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Liability Trends, Issues and Jury Verdicts:
Impact on Insurance Liability and Excess Casualty Markets
Insurance Information Institute
October 2003
Robert P. Hartwig, Ph.D., CPCU, Senior Vice President & Chief EconomistInsurance 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• P/C Insurance Overview
• Liability Issues
• P/C Macro Cost Drivers
• US Legal System: Is it Out of Control
• Case Studies
• Overview of Primary & Excess Liability Markets
• Pricing & Profitability Considerations
• Corporate Governance
• Q&A
P/C FINANCIAL OVERVIEW
Highlights: Property/Casualty First Half 2003
2003 2002 Change
Net Written Prem. 202,828 182,760 +11.0%
Loss & LAE 142,129 134,897 +5.4%
Net UW Gain (Loss) (2,070) (11,422) -81.9%
Net Inv. Income 18,268 17,894 +2.1%
Net Income (a.t.) 14,496 4,371 +231.6%
Surplus* 312,455 284,300 +9.9%
Combined Ratio 99.8 105.1 -5.3 pts.
*Comparison with year-end 2002
-10%
-5%
0%
5%
10%
15%
20%
25%
19
70
19
71
19
72
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
Current $ Real $
Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute
Strength of Recent Hard Markets by Real NWP Growth
Real NWP Growth During Past 3 Hard Markets
1975-78: 8.6%
1985-87: 14.5%
2001-03F: 8.8%
1975-78 1985-87 2001-03
*2003 figure is estimate on first half result.
P/C Net Income After Taxes1991-2003* ($ Millions)
$14,178
$5,840
$19,316
$10,870
$20,598
$24,404
$36,819
$30,773
$21,865$20,559
-$6,970
$2,903
$14,496
-$10,000
$0
$10,000
$20,000
$30,000
$40,000
91 92 93 94 95 96 97 98 99 00 01 02 03*
*First half 2003Sources: A.M. Best, ISO, Insurance Information Institute.
2001 was the first year ever with a full year net loss
2002 ROE = 1.0%
2003 ROE = 9.7%*
-5%
0%
5%
10%
15%
20%
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03F
US P/C Insurers All US Industries
ROE: P/C vs. All Industries 1987–2003E*
*2003 p/c estimate based on first half data.Source: Insurance Information Institute; Fortune
-5%
0%
5%
10%
15%
20%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E
ROE Cost of Capital
ROE vs. Cost of Capital: US P/C Insurance: 1991 – 2003E
Source: The Geneva Association, Ins. Information Inst.
The gap between the industry’s cost of capital and its rate of return is narrowing
14.6
pts
10.2
pts
US P/C insurers missed their cost of capital by an average 6.9 points from 1991 to 2002
1.8
pts
95
100
105
110
115
120
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
P/C Industry Combined Ratio
2001 = 115.7
2002 = 107.2
2003First Half = 99.8
Combined Ratios
1970s: 100.3
1980s: 109.2
1990s: 107.7
2000s: 111.0
Sources: A.M. Best; ISO, III *Based on First Half 2003 results.
110.
5
105.
0 113.
6
119.
2
104.
8
100.
8
100.
5
114.
3
106.
5
121.
3
97.9
108.
8 115.
8
106.
9
108.
5
106.
5
105.
8
101.
6
105.
6
107.
7
110.
0 115.
7
107.
2
99.8
162.
5
126.
5
90
100
110
120
130
140
150
160
170
91 92 93 94 95 96 97 98 99 00 01 02 03*
Reinsurance All Lines Combined Ratio
Combined Ratio: Reinsurance vs. P/C Industry
*First half 2003 figures for full industry from ISO; 1st half reinsusrance figures from RAA.
Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute
2001’s combined ratio was the worst-ever for reinsurers; 2003 was bad as well.
2003: Big improvement in first half
($60)
($50)
($40)
($30)
($20)
($10)
$0
$101
97
51
97
61
97
71
97
81
97
91
98
01
98
11
98
21
98
31
98
41
98
51
98
61
98
71
98
81
98
91
99
01
99
11
99
21
99
31
99
41
99
51
99
61
99
71
99
81
99
92
00
02
00
12
00
22
00
3
Underwriting Gain (Loss)1975-2003*
*2003 figure of $5.42 billion is annualized based on first quarter underwriting loss of $2.71 billionSource: A.M. Best, Insurance Information Institute
$ B
illi
ons
Based on first half results, 2003 will likely be a much better year in terms of underwriting losses.
First half losses totaled $2.71 billion or $5.42 billion on an annualized basis
10.1
%
8.0%
2.1% 2.5%
0.2%
6.1% 7.
3% 8.1%
11.2
%
14.7
%
1.3%
9.0%
5.1% 6.
4% 7.3%
5.7%
7.4%
7.6%
-1.1
%
14.0
%
-2.1
%
10.7
% 12.0
%
-5%
0%
5%
10%
15%
92 93 94 95 96 97 98 99 00 01 02 03p
Health Benefit Costs WC
Med Claim Costs Rising Sharply
Source: NCCI; William M. Mercer, Insurance Information Institute.
Health care inflation is affecting the cost of medical care, no matter
what system it is delivered through
World’s Most Dangerous Lines of Insurance(Combined Ratio + 1 Std. Deviation)
135.6135.1
133.9133.3
131.6129.3
121.8119.3
118.7117.1
116.3115.1114.6
112.9111
109.7109.1
107106.6
103.4102.9
101.7101.3
10084.1
73.3
70 80 90 100 110 120 130 140 150
EarthquakeMed Mal
Other LiabilityReinsurance
HomeownersAllied Lines
AircraftComm. Multi PerilComm. Auto Liab.
Workers CompFarm Multi PerilCommercial--All
Ocean MarineFire
All LinesPP Auto Liab
Personal--All LinesComm Auto PD
Boiler & MachineGroup A&HOther A&H
Priv Pass PDInland Marine
FidelityOther
SuretyBurglary & Theft
Source: Insurance Information Institute, calculated from A.M. Best combined ratio data 1992-2001.
