Ten Challenges for the
Year Ahead
Overview & Outlook for the
P/C Insurance Industry
Inland Marine Underwriting Association
Orlando, FL
April 14, 2003
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief Economist
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: (212) 346-5520  Fax: (212) 732-1916  bobh@iii.org  www.iii.org
Presentation Outline
• Improve Profitability
• Improve Underwriting
 Inland Marine Issues
•
•
•
•
•
•
•
•
•
Reserving Issues
Solvency Issues
Improve Pricing
Efficient Allocation of Capital
Improve Investment Performance
The Challenge of Terrorism
Courts & Torts: Abuse of the Civil Justice System
Mold
Q&A
IMPROVE
PROFITABILITY
P/C Net Income After Taxes
1991-2002E ($ Millions)
2001 was the first year ever
with a full year net loss
$40,000
$35,000
$36,819
2002 9-Month ROE = 4.4%
$30,773
$30,000
$24,404
$20,598
$25,000
$19,316
$20,000
$15,000
$21,865
$20,559
$14,178
$12,419
$10,870
$10,000
$5,840
$5,000
$0
-$5,000
-$6,970
-$10,000
91
92
93
94
95
96
*I.I.I. estimate based on first 9 months of 2002 data.
Sources: A.M. Best, ISO, Insurance Information Institute.
97
98
99
00
01
02*
ROE: P/C vs. All Industries
1987–2003F*
20%
15%
10%
5%
0%
-5%
87
88
89
90
91
92
93
94
US P/C Insurers
Source: Insurance Information Institute; Fortune
95
96
97
98
99
00
All US Industries
01
02E 03F
ROE vs. Cost of Capital:
US P/C Insurance: 1991 – 2002
15%
14.6 pts
10%
5%
6.8. pts
There is an enormous gap
between the industry’s cost of
capital and its rate of return
20%
US P/C insurers have missed
their cost of capital by an
average 6.6 points since 1991
0%
-5%
1991
1992
1993
1994
1995
1996
1997
Source: The Geneva Association, Ins. Information Inst.
1998
1999
ROE
2000
2001
2002
Cost of Capital
IMPROVE
UNDERWRITING
Underwriting Gain (Loss)
1975-2002*
$10
$0
$ Billions
($10)
($20)
($30)
($40)
($50)
P-C insurers paid $22 billion more in claims
& expenses than they collected in premiums
in 2002
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
($60)
*Annualized estimate based on first 9 months of 2002 data.
Source: A.M. Best, Insurance Information Institute
P/C Industry Combined Ratio
120
Combined
Ratios
2001 = 115.7
1970s: 100.3
2002E = 106.3*
115
1980s: 109.2
2003F = 103.2*
1990s: 107.7
2000s: 110.4
110
105
100
Sources: A.M. Best; III
00
98
96
94
92
90
88
02*
*Based on January 2003 III survey of industry analysts.
86
84
82
80
78
76
74
72
70
95
Combined Ratio:
Reinsurance vs. P/C Industry
170
All Lines Combined Ratio
162.5
Reinsurance
2001’s combined ratio was
the worst-ever for reinsurers
160
2002 was bad as well
150
105.0
121.3
115.7
106.5
110.0
114.3
107.7
100.5
105.6
100.8
101.6
104.8
105.8
106.5
119.2
113.6
108.5
110
105.0
106.9
120
110.5
108.8
130
115.8
126.5
140
100
90
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001 2002*
*Figure for first 9 months of 2002 for all lines; Reinsurance is RAA Full-year figure
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
U.S. Insured
Catastrophe Losses
$ Billions
CAT losses continue to be a problem,
though 2002 was much better than 2001
$30
$28.1
$22.9
$25
$20
$16.9
$15
$10 $7.5
$2.7
$5
$5.5
$4.7
$10.1
$8.3 $7.3
$8.3
$5.8
$4.3
$2.6
$0
89
90
91
92
93
94
95
96
97
98
99
00
01
02
*Estimate.
Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business
and personal property claims, business interruption and auto claims.
