.5
180
179.1
167.2
156.4
131.9 138.8
153.1
133.3
124.0
130
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
WORKERS
COMPENSATION
OPERATING
ENVIRONMENT
Workers Comp Combined Ratios,
1994-2005P
Workers Comp Calendar Year vs. Ultimate Accident Year –
Private Carriers
Percent
138
140
135
131
130
124
122
120
118
120
115
111 110
107
107
106
110
105
102
101
101 100 101
97 97
96
100
90
90
90
80
1994
1995
1996
1997
1998
1999
Calendar Year
2000
2001
2002
Accident Year
2003
2004 2005p
p Preliminary AY figure.
Accident Year data is evaluated as of 12/31/2005 and developed to ultimate
Source: Calendar Years 1994-2004, A.M. Best Aggregates & Averages; Calendar Year 2005p and Accident Years 1994-2005pbased on NCCI
Annual Statement Analysis.
Includes dividends to policyholders
OTHER LIABILITY
INCLUDING D&O
Other Liability
Combined Ratios*
150
140
138.6
Average Combined Ratio
1995-2005
116.1
130
122.6 124.4
117.6
120
112.3
110.5
108.5
110
111.8
114.4
112.1
104.5
100
Improvements in tort and
D&O environment have
contributed to performance
90
80
95
96
Sources: A.M. Best; III
97
98
99
00
01
02
03
04
05
*Includes Officers’ & Directors’ coverage.
D&O Premium Index
(1974 Average = 100)
Average D&O pricing is off
18% since 2003, after rising
146% from 1999-2003
1400
1200
1,237
1,113
931
1000
800
1,010
682
746
704 720 720
771 806 793
726
720
619
600
539 503 560
400
200
0
86
88
90 91
92
93 94
95
96 97
98
99 00
01
02 03
Source: Tillinghast Towers-Perrin, 2005 Directors and Officers Liability Survey.
04
05
% of Jury Awards with
Punitive Damages, by Jurisdiction*
25%
20%
5%
8%
7%
9%
9%
8%
10%
11%
11%
15%
Alabama, by far, has
the highest
percentage of awards
with punitive
damage awards
6%
6%
6%
6%
5%
5%
4%
4%
4%
3%
3%
3%
3%
2%
2%
2%
2%
2%
2%
2%
2%
2%
2%
1%
1%
4%
20%
1998-2004
A
la
b
N am
W ev a
is c ad
on a
A
S. ri sin
Ca zo
n
A r ol a
rk in
an a
sa
T
K ex s
en a
tu s
c
Id ky
ah
N
. C Io o
ar wa
ol
in
C Ut a
ol ah
o
G rad
e
M org o
O isso ia
kl u
ah ri
V om
C irg a
al i n
if ia
M
as In orn
s a d ia
ch ian
us a
et
t
D O s
ela hi
w o
ar
D e
Fl .C
or .
Ill ida
i
K noi
a
M ns s
i
N chi as
ew ga
n
Pe O Y o
nn r e rk
s g
Te ylv on
C n n e an i a
on s
s
M nec ee
in tic
n u
U es o t
.S ta
.A
vg
.
0%
*Data for AK, HI, LA, ME, MD, MS, MT, NE, NH, NJ, NM, ND, SD, VT, WA, WV and WY were listed as “N/A” by
JVR. Several of these states had above-average punitive award rates in previous issues of the JVR publication.
Source: Jury Verdict Research, Current Award Trends in Personal Injury (2006 edition)
% of Jury Awards of $1 Million or
More, by Jurisdiction (1997-2003)*
30%
26%
Top Five
25%
25%
25%
Bottom 10
24%
20%
20%
13%
15%
10%
4%
5%
3%
.S
.A
vg
.
U
/T
N
R
/O
IA
Pe
nn
R
sy
/C
lv
T/
an
K
ia
S/
M
E/
M
D
/N
E/
O
K
A
Lo
ui
sia
na
Je
rs
ey
ew
N
as
sa
ch
us
se
tts
M
N
ew
Yo
rk
0%
*Compensatory awards only. Data for AK, AZ, DE, HI, ID, MS, NV, NM, ND, SD, VT, WV and WY were listed
as “N/A” by JVR. Source: Jury Verdict Research, Current Award Trends in Personal Injury (2005 edition)
THE U.S. LEGAL SYSTEM:
BETTER BUT PROBLEMS PERSIST
TRENDS, CONDITIONS & OUTLOOK
Business Leaders Ranking of
Liability Systems for 2005
New in 2005
Best States
1. Delaware
ND, IN, SD, WY
2. Nebraska
Drop-Offs
3. North Dakota
4. Virginia
ID, UT, NH, KS
5. Iowa
6. Indiana
7. Minnesota
8. South Dakota
9. Wyoming
LA, AL and MS’s
10. Idaho
liability systems are
ranked among the worst
in the country by the US
Chamber of Commerce
Worst States
41. Hawaii
42. Florida
43. Arkansas
44. Texas
45. California
46. Illinois
Newly
Notorious
47.Louisiana
48.Alabama
HI, FL
Rising
Above
MO, MT
49. West Virginia
50.Mississippi
Source: US Chamber of Commerce 2005 State Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes
(2005)
Dishonorable
Mention
WI Supreme Ct.