407.3
(IN)SOLVENCY ISSUES
Seismic Shift in P/C Insurer Ratings
-30
-25
-20
-15
-10
-5
0
5
10
1998 1999 2000 2001 2002
Upgrades / Downgrades: North America
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Decline in Average Rating
Aa3
A1
A2
A3
Shift in IFS Ratings Distribution (by Group)
• Ratings in persistent, accelerating decline.
• Aaa ratings appear an endangered species.
• Mainly commercial insurers and reinsurers.
Is 2003 the trough?
0
5
10
15
20
25
30
Aaa Aa A Baa <Baa
1998 2003
Source: Moody’s
P/C Company Insolvency Rates,1993 to 2002
Source: A.M. Best; Insurance Information Institute
1.20%
0.58%
0.21%0.28%
0.79%
0.60%
0.23%
1.02% 1.03%
1.33%
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
•Insurer insolvencies are increasing•10-yr industry failure rate: 0.72%
•Failure rating for B+ or better rating: 0.49%•Failure rate for D through B rating: 1.29%
383030
10-yr Failure Rate
= 0.72%
Reason for P/C Insolvencies(218 Insolvencies, 1993-2002)
Unidentified17%
Impaired Affiliate3%
Overstated Assets2%
Change in Business
3%
CAT Losses3%
Reinsurer Failure0%
Rapid Growth10%
Discounted Ops8%
Alleged Fraud3%
Deficient Loss Reserves
51%
Source: A.M. Best, Insurance Information Institute
Reserve deficiencies account for
more than half of all p/c insurers
insolvencies
$ Billions, Calendar Year Basis
$2.3 $2.2 $1.2
($8.5)
($1.5)
($7.5)($6.7)($10.0)
$22.7
$0.3
($3.7)($0.3)
$9.9
($15)
($10)
($5)
$0
$5
$10
$15
$20
$25
90 91 92 93 94 95 96 97 98 99 00 01 02
P/C Insurance Industry Prior Year Reserve Development*
*Negative numbers indicate favorable development; positive figures represent adverse development.Source: A.M. Best, Morgan Stanley, Dowling & Partners Securities
Adverse reserve development of about $23 billion accounted for most of the
industry’s 2002 underwriting loss and “ate” much of the industry’s $37 billion
increase in earned premiums
Points (Reduced)/Increased
0.5
(2.4)
5.2
6.3
(0.4)
-3
-2
-1
0
1
2
3
4
5
6
7
1998 1999 2000 2001 2002
Combined Ratio:Impact of Reserve Changes (Points)
Source: ISO, A.M. Best, MorganStanley.
Adverse reserve development totaling an estimated $23 billion
added more than 6 points to the p/c combines ratio in 2002
LIABILITY ISSUES:Dollars and $ense
Cost of U.S. Tort System($ Billions)
Source: Tillinghast-Towers Perrin. 2005 forecasts from Tillinghast.
$129 $130$141 $144 $148
$159 $156 $156$167 $169 $180
$205
$298
$0
$50
$100
$150
$200
$250
$300
$350
90 91 92 93 94 95 96 97 98 99 00 01 05F
Tort costs consumed 2.0% of GDP annually on average since 1990, expected to rise to 2.4% of GDP by 2005!
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
Tort Costs as a % of GDP*
0.4%
0.6%
0.8%
0.8%
0.8%
0.9%
1.0%
1.1%
1.1%
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%
Denmark
U.K.
France
Japan
Canada
Switzerland
Spain
Australia
Belgium
Germany
Italy
U.S.
*1998 (latest available)Source: Tillinghast-Towers Perrin
High tort costs put the U.S. economy at a significant disadvantage.
Highest Indemnity Award for aSingle Bodily Injury
$124.0
$10.8
$7.3
$7.2
$5.9
$5.8
$5.5
$5.0
$4.3
$3.4
$3.3
$3.2
$2.0
$1.9
$1.4
$0.6
$0.6
$0 $20 $40 $60 $80 $100 $120 $140
U.S.
Switzerland
Australia
Germany
Belgium
UK
France
Canada
Italy
Spain
Hong Kong
Japan
Austria
Sweden
Norway
Denmark
Portugal
Sources: Swiss Re; 2003 Marsh Limits of Liability Survey
Geography Matters
U.S. awards are gargantuan compared to those in other countries
Personal, Commercial & Self (Un) Insured Tort Costs*
$17.0
$49.1 $57.2$17.1
$51.0
$70.9
$5.4
$20.1
$29.6
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
1980 1990 2000
Commercial Lines Personal Lines Self (Un)Insured
Bil
lion
s
Total = $39.5 Billion
*Excludes medical malpracticeSource: Tillinghast-Towers Perrin
Total = $120.2 Billion
Total = $157.7 Billion
Where the Tort Dollar Goes(2000)
Source: Tillinghast-Towers Perrin
Awards for Non-Economic
Loss22%
Claimants' Attorney Fees
17%Awards for
Economic Loss20%
Defense Costs16%
Administration25%
Tort System is extremely inefficient:
Only 20% of the tort dollar compensates victims for economic losses
At least 58% of every tort dollar never reaches the victim
There is a Glimmer of Hopefor Tort Reform
Best Chance for Tort Reform in Years
• Medical MalpracticeStates—already happening: 20+ states have caps
Federal reform discussed in Congress but bill failed in Senate
• Class Action ReformClass Action Fairness Act
Presently 2 or 3 votes short in the Senate. Vote in October????
• Asbestos ReformFairness in Asbestos Injury Resolution of 2003; Sept. vote?
• Punitive Damages—What’s ReasonableSupreme Court ruled favorably in Campbell v. State Farm
Summary of Class ActionLegislation: H.R. 1125 & S. 274
• Interstate class actions can be removed to fed courts if:Amount of suit exceeds $5 million, and
Plaintiffs and defendants are from different states
• Prohibits fed court from approving settlement if:Members would receive non-cash settlement or must expend funds to receive
settlement.