Source: Property Claims Service/ISO; Insurance Information Institute
Outlook for Commercial Lines:
2002 - 2004
2002E
2003F
2004F
153.3
155.3
158.1
165.0
2001
170
160
100.3
98.8
95.2
92.8
100
103.6
99.1
99.5
110
118.5
120
115.8
111.9
108.3
106.7
130
121.7
116.6
113.2
113.0
140
130.2
125.3
120.2
113.6
150
90
Workers
Comp
GL & Prod. Commercial Commercial
Package
Auto
Liab
Sources: A.M. Best, Conning & Co.
Med Mal
Inland
Marine
HOW DOES THIS HARD
MARKET STACK UP TO
PREVIOUS HARD MARKETS?
Hard Markets Since 1970
25%
1975-78
1985-87
2001-03
There have been 3 hard
markets since 1970:
20%
1975-1978
1985-1987
15%
2001-200?
10%
5%
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
0%
Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets
by Real NWP Growth
25%
1975-78
1985-87
2001-03
Real NWP Growth During
Past 3 Hard Markets
20%
1975-78: 8.6%
15%
1985-87: 14.5%
10%
2001-03: 9.1%
5%
0%
-5%
Current $
Real $
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
-10%
Note: Shaded areas denote hard market periods.
Source: A.M. Best, Insurance Information Institute
GDP Growth vs. Net Written
Premium Growth (1987=100)
Hard Market
250
The gap between cumulative GDP
and Net Written Premium growth
hit a maximum of 52.5 pts or
33.7% in 2000. In 2003, the
estimated gap is 29.0 pts or 15.2%.
200
52.5 pts
225
29.0 pts
175
150
125
Note: Shaded area denotes hard market.
Source: Insurance Information Institute
2003F
2002E
2001
2000
1999
1998
1997
1996
1995
1993
1992
1991
1990
1989
1988
1987
100
1994
Cumulative GDP Growth
Cumulative NWP Growth
INLAND MARINE
Combined Ratio:
Inland Marine vs. Commercial Lines
Inland Marine
Commercial Lines
97.3
91
92
93
94
95
96
97
98
99
00
01
02E
03F
110.2
101.6
118.8
100.9
109.6
100.8
112.1
91.9
109.4
97.3
106.7
95.7
103.4
97.1
108.6
101.9
111.3
92.9
110.1
100.3
95.2
109
92.8
80
90
120.7
107
100
110
Source: A.M. Best, Insurance Information Institute
120
130
140
Change in Net Premiums Written:
Inland Marine vs. Commercial Lines
Inland Marine
Commercial Lines
-1.0%
-1.9%
92
7.8%
6.7%
7.6%
93
94
95
3.7%
4.3%
1.9%
96
7.1%
1.3%
97
2.5%
0.4%
98
1.6%
-0.5%
99
1.8%
3.8%
6.9%
7.2%
00
2.7%
01
8.7%
02E
16.0%
03F
-4%
13.0%
-2%
0%
2%
4%
6%
Source: A.M. Best, Insurance Information Institute
8%
10%
12%
14%
16%
18%
Combined Ratio:
Ocean Marine vs. Commercial Lines
Ocean Marine
Commercial Lines
119.4
118.8
92
109.5
109.6
107.9
112.1
93
94
92.4
95
109.4
89.6
96
106.7
102.2
103.4
97
110.6
108.6
98
99
111.3
115.8
107.5
110.1
00
102.4
01
92.2
02E
120.7
109
03F
107
80
90
100
110
120
130
Source: A.M. Best, American Inst. Of Marine Underwriters, Insurance Information Institute
140
Change in Net Premiums Written:
Ocean Marine vs. Commercial Lines
Ocean Marine
Commercial Lines
93
94
9.0%
1.9%
2.8%
1.3%
96
-5.6%
0.4%
-3.0%
98
99
18.4%
3.7%
95
97
22.9%
6.7%
-0.5%
-6.4%
1.8%
-0.4%
00
7.2%
01
8.7%
9.5%
02E
03F
-10%
13.8%
16.0%
13.0%
-5%
0%
5%
10%
15%
20%
Source: A.M. Best, American Inst. Of Marine Underwriters, Insurance Information Institute
25%
Inland Marine: Better Than
Most, but Challenges Remain
• Trucking Market: Bad Results  Reduced Capacity
 Weak economy  Low or negative exposure growth
 2002 renewal up 15 – 30% for many trucking cos.
