Towers Perrin Study Indicates U.S. Tort Costs Down in 2006

The 2007 update on U.S. Tort Cost Trends from the Tillinghast insurance consulting practice of Towers Perrin said U.S. tort costs totaled $247 billion in 2006, which is $57 less per person than in 2005 at approximately $825 per person. The $13.4 billion decrease over tort costs in 2005 marks the first downward trend since 1997. The report considerd U.S. tort costs from 1950 through 2006, with projections through 2009.

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

Tillinghast said one of the greatest contributors 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.”

The firm said, 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.

For 2006, medical malpractice tort costs were said to total $30.3 billion, up from $29.4 billion in 2005. Tillinghast said medical malpractice costs have increased at an annual rate of 11.1 percent, since 1975, versus 8.2 percent 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,” said Sutter.
Looking ahead, Tillinghast anticipated growth of U.S. tort costs to be 2.5 percent in 2007, with slightly higher growth of 4.5 percent for the following two years.

They said 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,” said Sutter.

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 did not include 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 report is available at www.towersperrin.com/tillinghast.

Source: Towers Perrin and Tillinghast.