Member must pay sums to class counsel resulting in net loss
Greater sums paid to members closer to court
Class representative receives greater share than other members
• Notice Requirements (to join, settle cases)
• Report to Senate/House Judiciary Cmtes. on best practices
Are We Finally Seeing Punitives Reigned In by the Supreme Court?
10:1 ??
145:1
500:1
0
100
200
300
400
500
1996 2003 The Future?
Rat
io o
f Pun
itiv
e A
war
d to
Com
pens
ator
y
Sources: Insurance Information Institute
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)
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…”
Categories of Liability With Highest % of Punitive Awards
31%
20% 19%
10%
6% 5%
9%
0%
10%
20%
30%
40%
BusinessNegligence
VehicularLiability
PersonalNegligence
ProductsLiability
PremisesLiability
PoliceNegligence
OtherLiabilities
Source: Jury Verdict Research; Insurance Information Institute.
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.
Median Punitive Award for Most Frequent Categories of Liability, 2001
$30,000$38,250 $40,000
$90,000
$133,400$134,500
$0
$50,000
$100,000
$150,000
$200,000
VehicularLiability
PersonalNegligence
PoliceNegligence
PremisesLiability
BusinessNegligence
Overall ProductsLiability
Source: Jury Verdict Research; Insurance Information Institute.
$1,300,000
P/C COST DRIVERS
Macro Factors
$0
$50
$100
$150
$200
$250
$300
$350
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*
U.S. Policyholder Surplus: 1975-2003*
Source: A.M. Best, Insurance Information Institute *First Half
$ B
illi
ons
Surplus (capacity) peaked at $336.3 Billion in mid-1999 and fell by 15.5% ($52 billion) to $284.3 billion at year-end 2002 (a trough?)
•Surplus during the first half of 2003 rose by $28.2B or 9.9% to $312.5B
“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations
$47 Billion
Capacity of Lloyd’s Market
£8.9
£10.9£10.2 £10.0
£10.3 £10.2£9.9 £10.1
£11.1
£12.2
£14.4
£8
£9
£10
£11
£12
£13
£14
£15
93 94 95 96 97 98 99 00 01 02 03
After remaining stable at around GBP10bn, Lloyd’s capacity has increased by over 40% in the last three years.
2003 capacity is GBP14.4bn, 18% higher than 2002.
Source: Lloyd’s
Number of Captive Formations & Liquidations 1993 to 2002
294
305
250
245
316
462
238
289
243 29
0
150
113
103
102 13
5
154
156
170 20
2
311
0
100
200
300
400
500
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
New Captives Liquidated CaptivesSource: AM Best, Tillinghast-Towers Perrin
Hard market fueling captive formation
Corporate collapses and captive consolidations fueled the upward trend in captive liquidations in 2002.
100110
120130140
150160
170180190
200210220
230240
250260
89 90 91 92 93 94 95 96 97 98 99 00 01 02*
Rate On Line Index(1989=100)
Source: Guy Carpenter * III Estimate
Prices rising, limits falling: ROL up significantly
Gross Premiums Breakdown: Net vs. Ceded
$0
$50
$100
$150
$200
$250
$300
$350
$400
$450
$500
1997 1998 1999 2000 2001E 2002E
Net Premiums Written Reinsurance Ceded
In B
illi
ons
Ceded: 13.6%
Source: A.M. Best.
$43
$274
$46
$278
$53
$284
$62
$300
$72
$327
$61
$389Ceded: 14.3%
Ceded: 15.8%Ceded: 17.2%Ceded: 18.0%
Ceded: 13.6%
Cession rate fell from 18.0% in 2001 to 13.6% in 2002 (est). Less reinsurance is available.
10.1
%
8.0%
2.1% 2.5%
0.2%
6.1% 7.
3% 8.1%
11.2
%
14.7
%
1.3%
9.0%
5.1% 6.
4% 7.3%
5.7%
7.4%
7.6%
-1.1
%
-2.1
%
10.7
% 12.0
%
-5%
0%
5%
10%
15%
92 93 94 95 96 97 98 99 00 01 02
Health Benefit Costs WC
Med Claim Costs Rising Sharply
Source: NCCI; William M. Mercer, Insurance Information Institute.
Health care inflation is affecting the cost of medical care, no matter
what system it is delivered through
$0
$9
$18
$27
$36
$45
75 77 79 81 83 85 87 89 91 93 95 97 99 01 03E
Net Investment Income
History
1997 Peak = $41.5B
2000= $40.7B
2001 = $37.7B
2002 = $36.7B
2003E = $36.5B
Bil
lion
s
(US
$)
Investment income fell 2.8%in 2002 but rose 2.1% in first half of 2003
Note: 2003 estimate is based on annualized first half investment income of $18.268 billion.Source: A.M. Best, Insurance Information Institute
-$5.6 Billion
-30%
-20%
-10%
0%
10%
20%
30%
40%
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
*As of October 3 , 2003.Source: Ibbotson Associates, Insurance Information Institute
Total Returns for Large Company Stocks: 1970-2003*
2002 was 3rd consecutive year of decline for stocks
Will it be the last?
S&P 500 up 17.1% so
far this year
Property/Casualty Insurance Industry Investment Gain*
$ Billions
$35.4
$42.8$47.2
$52.3
$44.4
$36.6
$45.6
$57.9
$51.9
$56.9
$0
$10
$20
$30
$40
$50
$60
94 95 96 97 98 99 00 01 02 03E
*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 6/30/03.
Investment gains are simply returning to “pre-bubble” levels
THE U.S. LEGAL SYSTEM:IS IT OUT OF CONTROL?
TRENDS, CONDITIONS & OUTLOOK
TORT-ure
• Asbestos• Silicosis• “Toxic” Mold• Medical Malpractice• Construction Defects• Lead• Fast/Fattening Foods & Obesity• Reality TV• Arsenic Treated Lumber • Guns• Genetically Modified Foods & Labeling• Generic Drugs, Pharmaceuticals & Medical Devices• Security exposures (workplace violence, post-9/11 issues)• Slavery
New
New
New
2002 Top Ten Verdicts
Source: LawyersWeekly USA, January 2003.