Watch List
California
Eastern Kentucky
Eastern Alabama
Philadelphia
New Mexico
Delaware
Oklahoma
Orleans Parish, LA
Washington, DC
There were notably
fewer “Judicial
Hellholes” in 2005
ILLINOIS
Cook County
Madison County
St. Clair County
TEXAS
Rio Grande
Valley and Gulf
Coast
Source: American Tort Reform Association; Insurance Information Institute
West Virginia
South Florida
$4,000
$3,000
$2,000
$1,000
2004
5,185
4,161
4,811
($000)
$5,000
The average jury
award remains in
excess of $1 million for
the fourth consecutive
year and is rising
2003
2,887
2,743
2,731
3,399
$6,000
2002
602
1,031
1,151
1,079
1,390
170
272
245
251
286
564
675
691
1,366
614
2,338
2,406
$7,000
2001
6,173
1998
2,854
$8,000
6,657
5,772
5,550
5,021
Average Jury Awards
1998 vs. 2001, 2002, 2003 & 2004
$0
Overall
Vehicular
Liability
Premises
Liability
Wrongful Death
Medical
Malpractice
Products
Liability
Source: Jury Verdict Research, Current Award Trends (2006 edition) ; Insurance Information Institute.
Average Jury Award, 1998-2004
$2,000
The average award increased by
29% from 2003 to 2004, after being
relatively flat for three years
$1,390
($ 000)
$1,500
$1,151
$1,000
$987
$1,031
2000
2001
$1,079
$725
$602
$500
$0
1998
1999
Source: 2006 Current Award Trends, Jury Verdicts Research.
2002
2003
2004
Median Jury Award, 1998-2004
$45,000
$40,000
$41,220 $40,000
$36,313
$34,699
$35,000
$37,086
$35,000
$28,707
$30,000
$25,000
$20,000
The median award fell by 5% from 2003
to 2004, and is generally flat since 2000.
$15,000
$10,000
$5,000
$0
1998
1999
2000
Source: 2006 Current Award Trends, Jury Verdicts Research.
2001
2002
2003
2004
Trends in Million Dollar Verdicts*
100%
2003-2004
2001-2002
1998-2000
90%
34%
65%
60%
63%
47%
50%
15%
12%
16%
5%
10%
4%
5%
20%
8%
12%
30%
16%
30%
40%
35%
50%
33%
41%
60%
47%
70%
57%
80%
0%
Vehicular
Liability
Personal
Negligence
Premises
Liability
Business
Negligence
Government
Negligence
Medical
Malpractice
*Verdicts of $1 million or more.
Source: Jury Verdict Research (2006 edition); Insurance Information Institute.
Products
Liability
2005 Top Ten Verdicts
Value
Issue
State
$1.45 Billion
Investment Fraud
Texas
$606 Million
Medical Malpractice (Chemo overdose)
Florida
$253 Million
Pharmaceutical Liability (Vioxx)
Texas
$164 Million
Negligence/Products Liability Traffic Death Florida
$135 Million
Vicarious Liquor Liability
New Jersey
$90 Million
Unfair Business Practice
Illinois
$65.5 Million
Conflict of Interest, Estate Planning
Texas
$65 Million
Products Liability, Electrocution
Florida
$64 Million
Age Discrimination
California
$61.2 Million
Products Liability (Ford Explorer)
Florida
Source: LawyersWeekly USA, January 2006.
Sum of Top 10 Jury Awards
$6,000
$ Millions
$5,158.8
$5,000
$4,000
Total of Top 10
awards in 2005
was 43% lower
than in 2004
$2,953.7
$3,000
$2,000
$1,000
$0
2004
2005
Source: Insurance Information Institute from LawyersWeekly USA, January 2005 and 2006.
States With the Most Top 10 Jury Awards
1995-2005
•77% (85/110) of Top 10 awards came
from just 7 states between 1995-2005
25
21
19
20
•23 States have had no award in the top 10
17
15
11
10
7
5
5
GA
AL
5
0
NY
TX
CA
FL
Source: Lawyers Weekly USA; Insurance Information Institute.