• Cargo Theft: Cost $3.5B to $12B annually (American
Trucking Association/Natl. Cargo Security Council)
• Cargo: Very vulnerable to terrorism threat
 Hundreds of thousands of points of entry to system globally
• Fine Art/Collectibles:
 Market hardening pre-9/11
 Post-9/11 even more difficult
RESERVING
ISSUES
Reserve Deficiency, by Line
(AY 1992-2001, as of 12/01)
PPA Liab CA Liab
HO
WC
CMP
Special
Med Mal* Liab
Other
Liab*
XS Liab
Reins
Prod
Liab*
$0
-$2
-$0.8
-$0.8
-$1.8
-$1.9
-$4
-$6
-$3.8
-$4.1
-$6.2
-$8
-$10
-$9.1
-$12
-$14
-$16
-$18
-$20
Estimated Deficiency
Total Excluding A&E:
$64 Billion
A&E Deficiency:
$55 Billion
Total Including A&E:
$120 Billion
*Occurrence and claims made
Source: Morgan Stanley
-$17.8
-$18.0
Combined Ratio: Average Impact of
Prior-Year Reserve Changes (Points)
Points (Reduced)/Increased
7.0
6.0
5.0
4.0
Only 1 major insurer released reserves
in 2002; 1 had virtually no change.
6.4
5.6
Other 20 had charges that added up to
27 points to the CY2002 Combined
3.0
2.0
1.4
1.0
0.0
(1.0)
(2.0)
(3.0)
(2.0)
1999
2000
2001
2002
Source: Merrill Lynch universe of 22 publicly-traded companies; Insurance Information Institute.
Average Combined Ratio:
Calendar vs. Accident Year*
Reported Combined Ratio
Accident Year Combined Ratio
120
113.5
110
104.3
108.0
106.3
102.0 100.6
97.7
100
91.3
90
Both CY & AY results improved
in 2002 for most major companies
80
2002 reserves charges added 6.4
points to the CY combined ratio
70
1999
2000
2001
2002
*Not market cap weighted.
Source: Merrill Lynch universe of 22 publicly-traded companies; Insurance Information Institute.
(IN)SOLVENCY
ISSUES
P/C Company Insolvency Rates,
1993 to 2002
•Insurer insolvencies are increasing
1.33%
•10-yr industry failure rate: 0.72%
1.20%
•Failure rating for B+ or better rating: 0.49%
•Failure rate for D through B rating: 1.29% 1.02% 1.03%
10-yr Failure Rate
0.79%
= 0.72%
0.60%
0.58%
0.21%
1993
1994
1995
0.28%
1996
30
30
38
2000
2001
2002
0.23%
1997
Source: A.M. Best; Insurance Information Institute
1998
1999
Reason for P/C Insolvencies
(218 Insolvencies, 1993-2002)
Impaired Affiliate
3%
Unidentified
17%
CAT Losses
3%
Reinsurer Failure
0%
Deficient Loss
Reserves
51%
Reserve
deficiencies
account for
more than half
of all p/c
insurers
insolvencies
Change in
Business
3%
Discounted Ops
8%
Overstated Assets
2%
Alleged Fraud Rapid Growth
3%
10% Source: A.M. Best, Insurance Information Institute
Ratings Downgrades: “Swarms”
of Downgrades Stinging Insurers
Reasons for Recent Downgrades
of Insurers Worldwide
• Asbestos
• Reserve Deficiencies
Need to do business with quality,
highly-rated companies
• Management Issues (e.g., transitions)
• Reinsurance Uncollectibles
• Investment Write-Downs
• Adverse Development
• Missed/Shifting Earnings Targets
IMPROVE
PRICING
Growth in Net Premiums
Written (All P/C Lines)
25%
2001: 8.1%
20%
2002: 14.2% (est.)*
2003: 12.7% (forecast)*
15%
10%
The underwriting cycle went
AWOL in the 1990s.
It’s Back!
5%
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
0%
*Estimate/forecast based on January 2003 III survey of industry analysts.