Value Issue State
$28 Billion Tobacco (Product Liability) Florida
$2.2 Billion Negligence (Pharmacy Mal) Missouri
$270 Million Personal Injury (Burn) Kentucky
$225 Million Product Liability (Rollover) Texas
$150 Million Tobacco (Product Liability) Oregon
$122 Million Product Liab. (Auto Accident) Virginia
$97.2 Million Business Fraud California
$95.2 Million Med Mal (Birth Injury) New York
$91 Million Medical Malpractice New York
$80 Million Med Mal (Birth Injury) New York
$80 Million Prod. Liab/Personal Inj. (Auto) Missouri
States With the Most Top 10 Jury Awards1995-2002
18
1312
7
54 4
0
5
10
15
20
NY CA TX MO FL GA AL
Source: Lawyers Weekly USA; Insurance Information Institute.
•79% (63/80) of Top 10 awards came from just 7 states between 1995-2002
•23 States have had no award in the top 10
Business Leaders Ranking of Liability Systems for 2003
Best States1. Delaware2. Nebraska3. Iowa4. South Dakota5. Indiana6. North Dakota7. Utah8. Virginia9. Minnesota10. New Hampshire
Worst States41. New Mexico42. South Carolina43. Hawaii44. California45. Arkansas46. Texas47. Louisiana48. Alabama49. West Virginia50. Mississippi
Source: US Chamber of Commerce States Liability Systems Ranking Study; Insurance Info. Institute.
The Nation’s Judicial Hellholes
Source: American Tort Reform Association; Insurance Information Institute
City of St. Louis, MO
CALIFORNIA
Alameda County
Los Angeles County
San Francisco County
Orleans Parish, LA
I
Madison County, IL
TEXAS
Jefferson County
Hidalgo County
Starr County
Mississippi’s 22nd Judicial
District
Verdicts of $100+ Million
Source: Marsh, 2001 Limits of Liability Report
17 18
27
0
5
10
15
20
25
30
1998 1999 2000
1994-2000
14%12%
10%8% 8%
4%
25%
17%
11% 11%9%
0%
5%
10%
15%
20%
25%
30%
Alaba
ma
Idah
o
New M
exico
Alask
a
S. Dak
ota
Utah
S. Car
olin
a
W. V
irgin
ia
Haw
aii
Verm
ont
U.S. A
vg.
% of Jury Awards with Punitive Damages, by Jurisdiction
Source: Jury Verdict Research, Current Award Trends in Personal Injury (2002 edition)
1995-2001
10%9%
7%
4%
6%
8%9%
13%13%
0%
2%
4%
6%
8%
10%
12%
14%
Haw
aii
S. Dak
ota
W. V
irgin
ia
Mon
tana
S. Car
olin
a
Texas
Wisc
onsin
Ken
tuck
y
U.S. A
vg.
% of Jury Awards with Punitive Damages, by Jurisdiction*
*Data for AL, AK, AZ, ID, MS, NE, NM, ND, VT 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 (2002 edition)
19% 19%
3% 3%
12%
27%
20%
17%
4%3%
0%
5%
10%
15%
20%
25%
30%
New Y
ork
Penns
ylvan
ia
Louisi
ana
Mas
sach
usett
s
Texas
CT/IA/K
S
Nebra
ska
Okl
ahom
a
Tenne
ssee
U.S. A
vg.
% of Jury Awards of $1 Million or More, by Jurisdiction (1995-2001)*
Top Five Bottom Five
*Compensatory awards only. Data for AK, AZ, ID, MS, NM, ND, VT 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 (2002 edition)
Average Jury Awards1994 vs. 2001
419 187 333759
1,185 1,1401,744
1,365
323789
1,7272,288
3,902
9,113
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
Overall VehicularLiability
PremisesLiability
BusinessNegligence*
WrongfulDeath
MedicalMalpractice
ProductsLiability
($00
0)
1994 2001
*Figure is for 2000 (latest available)Source: Jury Verdict Research; Insurance Information Institute.
Trends in Million Dollar Verdicts*
4%
10%
8%
21%
21%
36% 42
%
4%
11%
11%
27%
25%
43%
59%
6%
10% 17
%
44% 47
% 54%
68%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
VehicularLiability
PersonalNegligence
PremisesLiability
BusinessNegligence
GovernmentNegligence
MedicalMalpractice
ProductsLiability
95-97 98-99 2000-2001
*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.
Very sharp jumps in multi-million dollar awards in recent years across virtually all types of defendants
Probability of Plaintiff Verdict is Rising
Source: Jury Verdict Research, 2002 Current Award Trends
1994 1997 2001
Premises Liability 43% 45% 57%
Business Negligence NA 57% 66%
Vehicular Liability 58% 59% 68%
Products Liability 39% 39% 56%
Excess Layer Hit With Leveraged Impact of Increase in Trend
Assumptions: Primary Limit of $1 M
Ground Up Trend of 7.0%
ClaimTotal Loss
Primary Loss
Excess Loss
% Loss Trend
Total Loss
Primary Loss
Excess Loss
1 0.900 0.900 0 7.0 0.963 0.963 02 1.000 1.000 0 7.0 1.070 1.000 0.0703 2.000 1.000 1.00 7.0 2.140 1.000 1.140
Total 3.900 2.900 1.00 4.173 2.963 1.210
7.0% 2.2% 21.0%Loss Trend:Trend in excess layers is 3 times the ground-up
trend and nearly 10 times the primary trend
Factors Driving Severity
More Sophisticated & Innovative Plaintiff’s Bar Trial Bar is Flush With Cash
Rush to file cases before reform legislation Medical Inflation Venue—Judicial “Hellholes” in these states:
TX, MS, AL, CA, NY, FL, IL, LA Class Actions Erosion of Tort Reform/Acceptance of “Junk Science” as Fact Jury Desensitization to Money/Deep Pockets Syndrome Sensationalized Media Coverage (e.g., Mold) Concern over Corporate Image—Cos. Quick to Settle Some US Corporations do Really Dumb Things (Enron,etc.)