MO
HOW THE RISK DOLLAR IS SPENT
How the Risk Dollar is Spent (2004)
Total liability costs account for about 40% of the risk dollar
Firms w/Revenues < $1 Billion Firms w/Revenues > $1 Billion
Admin Costs
Retained
9%
Liability
3%
Property
Premiums
22%
Retained
Liability
14%
Retained
Property
4%
Liability
Premiums
27%
Admin Costs
7%
Liability
Premiums
14%
Property
Premiums
19%
Retained
Property
6%
WC Premiums
16%
Retained WC
6%
Other
1%
Total Mgmt.
Liab.
8%
Total Prof. Liab
4%
Source: RIMS (2004); Insurance Information Institute
Retained WC
24%
Other
1%
Total Mgmt.
Liab.
6%
WC Premiums
Total Prof. Liab 6%
5%
Who Buys Umbrella/Excess?
(2005)
100%
Professional Services
Consumer Discretionary
Consumer Staples
Energy
Utilities
Telecomm Services
Industrials
Nonbank Financials
Information Technology
Banks
ALL INDUSTRIES
Materials
Health Care
Government & NPOs
Education
0%
91%
86%
85%
85%
84%
Professional
83%
Services
83%
concerns are
80%
more likely
80%
than average
to buy
79%
umbrella/
78%
68%
64%
60%
20%
Source: RIMS Benchmark Survey (2005)
40%
60%
80%
excess
coverage
100%
120%
INFLUENCE OF TORT
ENVIRONMENT AND LEGAL
LIABILITY TRENDS ON PRICING
AND AVAILABILITY
2005
$0.48
$0.39
$0.50
$0.42
$0.86
$0.77
$1.00
$0.67
$1.27
$1.08
$1.03
$1.50
$1.56
$1.37
$1.30
$2.00
$0.40
Liability insurance
costs relative to
revenue are falling
for firms of all size
$2.31
$2.50
2004
$0.18
$0.13
2003
$3.00
$0.17
$3.50
$0.36
$0.44
$3.21
$3.09
Liability: Average Cost per $1,000
of Revenue,* 2003 to 2005
$0.00
$0 - $200M
$201M$500M
$501M-$1B
*Across entire liability program
Source: Marsh, 2005 Limits of Liability Report
$1B-$5B
$5B-$10B
$10B+
All
Average Price per Million Dollars
of Liability Coverage
Healthcare
Construction
Chem, Pharma.
Government
Trans. Services
Trans. Equip.
Mining/Energy
Misc. Mfg.
Utility: Non-Nuclear
Rubber/Plastic
Lumber, Furn, Pack., Paper
Primary Metals, Leather,
Telecommunications
Elect. Equip., Instruments
Wholesale/Retail Trade
Machinery
Metal Products
Food, Ag., Tobacco Textiles
Education, Non-Profit
Pers/Biz Serv., Hotels
Insurance
Finance: RE, Banks, etc
Printing & Publishing
$0
$52,004
$29,895
$22,852
$21,724
$18,166
$17,187
$14,804
$13,676
$13,512
$13,149
$11,278
$10,872
$10,000
$9,185
$9,122
$9,117
$8,611
$8,594
$7,277
$6,749
$5,853
$5,737
$5,684
There is a 9-fold
difference in the price
per million in liability
coverage across
industry groups
$10,000 $20,000 $30,000 $40,000 $50,000 $60,000
Source: Limits of Liability Survey (2005), Marsh, Inc.
Umbrella/Excess Insurance: Avg. Cost
per $1,000 of Revenue, 2005
Size is very important when it comes to
the cost of umbrella/excess coverage.
$3.50
$3.00
$2.94
There is a more than 14-fold difference in
price between the smallest and largest
buyers.
$2.50
$2.00
$1.31
$1.50
$1.07
$1.17
$0.97
$0.95
$1.00
$0.69
$0.43
$0.50
$0.35
$0.21
$0.00
$0 $100M
$100M$250M
$250M$500M
$500M$750M
Source: RIMS Benchmark Survey (2005)
$750M$1B
$1B$2.5B
$2.5B$5B
$5B$10B
$10B+
ALL
Billions
Excess Liability Market Capacity
$3.0
$2.5
$2.0
$2.045
$2.011
$1.941
$1.721
$1.570
$1.710
$1.575
$1.540
$1.432
$1.405
$1.425
$1.334
$1.5
$1.0
$0.5
Capacity dropped 30% from 2000 to
2003 but has since increased by 10.2%
$0.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Marsh, 2005 Limits of Liability Report
Average Total Limits Purchased
by All Firms* ($ Millions)
$110
$99.1
$100
$105.0
$101.8
$95.7
$90
$85.8
$83.2
$85.9
$88.7
$80 $77.9
$87
$77
$75
Limits purchased fell by 16%
between 2003 and 2005.
Price/capacity are issues.
$70
$60
$50
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
*Includes underlying primary limits.
Source: 2005 Limits of Liability Report, Marsh, Inc.
