Download P6466 - iii Template - Insurance Information Institute

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  [email protected]  www.iii.org
How Big Are Liability Insurance Markets
in Major Economies?
Premiums & GDP (USD billions)
Rank
Liability
Total Non-Life
GDP
Percentage Shares
Liability/ Total
Non-Life
Liability/ GDP
1
US
8 4 .0
5 3 1 .2
1 6 '8 0 2
1 5 .8 %
0 .5 0 %
2
UK
9 .9
9 9 .2
2 '5 2 1
1 0 .0 %
0 .3 9 %
3
Germany
7 .8
9 0 .4
3 '7 1 3
8 .7 %
0 .2 1 %
4
France
6 .8
8 3 .1
2 '7 5 0
8 .2 %
0 .2 5 %
5
Japan
6 .0
8 1 .0
4 '9 6 4
7 .3 %
0 .1 2 %
6
Canada
5 .2
5 0 .5
1 '8 2 3
1 0 .3 %
0 .2 9 %
7
Italy
5 .0
4 7 .6
2 '0 7 3
1 0 .6 %
0 .2 4 %
8
Australia
4 .8
3 2 .7
1 '5 0 6
1 4 .8 %
0 .3 2 %
9
China
3 .5
1 0 5 .5
9 '3 4 5
3 .3 %
0 .0 4 %
10
Spain
2 .2
3 1 .0
1 '3 6 1
7 .0 %
0 .1 6 %
1 '1 5 0
4 6 '9 0 0
1 1 .8 %
0 .2 9 %
1 '5 5 0
6 1 '7 0 0
1 0 .3 %
0 .2 6 %
Top 1 0
World
135
160
The US and
UK have the
highest
shares of
liability
premiums
relative to
GDP
Liability
premiums
in China
account for
a much
smaller
share of
GDP
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%
?
0.1%
US [1]
Canada [1]
UK [1]
Germany
Italy
France
0.0%
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.
 The question is whether
economic drivers of claims
costs have begun to accelerate
in the US and some other
countries.
 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
3
US Non-Life Insurance Loss Reserve
Development, 1992 – 2016E*
Reserve Change
Source: A.M. Best; Barclays research for estimates.
Reserve releases are expected to
gradually taper off, but will
continue to benefit the bottom
line and combined ratio through
at least 2016
Some Expect Higher Claim Cost Growth
to Resume in Post-Crisis Era
Range of Expected Liability Claims Growth
(2014-20) vs historic growth (2007-12)
8%
6%
4%
 US, Canada, and the UK
have the highest GDP
forecasts; France and
Italy the lowest.
 The UK and France
have historically shown
low growth of claims in
relation to GDP.
2%
0%
-2%
-4%
Historic growth (2007-2012)
Expected claims growth (2014-2020)
 Canada and Germany
have historically high
correlations of claims
growth to wage and CPI
inflation.
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
Sources: US Bureau of Labor Statistics; Insurance Information Institute.
05
06
07 08
09
10
11
12
13
14
US National Health Care Expenditures as
a Share of GDP, 1965 – 2022F*
% of GDP
18%
16%
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
2022
19.9%
2010:
17.9%
14%
12%
10%
1990:
12.5%
8%
6%
2%
0%
1965
5.8%
Since 2009, heath
expenditures as a %
of GDP have
flattened out at
about 18%--the
question is why and
will it last?
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
4%
1980:
9.2%
2000:
13.8%
Sources: Centers for Medicare & Medicaid Services, Office of the Actuary at http://www.cms.gov/Research-Statistics-Data-and-Systems/StatisticsTrends-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
Tort Costs: Rising for Eight Decades
Growth in Tort Costs, Current (Nominal) Dollars,1933-2011
300
Billions of Dollars
250
2011 (est.): $253 billion
(770 times more than 1933)
200
150
100
50
1933
1935
1937
1939
1941
1943
1945
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011 *
1933: $343 million
A clear flattening
of tort cost has
occurred in
recent years
after 7 decades
of increases
* Projected
Sources: Trends in Tort Costs, Towers Watson; Insurance Information Institute.
10
Over the Last Three Decades, Total Tort Costs as a
% of GDP Appear Somewhat Cyclical, 1980-2013E
($ Billions)
$300
2.25%
Deepwater
Horizon Spike
in 2010
$200
2.00%
$150
$100
1.75%
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
Tort Costs as % of GDP
2.21% of
GDP in 2003
= pre-tort
reform peak
$250
Tort System Costs
2.50%
Tort Costs as % of GDP
Tort Sytem Costs
1.68% of
GDP in
2013
1.50%
$0
80
82
84
86
88
90
92
94
96
98
00
Sources: Towers Watson, 2011 Update on US Tort Cost Trends, Appendix 1A
02
04
06
08
10
12E
11
The Nation’s Judicial Hellholes: 2014/2015
(Are Now Fewer in Number)
Illinois
Watch List
 Atlantic County, New
Jersey
 Mississippi Delta
 Montana
 Nevada
 Newport News, Virginia
 Philadelphia,
Pennsylvania
West Virginia
Madison County
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%
60%
50%
40%
30%
20%
10%
1973: 94%
was insured,
6% self(un)insured
1985:74.5%
insured,
25.5% self(un)insured
1995: 69.5%
insured,
30.5% self(un)insured
2005: 66.4%
insured,
33.6% self(un)insured
Self (Un) Insured Share
Insurer Share
0%
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
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
List of Emerging Risks Future
Tort Cost Drivers is Endless
New Risks Emerge Every Day
Can They Be Contained and
Managed?
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
800
700
783
200
662
656
619
180
600
160
498
500
140
446127.7
419
447
87.9
400
66.9
120
85.6
321
35.7
157
100
80
300
200
220
60
16.2
19.1
22.9
40
17.3
20
100
0
2005
2006
2007
2008
2009
# Data Breaches
2010
2011
2012
2013
2014
# 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
regulatory
authorities
Regulatory
fines at
home &
abroad
Costs of
notifying
affecting
individuals
Data
Breach
Event
Forensic costs
to discover
cause
Defense and
settlement
costs
Lost customers
and damaged
reputation
Cyber extortion
payments
Business
Income Loss
Source: Zurich Insurance; Insurance Information Institute
17
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