Why Are Awards Getting Bigger?
EXAMPLES
CASE STUDY 1:
SILICOSIS
Silica: An Emerging Problem
Crystalline silica, or quartz, is the second most
common mineral in the earth’s crust and a major
component of sand, rock and mineral ores.
Overexposure to respirable crystalline silica can
cause a disabling and sometimes fatal lung disease
known as silicosis.
More than 1 million US workers are exposed to
crystalline silica and each year more than 250 of them
die with silicosis.Source: National Institute for Occupational Safety and Health (NIOSH) and the Department of Labor (DOL)
Occupations At Greatest Risk Of Silica Exposure
• Construction - sandblasting, rock drilling• Mining - cutting or drilling through sandstone and
granite• Foundry work - grinding, moldings• Stone cutting - sawing, abrasive blasting, chipping,
grinding• Glass manufacturing• Agriculture - such as plowing or harvesting• Shipbuilding - abrasive blasting• Ceramics, clay, and pottery• Railroad - setting and laying track• Manufacturing of soaps and detergents• Manufacturing and use of abrasives
Source: National Institute for Occupational Safety and Health (NIOSH) and the Department of Labor (DOL)
Claims Filed Against U.S. Silica By Claimant (1997-2003)
Source: Coalition for Litigation Justice; (* through 6/30/03)
93 153 505 6541,371
5,142
15,342
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
1997 1998 1999 2000 2001 2002 2003*
• Leading industrial sand producer U.S. Silica today faces more than 22,000 silica claims!
• Some 15,342 plaintiffs have named the company in lawsuits so far in 2003 - triple the number seen in 2002!
Some 87% of the lawsuits filed are from Mississippi and Texas!
CASE STUDY 2:
“TOXIC” MOLD
$0
$50
$100
$150
$200
$250
Wa
ter
Da
ma
ge
Pa
id L
os
se
s*
($M
illio
ns
)
0
5000
10000
15000
20000
25000
30000
Cla
im C
ou
nt
Paid Losses
Claim Count
Source: Texas Department of Insurance; Insurance Information Institute
* Data are for TDI Cause 61: Discharge – Other Damage. Not all claims in cause 61 are mold and mold claims may also arise from other (non-water) causes of loss.
Texas: Mold Losses/Claims Are Finally Moderating*
California: Surging Water Claim Frequency and Costs:
Symptom of Growing Mold Problem
$224.1
$298.9$316.5
$441.6
$496.3
$562.4
24%
36%
27%
32%33%
31%
$100
$150
$200
$250
$300
$350
$400
$450
$500
$550
$600
1997 1998 1999 2000 2001 2002
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
Paid Water Losses ($ Mill) Water Claims as % of All Homeowners Claims
Source: Insurance Information Network of California; Insurance Information Institute
•Water losses paid rose 151% from 1997 to 2002 and 77% since 1999
•Water claims accounted for less than 1/4 of all HO claims in 1997, now they for 1/3.
California may be in a drought, but homeowners say they’re drowning
Where are the Next Battlefields for Mold?
• Homeowners issue probably crested in 2002• Migration to commercial area affects many lines:
Commercial Property Commercial LiabilityProducts Liability Builders Risk/Construction DefectsWorkers Comp…
• Hot Spots: Apartments/Condos/Co-ops Office Structures (e.g., IBM) Schools Municipal BuildingsCars? (GM case in NC)
• Trend toward class actions since science doesn’t support massive individual non-economic damagesMuch more lucrative for trial lawyers to form class
Source: Insurance Information Institute.
CASE STUDY 3:
CONSTRUCTION DEFECT/BUIDER’S RISK
Construction Defect Problem• Growing number of lawsuits target:
Builders, Contractors, Developers, Sub-Contractors, Material Suppliers, Product Manufacturers, Architects & Engineers.
• Construction defect claims include:Subsidence, collapse, cracks in walls & foundations.Leaking roofs, windows, doors, foundations.Dry rot of wood or other building materials, pest
infestations.Mold, code violations, improper specification of building
materials.
• Hotspots:California, Nevada, Colorado, Texas, the Carolinas, Florida,
New York.
Construction Defect Litigation Destroying CA Condo Market
$1.87
$2.95
$1.00
$1.25
$1.50
$1.75
$2.00
$2.25
$2.50
$2.75
$3.00
1998 2000
Source: ISO, Insurance Information Institute
Condo construction in parts of CA has come to a virtual stop.
Insurer costs rose 58% in just 2 years!
Ratio of Losses Paid Out to Premiums Taken In
“Right-to-Cure” laws now in 5
states: AZ, CA, NV, TX, WA
16 considering such laws.
CASE STUDY 4:
OBESITY/FAST FOOD
Fast Food/Junk Science:Edible Asbestos?
•Are the food service & manufacturing industry’s vulnerable to suits over obesity?•McDonald’s sued in late 2002 over allegations that their food makes people fat (DISMISSED)•Kraft sued earlier this year over trans fats in Oreo cookies (DROPPED)
Source: Insurance Information Institute
Prevalence of Overweight and Obesity among US Adults (aged 20-74 years)
32 33 33
56%
64%
47%
0
10
20
30
40
50
60
70
NHANES II (1976-80) NHANES III (1988-94) NHANES (1999-2000)
%
Obese (BMI>30)
Overweight (BMI 25.0-29.9)
Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition
Examination Survey (NHANES); Insurance Information Institute
Nearly 2/3 of US adults are overweight or obese, up
from 47% in the late 1970s
15
2331
Adult Body Mass Index
BMI Weight Status
Below 18.5 Underweight
18.5-24.9 Normal
25.0-29.9 Overweight
30.0 and Above Obese
Source: Centers of Disease Control and Prevention (CDC).
