U.S. Tort Costs Rise in 2003, but at More Moderate Pace Than in Prior Years, According to Tillinghast Study

January 12, 2005

U.S. tort costs reached a record $246 billion in 2003, or approximately $845 per person, according to U.S. Tort Costs: 2004 Update from the Tillinghast business of Towers Perrin. This represents a 5.4 percent increase in tort costs from 2002 — a much slower growth rate than the prior two years (13.4 percent increase in 2002; 14.7 percent increase in 2001).

The 2004 Update analyzes tort costs from 1950 through 2003, with projections into 2006. The 5.4 percent rate of growth in tort costs in 2003 slightly exceeded overall economic growth (as measured by gross domestic product — GDP) of 4.9 percent.

“The moderation in tort cost growth during 2003 merits closer consideration,” said Russ Sutter, principal. “Essentially, the double-digit increases in 2001 and 2002 raised costs to such a high level that growth rates were bound to level off — at least for a short period of time. But there is plenty of uncertainty lurking beneath the surface, so we can’t really say that this more modest growth trend in tort costs will definitely continue.”

Some factors that may impact the growth of tort costs in the near future include:

— Possible reversal in personal auto liability trends from their
current benign growth

— Enactment of widespread asbestos reform

— Industry scandals (such as the mutual fund and insurance
industry scandals), which may prompt large lawsuits

— The potential for obesity-related claims

Commercial Tort Costs Moderate

“There seems to be a shift under way in the types of liabilities that comprise tort costs. In particular, substantial improvements in auto safety over the last several years have led to a long-term decline in the frequency of auto accidents. As a result, personal lines tort costs have been relatively stable, and we expect this trend to continue,” Sutter said. The annual growth rate for personal lines tort costs (torts alleged against individuals, excluding medical malpractice) has averaged around 5 percent since 2001.

“Commercial lines tort costs (torts alleged against business) tend to fluctuate more year to year since there are more ‘unknown quantities’ involved with lawsuits that involve commercial entities,” he added. “Based on what we know right now, we expect any future spikes in tort costs to come from this side.”

Growth in commercial lines tort costs dropped significantly from 20 percent in 2001 to 5.5 percent in 2003, which slowed total tort costs growth. Recognized direct insured asbestos losses increased by $9 billion in 2003, slightly less than the $10 billion increase in 2002, but still significantly higher than the $2 billion increase in 2000 and the $5 billion increase in 2001. The 2003 decline relative to 2002 was partly the cause of the dampening effect on the percentage growth of total commercial tort costs.

“While asbestos-related reserve additions during 2002 and 2003 were significant, we anticipate further increases absent comprehensive asbestos reform. The U.S. insurance industry has recognized only $50 billion of net asbestos liabilities compared to Tillinghast’s estimate of $60 billion ultimately,” said Jenni Biggs, principal and co-leader of Tillinghast’s asbestos practice.

Medical Malpractice Tort Costs: On the Rise

Medical malpractice tort costs in the U.S. totaled $27 billion, or $91 per person, in 2003. The growth in these costs — 11.8 percent per year on average since 1975 — continues to outpace that of total tort costs, which has averaged 9.2 percent per year.

“Medical malpractice increases may have peaked in 2003 on a national basis,” Sutter said. “However, med mal cost trends are very state-specific — perhaps more so than any other tort class — so costs have not necessarily peaked in every state. We have seen some moderation in growth on a state-by-state basis, perhaps due to tort reforms that were implemented in 2003.”

“Reinsurance pricing for all liability coverages, but especially medical malpractice, is sensitive to the assumptions used concerning the rate of growth of tort costs,” added Michael Hollenbach, Professional Liability Practice Leader for Towers Perrin’s Reinsurance business. “In the past several years, many reinsurers have built higher tort growth rates into their pricing models, driving up the cost of reinsurance. With the implementation of these increases, along with a tort cost growth rate for the near future which appears stable, reinsurers seem poised to perform relatively well in the medical malpractice arena at least in the short term.”

Future Implications

Given current trend patterns, Tillinghast expects U.S. tort costs to increase 6.5 percent in 2004, and increase between 5 percent and 8 percent annually in each of the following two years. Based on predictions of GDP growth in 2004, Tillinghast expects the ratio of tort costs to GDP to remain at 2.23 percent in 2004.

“President Bush has put tort reform high on his legislative agenda for the second term,” said Jeanne Hollister, senior consultant. “Depending on the nature and extent of the reforms proposed and the timing of their passage, it will take some time to understand their impact on the trends we are seeing in tort cost inflation.”

U.S. Tort Costs: 2004 Update is the eighth study of U.S. tort costs published by the Tillinghast business of Towers Perrin. The full report is available at www.towersperrin.com/tillinghast.

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