Source: A.M. Best, Insurance Information Institute
Council of Insurance Agents &
Brokers Rate Survey
Fourth Quarter 2002
Rate Increases By Line of Business
No Change Up 1-10%
10-20%
20-30%
30-50%
50%-100%
>100%
Comm. Auto
6%
14%
42%
25%
8%
1%
0%
Workers Comp
8%
17%
25%
24%
10%
2%
2%
General Liability
7%
13%
29%
37%
11%
0%
0%
Comm. Umbrella
8%
3%
21%
21%
26%
10%
5%
D&O
6%
4%
22%
23%
18%
9%
3%
Comm. Property
8%
16%
25%
25%
18%
3%
0%
Construction Risk 4%
8%
17%
18%
23%
9%
4%
Terrorism
12%
5%
8%
12%
5%
0%
6%
Business Interr.
13%
19%
36%
14%
4%
0%
0%
Surety Bonds
8%
16%
16%
15%
6%
1%
1%
Med Mal
1%
5%
6%
6%
12%
12%
16%
Rate On Line Index
(1989=100)
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
Prices rising, limits falling:
ROL up significantly
89
90
91
Source: Guy Carpenter
92
93
94
95
96
97
98
99
00
01
* III Estimate
02*
Urban Legend
Insurance is More
Expensive than Ever and is
Putting Companies Out of
Businesses
Commercial Lines Net Written
Premium as % of GDP
Commercial insurance premiums
as a % of GDP fell 35% between
1988 and 2000 and remains far
below late 1980’s levels
2.4%
2.3%
2.2%
2.1%
2.1%
2.0%
2.0%
1.9%
1.9%
1.9%
1.8%
1.8%
1.8%
1.7%
1.6%
1.6%
1.5%
1.6%
1.5%1.5%
More Cover for Less Money: Terms
& conditions broadened significantly
during the soft market, even as prices
fell
1.4%
1.2%
1.0%
88
89
90
91
92
93
94
95
96
97
98
99
00
01 02E
Sources: Insurance Information Institute, calculated from U.S. Bureau of
Economic Analysis and A.M. Best data.
Cost of Risk per $1,000 of
Revenues: 1990-2002E
$10
•Cost of risk to
corporations fell 42%
between 1992 and
2000
$9
$8.30
$7.70
$7.30
$8
$7
$6.49
$6.40
$6.10
$5.70
$6
$5
$4
•Estimated 15%
increase in 2001,
25% in 2002
$6.94
$5.71
$5.55
$5.25
$5.20$4.83
Cost of risk is still less than
it was a decade ago!
90
91
92
93
94
95
96
97
98
99
00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
EFFICIENT
ALLOCATION OF
CAPITAL
Policyholder Surplus:
1975-2002*
$350
$300
Billions
(US$)
$250
Surplus (capacity) peaked at $336.3 Billion in
mid-1999 and has fallen by 18.7% ($63 billion) to
$273.3 billion since then.
•Surplus fell 5.6% during first 9 months of 2002
•Surplus is now lower than at year-end 1997.
$200
$150
$100
$50
“Surplus” is a measure of
underwriting capacity. It is
analogous to “Owners
Equity” or “Net Worth” in
non-insurance organizations
$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
*As of September 30, 2002
Source: A.M. Best, Insurance Information Institute
Global P/C Insurance Capacity is
Falling Dramatically
$1,000
$920
$900
$800
$690
$ Billions
$700
Global
non-life
capacity
is down
25%
over the
past 2
years
$600
$500
$400
$300
$200
$100
$0
2000:I
Sources: Insurance Information Institute, Swiss Re
2002:IV (est.)
Capital Myth: US P/C Insurers Have
$300 Billion to Pay Terrorism Claims
Total PHS = $298.2 B as of 6/30/01
= $273.3 B as of 9/30/02
"Target"
Commercial*
$100 billion
33%
Only 33% of
industry surplus
backs up “target”
lines
Personal
$150 billion
50%
*”Target” Commercial includes: Comm property, liability and workers comp; Surplus must
also back-up on non-terrorist related property/liability and WC claims
Source: Insurance Information Institute
Other
Commercial
$50 billion
17%
Capital Raising by P/C Insurers
Since September 11, 2001*
Capital Raising by P/C Insurers Since 9/11 Totals $53.2B
$30,000
$27.9 Billion
$25.4 Billion
$25,000
14 Pending
($ Millions)
$4,872
38 Pending
$20,000
$16,437
$15,000
$10,000
$20,492
40 Completed
33 Completed
$11,442
$5,000
$0
2002*
2001
Completed
*As of September 13, 2002.