Prevalence of Obesity 2000
Source: Behavioral Risk Factor Surveillance System; Insurance Information Institute
<10%
15%-19%
≥20%
Obesity epidemic: only Colorado has an obesity
prevalence of less than 10%
Prevalence of Overweight and Obesity Among Children and Adolescents
15%
7%
4%
11%
15%
11%
5%6%
0
2
4
6
8
10
12
14
16
NHANES I (1971-74) NHANES II (1976-80) NHANES III (1988-94) NHANES (1999-2000)
Ages 6-11
Ages 12-19
%
Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition
Examination Survey (NHANES); Insurance Information Institute
In the past two decades the percentage of overweight children has more than
doubled and the percentage of adolescents who are overweight has tripled
Obesity More Prevalent than Smoking, Heavy Drinking or Poverty
12%
25%
58%
70%67%
0
10
20
30
40
50
60
70
80
Obese Aging from 30to 50
Living inPoverty
CurrentSmoker
Heavy Drinker
• More Americans are obese/overweight than smoke or drink heavily combined.
• More Americans are obese/overweight than live in poverty
Source: RAND Health; Insurance Information Institute
Potentially Vulnerable Industries
Many Industries are Potentially At Risk:• Agriculture• Food Processors & Manufacturers• Beverage Makers• Food Distributors, Grocers• Restaurants & Franchisees• Advertising Agencies• TV Networks/Magazines/Newspapers• Toy Manufacturers (i.e., co-marketers)• Sporting Event/Entertainment Organizers
Source: Insurance Information Institute
Possible Legal Liability Theories in Obesity Cases
• Products Liability Product dangerous/defective and caused health hazard
• Personal Injury Obesity, overweight, diabetes, heart condition, high blood pressure, stroke
• Negligence Knew product was hazardous to health; knew product was addictive?
• Strict Liability Extreme hazard
• Failure to Warn Failed to disclose that product associated with various diseases
• Breach of Warranty Product not as healthy as purported
• Misrepresentation Health claims valid?
• Negligent/reckless marketing or distribution
Market product w/o stating health risks; market to children (like in gun suits)
• Advertising Liability Advertising misled consumers (esp children)
• Government Subrogation E.g. Tobacco settlement w/states; fast food “sin” tax
CASE STUDY 4:
REALITY TV
2003: Media AttentionReality TV
“Bachelor Pad a Mess” Yahoo News, September 24, 2003
“Irish Reality Show is More Like a Nightmare” New York Times, June 23, 2003
“Hospital Patients Sue Reality TV Show for Fraud New Jersey Law Journal, July 23, 2003
“Reality Shows Spark Insurer Fears” National Underwriter, February 10, 2003
“Growing Rowdier, TV Reality Shows are Attracting Suits” New York Times, January 7, 2003
Legal Realities: TV LawsuitsReality TV lawsuits address such issues as:
• Personal injury• Legality of waivers signed by show participants• Defamation/Humiliation• Use of hidden cameras• Misrepresentation• Alleged rigging of shows• Breach of contract• Copyright• Property Damage at Filming Venues
Reality TV shows are breaking new ground, but for program producers the risks
are increasing
Source: Broadcasting & Cable, Insurance Information Institute
CASE STUDY 5:
DRAM SHOP/VICARIOUS LIQUOR LIABILITY
Dram Shop LiabilityDefinition:• Liability of establishments arising out of the sale of alcohol to
obviously intoxicated persons or minor who subsequently cause death or injury to third-parties as a result of alcohol-related crashes
• Some 44 states and territories have dram shop liability laws or statutes
States with laws help reduce alcohol-related injury because:There is more publicity regarding liabilityAlcohol servers and management are more aware of
liabilityMore alcohol establishments obtain liablity insuranceThere are fewer low-price drink promotionsMore servers check ID
Source: Mothers Against Drunk Driving (MADD) and Alcohol-Related Injury & Violence (ARIV)
2003: Media AttentionDram Shop Liability In the Papers
“Perry Mason Moment, A $39 Million Verdict: Outback Restaurant Loses Dram Shop Action” National Law Journal, July 7, 2003
“Eatery Pays Millions For Drunk Driver” The Guardian (Charlottetown), June 21, 2003
“DUI Suit Settled For $21 million; Man in Crash That Killed 3 Drank at TGI Fridays" The Courier-Journal (Louisville, KY), June 20, 2003
“Bar Ordered to Pay $1 million in Death of Patron: Denim & Diamonds Plans to Appeal Verdict in Lawsuit" Kansas City Star, April 15, 2003
Alcohol-Related Crash Fatalities1992-2002
Sources: US Dept. of Transportation, National Highway Traffic Safety Administration
* Preliminary data
17,8
58
17,4
73
16,5
80
17,2
47
17,2
18
16,1
89
16,0
20
15,9
76
17,3
80
17,4
48 17,9
70
14,500
15,000
15,500
16,000
16,500
17,000
17,500
18,000
18,500
92 93 94 95 96 97 98 99 00 01 02*
• In 2002, 17,970 people died in alcohol-related crashes, up 3% from 17,448 in 2001.
• Alcohol-related crash fatalities accounted for 42% of all crash fatalities in 2002.
Economic Costs of Impaired Driving in the US
According to a study by economists at the
Public Services Research Institute:• Alcohol-related crashes in the US cost the public an
estimated $114.3bn in 2000• Average alcohol-related fatality costs $3.5m• Societal costs of alcohol-related crashes in the US average
$1.00 per drink consumed• Alcohol-related crashes accounted for est. 18% of the
$103bn in US auto insurance payments• Reducing alcohol-related crashed by 10% would save
$1.8bn in claims payments and loss adjustment expenses
Source: Taylor, Miller & Cox 2002
CASE STUDY 6:
EMPLOYMENT PRACTICES LIABILITY
Employment Practices Liability:Median Compensatory Award ($000)
Source: Trends in Employment Practices Liability, LRP Publications.