Average Underlying Limits
(Attachment Points)
$ Millions
$2.4
$2.2
$2.2
$2.0
$1.8
$1.6
$1.8
$1.9
$1.9
$2.0
$2.1
$1.4
$1.2
$1.0
2000
2001
Source: Marsh, 2005 Limits of Liability Report
2002
2003
2004
2005
The Cost of
Litigation
Cost is Chief Concern
of Businesses
Predicted Trend of Legal
Disputes
One third of responding counsel expect the total number of legal disputes
their organizations will face in the coming year to increase.
None Pending
6%
Same
52%
Decrease
9%
Increase
33%
Source: Third Annual Litigation Trends Survey, Fulbright & Jaworski, 2006.
Forty percent of
large companies
expect the number
of actions to
increase in the
coming year.
Cost as a Top Litigation
Concern for Businesses
30%
25%
20%
15%
10%
Cost was the single
most cited concern
about litigation, in
general. Mid-sized
companies ($100-$999
million in revenues)
appeared most
concerned about the
costs of litigation.
26%
18%
6%
5%
0%
Under $100 Million
$100-$999 Million
$1 Billion or More
Source: Second Annual Litigation Trends Survey, Fulbright & Jaworski, 2005.
Most Costly Types of Litigation,
by Industry
INDUSTRY
TYPE OF LITIGATION
Energy
Intellectual Property
Finance
Employment
Health Care
Contracts
Insurance
Employment
Manufacturing
Intellectual Property
Real Estate
Personal Injury
Retail/Wholesale
Intellectual Property
Technology/Communications
Intellectual Property
Source: Second Annual Litigation Trends Survey, Fulbright & Jaworski, 2005.
Expenditures on E-Discovery
($ Millions)
Expenses made on electronic discovery
preservation, collection and production in
U.S. commercial litigation increased by
nearly 300% between 1999 and 2005.
$1,800
$1,100
$700
$430
$40
$70
99
00
$150
01
$270
02
03
04*
*Projections.
Source: Socha-Gelbmann Electronic Discovery Survey; National Law Journal 8/2/04.
05*
06*
Legal Budget as a Percentage of Gross
Revenues Reported by Company Size
Legal Budget is 0-1% of Gross Revenues
Legal Budget is 2% or More of Gross Revenues
60%
54%
52%
50%
42%
40%
30%
24%
Some 10%
of U.S.
companies
had legal
budgets of
more than
5% of
their gross
revenues.
23%
18%
20%
10%
0%
Under $100 Million
$100-$999 Million
$1 Billion or More
Source: Second Annual Litigation Trends Survey, Fulbright & Jaworski, 2005.
Class Action
Concerns
Class Action Fairness Act:
Only a Beginning
Class Action Impact
A significant majority (72%) feel the Class Action Fairness Act
(CAFA) of 2005 has had no effect, but more than a quarter believe
the Act’s effect has been beneficial.
Very Beneficial
2%
Somewhat
Harmful
2%
Neutral/No
Effect
72%
Beneficial
24%
Source: Third Annual Litigation Trends Survey, Fulbright & Jaworski, 2006.
Just 27% of
respondents said
their organizations
had a case removed
from state to
federal court
because of CAFA
provisions.
Percentage of Class Actions
Settled Before Certification
20%
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
The highest
concentrations of
settlements before
class certification
were in Texas and
California. Energy
companies were most
likely to have settled
all their cases (29%).
All
Some
18%
11%
5%
5%
2%
0%
Under $100 Million
$100-$999 Million
$1 Billion or More
Source: Second Annual Litigation Trends Survey, Fulbright & Jaworski, 2005.
Leading Types of Class Actions
Response
Past Three Years
Labor/Employment
38%
Securities Litigation/ Enforcement
28%
Contracts
23%
Environmental/Toxic Tort
20%
Anti-Trust/Trade
20%
Class Action
19%
Product Liability
16%
Source: Third Annual Litigation Trends Survey, Fulbright & Jaworski, 2006.
Highest Incidence of Class
Actions in 2006
One or More Class Actions Filed
80%
70%
69%
60%
65%
51%
43%
50%
40%
30%
20%
10%
39%
Insurers were most likely to be
named as defendants in class
actions in 2006. More than twothirds of them had at least one
class action pending.
0%
Insurance
Retail/Wholesale Manufacturing Banking/Financial
Services
Source: Third Annual Litigation Trends Survey, Fulbright & Jaworski, 2006.
Energy
Summary
• 2006 represents profitability peak in the current cycle for p/c
insurance (underwriting/earnings);
• Commercial lines pricing environment becoming increasingly
competitive
 Terms & Conditions?
• Tort environment in US is “bad,” but not getting significantly
worse at present time and there are some areas of
improvement
• Major Challenges:
 Maintaining price/underwriting discipline w/slow growth
 Managing variability/volatility of results
 New/emerging/re-emerging risks
Insurance Information
Institute On-Line
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