Source: Morgan Stanley, Insurance Information Institute.
Pending
Number of Homeowners
Insurers in Texas
350
313
300
280
258
250
287 290
299
277 271 272 273 276
263
240
220
204
200
194
181
162
150
100
The number of insurers
writing HO coverage in Texas
has been declining steadily.
151
138
128 127
50
0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
Source: Texas Coalition for Affordable Insurance Solutions from A.M. Best data; Insurance Information Institute
IMPROVE
INVESTMENT
PERFORMANCE
Net Investment Income
$45
Billions
(US$)
$36
$27
Investment income in
2002 is expected
to fall 5 to 6%
due primarily to
historically low
interest rates
Facts
1997 Peak = $41.5B
$18
2000= $40.7B
2001 = $37.7B
$9
2002E* = $35.2B
$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
*Annualized estimate based on first 9 months of 2002 data.
Source: A.M. Best, Insurance Information Institute
Interest Rates: Lower Than
They’ve Been in Decades
16%
1.
Historically low interest rates are the primary driver
behind lower investment yields. Nevertheless, overall
insurer investment performance outpaces all major
market indices and almost every major category of
mutual fund.
66% of the industry’s invested assets are in bonds
14%
12%
2.
10%
8%
6%
4%
2%
3-Month T-Bill
1-Yr. T-Bill
10-Year T-Note
2002
2003
*
*As of February 2003.
Source: Board of Governors, Federal Reserve System; Insurance Information Institute
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
0%
Total Returns for Large Company
Stocks: 1970-2003*
40%
30%
20%
10%
0%
-10%
2002 was 3rd consecutive year of decline for stocks
Large Company Stocks
*As of April 11, 2003.
Source: Ibbotson Associates, Insurance Information Institute
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1976
1974
1972
1970
-30%
1978
Will 2003 be the 4th?
-20%
P/C Industry Investments,
by Type (as of Dec. 31, 2001)
Common
stock accounts
for about 1/5
of invested
assets
Common Stock
21%
Other
5%
Cash & ST Secs.
6%
Bond Holdings, by Type
Industrial & Misc.
32.5%
Special Revenue
30.5%
Governments
18.0%
States/Terr/Other
15.4%
Public Utilities
Real Est. &
Mortgages
1%
Preferred Stock
1%
Source: A.M. Best, Insurance Information Institute
3.1%
Parents/Subs/Affiliates 0.5%
Bonds
66%
Property/Casualty Insurance
Industry Investment Gain*
$ Billions
$57.9
$60
$52.3
$56.9
$51.9
$47.2
$50
$44.4
$42.8
$40
$39.5
$35.4
Investment gains are simply
returning to “pre-bubble” levels
$30
$20
$10
$0
94
95
96
97
98
99
00
01
2002E
*Investment gains consists primarily of interest, stock dividends and realized capital gains and losses.
Source: Insurance Services Office; Insurance Information Institute estimate annualized as of 9/30/02.
THE CHALLENGE
OF TERRORISM
Sept. 11 Industry Loss Estimates
($ Billions)
Property WTC 1 & 2
$3.5 (9%)
Other
Liability
$10.0 (25%)
Life
$2.7 (7%)
Aviation
Liability
$3.5 (9%)
Event
Cancellation
$1.0 (2%)
Workers
Comp
Aviation Hull
$2.0 (5%)
$0.5 (1%)
Property Other
$6.0 (15%)
Biz
Interruption
$11.0 (27%)
Consensus Insured Losses Estimate: $40.2B
Source: Insurance Information Institute
Industry Losses Under Proposed Federal
Backstop Using 9/11 Scenario
(as interpreted on date of enactment, Nov. 26, 2002)
$14.25B
Total Ind. Loss: $10.875B
$19.675B
$20
$1.75B
Industry
Co-Share
$0.925B
Industry
Co-Share
$10.575
$2.0B
Industry
Co-Share
$18.00
($ Billions)
$25
$15.75
$30
$15
$0.125B
$10 Industry $1.125
Co-Share
$5
$8.75
$18.75
$12.50
$0
Year 1
Industry Retention
Year 2
Surcharge Layer
Year 3
Co-Reinsurance Layer
Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPE
Source: Insurance Information Institute.