($ 000)
$128.0
$140.9$150.8
$146.6
$182.5$175.0
$200.0
$100
$120
$140
$160
$180
$200
$220
1996 1997 1998 1999 2000 2001 2002
Median Compensatory Award for Discrimination Cases
Source: Jury Verdict Research
$85
$114$128
$150
$200
$222
$0
$50
$100
$150
$200
$250
1994 1995 1996 1997 1998 1999
Th
ousa
nd
s
Median Compensatory Award by Type of Discrimination Case
Source: Jury Verdict Research
$100,000$121,951
$150,000
$175,001
$268,926
$0
$50,000
$100,000
$150,000
$200,000
$250,000
$300,000
Sex Race Overall Disability Age
EPL FACTORSNew lawsConfusing languageCourt broadening decisionsHeightened public awarenessWorkplace demographicsRacists, biggots & dummies
Median Age of Labor Force:On the Rise
Source: Bureau of Labor Statistics
34.835.9
38.7
40.7
30
35
40
45
1978 1988 1998 2008 Projected
The median age of the labor force will approach 41 years by 2008 – a very high level by historical standards
CASE STUDY 7:
CYBER RISK
The Cost of Worms & Viruses($ Billions)
Source: USA TODAY, September 3, 2003
$10bn
$9bn
$80m
$1bn
$590m to $2bn
$2.6bn
$0 $2 $4 $6 $8 $10 $12
Melissa virus (1999)
Slammer worm (2003)
Nimda virus (2001)
Code Red I and II worms (2001)
Klez worm (2002)
Love Bug virus (2000)
• Estimated cleanup and lost productivity costs of worms and viruses can add up to billions of dollars!
• Microsoft being sued as product liability case
Nature & Distribution of Costs Associated With Computer Crime
Source: 2003 CSI/FBI Computer Crime and Security Survey
Theft of Proprietary
Info37%
Denial of Service
33%
Virus14%
Insider Abuse of Net
Access6%
Financial Fraud
5%
Other2%
Laptop Theft3%
Total cost of computer crimes and other
information security breaches is high: $201.8 million in
2003 for 251 firms responding to survey
Cyber-Risk Gaps in Insurance Coverage
Source: Ernst & Young 2003 Global Information Security Surveyof 1,400 organizations from 66 countries
33%
34%
22%
7%
0 5 10 15 20 25 30 35 40
Risks covered bygeneral policies
Do not haveinsurance
Do not know theanswer
Insured by aspecific policy
Despite increasing risks, only 7% of respondents knew they had specific insurance geared to
cyber-risks!
CASE STUDY 8:
TERRORISM
Sept. 11 Industry Loss Estimates($ Billions)
Life$2.7 (7%)
Aviation Liability$3.5 (9%)
Other Liability
$10.0 (25%)
Biz Interruption$11.0 (27%)
Property -WTC 1 & 2$3.5 (9%)
Property - Other
$6.0 (15%)
Aviation Hull$0.5 (1%)
Event Cancellation
$1.0 (2%)
Workers Comp
$2.0 (5%)
Consensus Insured Losses Estimate: $40.2BSource: Insurance Information Institute
Status of 9/11 Death Claims (Through August 2003)
Claim Filed and Compensation Sought (1,035)
34%
Claim Filed but No
Compensation Sought (205)
7%
No Claim Filed (1,776)
59%
Source: September 11 Victims Compensation Fund; Insurance Information Institute
Out of 3,016 9/11 deaths (excl. hijackers), only 34%of claimants had sought
compensation by Aug. 29, 2003. The deadline is Dec. 22.
Will many choose litigation?
•Fund has paid $623.1 million to date
•Total could exceed $3 billion
Industry Losses Under Proposed Federal Backstop Using 9/11 Scenario
(as interpreted on date of enactment, Nov. 26, 2002)
$8.75$12.50
$18.75$1.125
$10.
575
$15.
75
$18.
00
$0
$5
$10
$15
$20
$25
$30
Year 1 Year 2 Year 3
($ B
illi
ons)
Industry Retention Surcharge Layer Co-Reinsurance Layer
Source: Insurance Information Institute.
$1.75B Industry Co-Share
Assumes $30B Commercial Prop & WC Loss, $125B “At Risk” Commercial DPE
$2.0B Industry Co-Share
$0.925B Industry Co-Share
$0.125B Industry Co-Share
Total Ind. Loss: $10.875B $14.25B $19.675B
Terrorism: Legal Liability Theories Available to Victims
• Negligence
• Express or Implied Contract
• Strict Liability
• Duty to Maintain Secure Common Areas
• Breach of the Voluntary Duty to Protect
• D&O (Duties of care/loyalty/disclosure)
Source: Rivkin Radler LLP
WORKERS COMPENSATION OPERATING ENVIRONMENT
WC Net Premiums Written
*III EstimateSource: A.M. Best
28.2
31.0 31.3
29.730.3
28.9
26.225.1
24.123.2
22.2
24.8
26.0
29.0
2.7
2.32.3
3.2
5.3
6.5
2.2
2.2
$20
$25
$30
$35
89 90 91 92 93 94 95 96 97 98 99 00 01 02*
Pri
va
te C
arr
ier
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
$5.0
$5.5
$6.0
$6.5
$7.0
Sta
te F
un
ds
Private Carriers
State Funds
$ Billions
WC Combined Ratios
Source: A.M. Best, NCCI
*Includes dividends to policyholdersAccident year is developed to ultimate as 12/31/02;Note: CY figures from AM Best; AY figures from NCCI
Calendar Year vs. Ultimate Accident Year Countrywide—Private Carrier*
123 122
109
10197
100
122
110
121
102
107
121
129
137
125
107
101
108
115117 118
9795
100
112
133
9095
100105110115120125130135140
90 91 92 93 94 95 96 97 98 99 00 01 02
Per
cent
Calendar YearAccident Year
2.9 pts due to 9/11
+1.0% +1.7%+5.8%
+5.7%+6.4%
+7.3%+7.8%
+7.7%+7.0%
-3.1% -2.8%+4.9%
5
7
9
11
13
15
17
Accident Year
WC Indemnity Claim Costs Has Accelerated Since 1995
Indemnity Claim Cost (000s)
Annual Change 1991-1995: +0.3%
Annual Change 1996-2002p: +6.8%
Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002; 2002 data are preliminary.Based on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Source: NCCI
+6.8%+1.3%
+5.1%+6.4%
+7.3%+5.7%
+7.4%
+7.6%
+10.7%
+12.0%
-2.1%+9.0%
6
7
8
9
10
11
12
13
14
15
16
Accident Year
WC Medical Claim Costs Accelerating Too
Medical Claim Cost (000s)
Annual Change 1991-1995: +4.0%
Annual Change 1996-2001: +8.1%
Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002Based on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies
Source: NCCI
4.5%3.6%
2.8% 3.2% 3.5%4.1%
4.6% 4.7%
5.1%
6.4%7.3%
5.7%
7.4% 7.6%
10.7%
12.0%
0%
2%
4%
6%
8%
10%
12%
14%
1995 1996 1997 1998 1999 2000 2001 2002
Change in Medical CPIChange Med Cost per Lost Time Claim
WC Medical Severity Rising Far Faster than Medical CPI
Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
7.3
pts
WC medical severity is rising 2.7 times faster than the
medical CPI
Med Costs Share of Total Costs is Increasing Steadily
Indemnity60%
Medical40%
Source: NCCI (based on states where NCCI provides ratemaking services).