Property Market Response
Terrorism Market is Inconsistent
Moderate take-up rate among small risks
Very low take-up rate for larger risks
 Carriers/brokers report take-up rate of just 15% - 25 % for larger risks
Prices cited varied from 0% to 1,000% of property premiums but
quotes in the 2% - 8% range typical as insurers sought to
distribute max loss under TRIA loss across policyholder base
Could change substantially for 2003 renewal: more indiv. rating
Reasons Businesses Decline Coverage






Expense
Want to bargain with insurer; attempt to change terms/conditions
Feel likelihood of an attack impacting them is remote
Believe government will bail them out
Feel“Fire Following” provision will compel coverage
Will try self insurance; investigate alternative risk transfer options
Source:Marsh, Inc.; Insurance Information Institute.
Property Market Response
• Problems
Low take-up rate => possible adverse selection problem
Insurability of terrorism still question despite TRIA
12/31/05 sunset date will cause market to unravel in 2004
• Stand-alone terrorism market
Some quotes being sought for certified and non-certified losses
Those treaties that existed are expiring and capacity for 2003 is
uncertain
Some insurers have reallocated resources
• Reinsurance Market
Some property catastrophe treaty renewals at Jan 1 were renewed
including “non-certified” terrorism but still excluding nuclear,
biological and chemical
Reinsurers cautious about risk accumulation (e.g., zip code buckets)
Insurers are seeking reinsurance to buy down their retentions
Source:Marsh, Inc.; Insurance Information Institute.
ABUSE OF THE
U.S. CIVIL JUSTICE
SYSTEM
TORT-ure
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Asbestos
“Toxic” Mold
Medical Malpractice
Construction Defects
Lead
Fast Food
Arsenic Treated Lumber
Guns
Genetically Modified Foods (Corn)
Pharmaceuticals & Medical Devices
Security exposures (workplace violence, post-9/11 issues)
What’s Next?
Slavery
Sept. 11??
Average Jury Awards
1994 vs. 2001
9,113
1994
$7,000
2001
$6,000
($000)
$5,000
3,902
$4,000
$3,000
$2,000
$1,000
2,288
1,365
419
1,744
1,727
1,185
789
187 323
333
Vehicular
Liability
Premises
Liability
1,140
759
$0
Overall
Business
Negligence*
*Figure is for 2000 (latest available)
Source: Jury Verdict Research; Insurance Information Institute.
Wrongful
Death
Medical
Malpractice
Products
Liability
Trends in Million Dollar Verdicts*
100%
11%
8%
10%
11%
6%
4%
10%
4%
68%
42%
36%
25%
21%
20%
10%
30%
17%
40%
27%
50%
21%
60%
44%
70%
54%
Very sharp jumps in multi-million
dollar awards in recent years across
virtually all types of defendants
43%
80%
47%
95-97
59%
2000-2001
98-99
90%
0%
Vehicular
Liability
Personal
Negligence
Premises
Liability
Business
Negligence
Medical
Government
Negligence Malpractice
*Verdicts of $1 million or more.
Source: Jury Verdict Research; Insurance Information Institute.
Products
Liability
Probability of Plaintiff
Verdict is Rising
1994
1997
2001
Premises Liability
43%
45%
57%
Business Negligence
NA
57%
66%
Vehicular Liability
58%
59%
68%
Products Liability
39%
39%
56%
Source:
Jury Verdict Research, 2002 Current Award Trends
Cost of U.S. Tort System
($ Billions)
Tort costs consumed 2.0% of GDP annually on average since 1990,
$350 expected to rise to 2.4% of GDP by 2005!
$300
$250
$200
$150
$298
Per capita “tort tax” expected to rise to $1,000 by 2005,
up from $721 in 2001
Even a modest reduction in tort costs would be more
stimulative than the $674 billion Bush tax/spending plan
$129 $130
$141 $144 $148
$159 $156 $156
$167 $169
$205
$180
$100
$50
$0
90
91
92
93
94
95
96
Source: Tillinghast-Towers Perrin. 2005 forecasts from Tillinghast.
97
98
99
00
01
05F
Where the Tort Dollar Goes
(2000)
Tort System
is extremely
inefficient:
Only 20%
of the tort
dollar
compensates
victims for
economic
losses
Claimants'
Attorney Fees
17%
Awards for
At least
Non-Economic
58% of every
Loss
tort dollar
22%
Awards for
Economic Loss
20%
Administration
25%
never reaches
the victim
Defense Costs
16%
Source: Tillinghast-Towers Perrin
Tort Costs as a % of GDP*
Denmark
0.4%
U.K.
0.6%
High tort costs put the U.S. economy at
a significant disadvantage.
France
0.8%
Japan
0.8%
Canada
0.8%
Switzerland
Spain
0.9%
1.0%
Australia
1.1%
Belgium
1.1%
Germany
Italy
U.S.
1.3%
1.7%
1.9%
0.0% 0.2% 0.4% 0.6% 0.8% 1.0% 1.2% 1.4% 1.6% 1.8% 2.0%
*1998 (latest available)
Source: Tillinghast-Towers Perrin
Personal, Commercial &
Self (Un) Insured Tort Costs*
$180
Commercial Lines
Personal Lines
Total = $157.7 Billion
$160
$29.6
$140
Billions
Self (Un)Insured
Total = $120.2 Billion
$120
$20.1
$100
$70.9
$80
$51.0
$60
Total = $39.5 Billion
$40
$5.4
$17.1
$20
$0
$49.1
$57.2
1990
2000
$17.0
1980
*Excludes medical malpractice
Source: Tillinghast-Towers Perrin
There is a Glimmer of Hope
for Tort Reform
Best Chance for Tort Reform in Years
• Medical Malpractice
 States—already happening
 Federal reform is possible (but increasingly unlikely)
• General Federal Tort Reform
 Broad support across all industries
 But only 3 previous examples of federal tort limits
 Light aircraft (GARA), vaccines, implantable med devices
• Asbestos Reform (Supreme Court no help)
• Punitive Damages—What’s Reasonable
 Supreme Court ruled favorably in Campbell v. State Farm
Ratio of Punitive Award to Compensatory
Are We Finally Seeing Punitives
Reigned In by the Supreme Court?
500
500:1
400
300
200
In Campbell v. State Farm
(2003) the Supreme Court
ruled in a 22-year old Utah
case that punitive awards
that were 145 to 1 were
excessive (actual damages in
the case, which involved
insurer bad faith were $1
million)
In BMW of North America v. Gore (1996)the
Supreme Court ruled in an Alabama case that
punitive awards that were 500 to 1 were
excessive (actual damages in the case, which
involved the repainting of a car, were $4,000
but the jury awarded the plaintiff $2 million)
145:1
In Campbell v. State Farm the Court
added that “…few awards exceeding a
single- digit ratio between punitive and
compensatory damages will satisfy due
process…Single digit multipliers are
more likely to comport with due process,
still achieving the State’s deterrence and
retribution goals…”
100
10:1 ??
0
1996
Sources: Insurance Information Institute
2003
The Future?
Categories of Liability With
Highest % of Punitive Awards
The Supreme Court’s Campbell v. State Farm
ruling that a ratio of punitive to compensatory
damages “single digits” is excessive is especially
important for these categories of liability which
are hit with punitives with above-average
frequency.
40%
31%
30%
20%
20%
19%
10%
10%
9%
6%
5%
0%
Business
Negligence
Vehicular
Liability
Personal
Negligence
Products
Liability
Source: Jury Verdict Research; Insurance Information Institute.
Premises
Liability
Police
Negligence
Other
Liabilities
Median Punitive Award for Most
Frequent Categories of Liability, 2001
$200,000
$1,300,000
$150,000
$133,400 $134,500
$90,000
$100,000
$50,000
$30,000
$38,250 $40,000
$0
Vehicular
Liability
Personal
Negligence
Police
Negligence
Premises
Liability
Source: Jury Verdict Research; Insurance Information Institute.
Business
Negligence
Overall
Products
Liability
‘TOXIC’ MOLD
U.S.: Documented Toxic Mold Suits
Former
Owners of
Sold Homes
10%
Builder for
Construction
Defects
20%
Bad Faith
Against
Insurers
50%
1,000
Cases
5,000
Cases
2,000
Cases
2,000
Cases
HO
Associations
for Improper
Maintenance
20%
Source: www.toxlaw.com; Guy Carpenter
TX: Annual Losses from Mold Claims*
$ Millions
$2,279
$2,500
$2,000
Mold claim costs rose 612%
between 1999 and 2002
$1,500
$1,002
$1,000
$417
$500
$0
$320
1999
2000
20001
Source: Texas Department of Insurance;
*2002 III estimate is annualized figure based on data through September 2002.
2002E
Texas: Estimated Total Number
of Mold Claims, 1999-2002E*
237,299
250,000
The number of mold claims rose 106%
between 1999 and 2002
200,000
169,982
150,000
128,271
115,182
100,000
1999
2000
2001
2002E
Source: Texas Department of Insurance;
*2002 III estimate is annualized figure based on data through September 2002.
Texas Accounted for the Vast
Majority of New Mold Cases in 2001
Claims
Arising
Outside TX
30%
Source: Insurance Information Institute
Claims
Arising Inside
TX
70%
California: Surging Water Claim
Frequency and Costs:
Symptom of Growing Mold Problem
$450
$430.6
•Water losses paid rose 109% from 1997 to 2001 and
$400 50% since 1999
•Water claims accounted for less than 1/4 of all HO
$350 claims in 1997, now they account for nearly 1/3.
$383.7
32%
34%
32%
31%
30%
29%
$300
$276.5
$286.6
28%
27%
$250
26%
California may be
in a drought, but
homeowners say
they’re drowning
$206.1
$200
24%
$150
$100
24%
22%
20%
1997
1998
Paid Water Losses ($ Mill)
1999
2000
Water Claims as % of All Homeowners Claims
Source: Insurance Information Network of California; Insurance Information Institute
2001
Sharply Rising Average Water
Claim Cost: Mold Symptom
$5,000
The cost of the average water loss in CA
surged 27% in 2001 and 80% since 1998
$4,000
$4,730
$3,719
$3,339
$3,000
$2,537
$2,631
$2,000
1997
1998
1999
2000
2001
Source: Insurance Information Institute based on data from the Insurance Information Network of California;
Construction Defect Litigation
Destroying CA Condo Market
$3.00
$2.75
$2.50
Ratio of Losses Paid Out
to Premiums Taken In
$2.95
Condo construction in parts of CA has
come to a virtual stop.
Insurer costs rose 58% in just 2 years!
$2.25
$2.00
$1.87
$1.75
$1.50
“Right-to-Cure”
laws now in 5
states: AZ, CA,
NV, TX, WA
16 considering
such laws.
$1.25
$1.00
1998
Source: ISO, Insurance Information Institute
2000
Where are the Next
Battlefields for Mold?
• Homeowners issue probably crested in 2003
• Migration to commercial area affects many lines:
Commercial Property
Products Liability
Workers Comp…
Commercial Liability
Builders Risk/Construction Defects
• Hot Spots:
 Apartments/Condos/Co-ops
 Schools
Cars? (GM case in NC)
Office Structures
Municipal Buildings
• Trend toward class actions since science doesn’t
support massive individual non-economic damages
Much more lucrative for trial lawyers to form class
Source: Insurance Information Institute.
CRISIS IN
CORPORATE
GOVERNANCE
Accounting Problems are Getting
Many Companies into Trouble
•Enron was tip of an iceberg
•Major implications for insurers (p/c and life)
Financial Restatements Filed
300
250
200
The number of financial
restatements is rising
even thought the number
of publicly traded
companies is falling.
270
233
215
160
150
116
100
50
0
1997
1998*
*Approximate
Sources: Huron Consulting Group
1999*
2000
2001
Shareholder Class Action Lawsuits*
600
Shareholders typically recover just
2.56% of amount lost; 1/3 of that
goes to lawyers & expenses**
500
400
300
202
200
164
236
231
188
163
178
487
258
209 216
110
100
0
91
92
93
94
95
96
97
98
*Securities fraud suits filed in U.S. federal courts.
**Suits of $100 million or more.
Source: Stanford University School of Law; Insurance Information Institute
99
00
01
02
Summary
• Economics of the industry suggest hard market
should continue into 2004
If it doesn’t, it will end badly for some insurers
Combined ratio remains unacceptably high given
current investment environment
Top line improvement outpacing bottom line
improvement
Reserve hangover still enormous
• US courts still out of control
Hopes for significant tort reform probably too high
• Mold situation probably crested in 2002
Insurance Information
Institute On-Line
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