Indemnity52%
Medical48%
Indemnity47%
Medical53%
1982
1992
2002p
Workers’ Comp: Residual Market Premiums & Combined Ratios
177164 169 166
159
126111
102 96 93 98 102112 117 118 116 116
142
$1.2
$2.1
$2.8
$3.5
$4.4$4.8
$4.1
$2.0
$1.0$0.6
$0.3$0.3$0.4
$1.1
$4.0$3.1
$0.6
$2.6
$0
$1
$2
$3
$4
$5
$6
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02*
Res
idua
l Mar
ket
Pre
miu
ms
($
Bill
ions
)
0
20
40
60
80
100
120
140
160
180
200
Co
mb
ined
Ratio
*Incomplete PY Projected to UltimateNote:Excludes Maine 1988-92.Source: NCCI
Expect residual market plans/pools to continue grow as market hardens
and threat of terrorism persists
WC Residual Market Shares
Source: NCCI
Residual Market Shares
5%
9%
16%18%17%17%
21%22%24%
26%
16%
11%
7%4% 3% 4%
6%9%
23%
0%
10%
20%
30%
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02p
Residual market plans/pools are
nowhere near where they were a decade ago
LIABILITY:
OVERVIEW OF PRIMARY & EXCESS MARKETS
UPDATE ALL
Average Total Limits Purchased by All Firms* ($ Millions)
*Includes underlying primary limits
Source: Limits of Liability 2003, Marsh, Inc.
$77.9
$85.8$83.2
$85.9$88.7
$99.1
$105.0$101.8
$95.7
$87
$50
$60
$70
$80
$90
$100
$110
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Limits purchased fell by 17.1% between 2000 and 2003. Price/capacity are issues.
$136 $128
$50$35 $30
$44$56
$108
$144
$190
$0$20$40$60$80
$100$120$140$160$180$200
Mill
ion
sLiability Limits – Industry Rankings:
Average Limits Purchased, 2003*
Top Five Bottom Five
*As of January 1
**Non-nuclear Source: Limits of Liability 2003, Marsh, Inc.
Average Underlying Limits(Attachment Points)
*Source: Marsh, 2003 Limits of Liability Report
$ Millions
$2.0$1.9$1.9
$1.8
$1.0
$1.2
$1.4
$1.6
$1.8
$2.0
$2.2
2000 2001 2002 2003
Average Underlying Limits(Attachment Points)
*Source: Marsh, 2003 Limits of Liability Report
$ Millions
$3.0
$4.0
$2.0$1.9$1.9$1.8
$3.2
$2.7
$1.0
$1.5
$2.0
$2.5
$3.0
$3.5
$4.0
$4.5
2000 2001 2002 2003Average Auto Liability (@500 Vehicles) GL @ $1B Revenue
Average Limits by Revenue Class 2000-2003 ($ Millions)
* Percent Change 2003 over 2002.Source: Marsh, 2003 Limits of Liability Report
$45 $5
9 $88
$148
$256
$337
$37 $5
3 $78
$129
$237
$335
$92
$146
$241
$338
$50 $7
0
$48
$94
$256
$376
$61
$0
$50
$100
$150
$200
$250
$300
$350
$400
$0 - $200 M $201 - $500M
$501M - $1B $1 - $5B $5 - $10B $10+ B
2000 2001 2002 2003
-17.8%* -10.2%* -11.4%* -12.8%* -7.4%*
-0.6%*
Russian Roulette? Many risks skimping on coverage to save money
Average Limits Purchased and Loss Experience ($ Millions)
Source: Marsh, 2002 Limits of Liability Report
$93
$199
$84
$203
$75
$207
$96
$207
2000 2001 2002 2003
Once Burned, Twice Shy: Firms suffering $5+ million loss buy
176% more coverage
Firms Not Experiencing $5
Million Loss
Firms Experiencing $5
Million Loss
Excess Liability Market Capacity
Source: Marsh, 2003 Limits of Liability Report
$1.425$1.575
$1.710
$2.045$1.941$2.011
$1.721
$1.405$1.334
$1.432
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Bil
lio
ns Capacity has dropped 30% since peaking in 2000
PRICING IN LIABILITY MARKETS
Insurance is the Biggest Concern of Small Business Owners
Regulations9%
Competition7%
Labor Qlty.10%
Taxes17%
Poor Sales18%
Labor Costs5%
Inflation2%
Insurance28%
Credit/Int. Rates2%
Source: National Federation of Independent Business (June 2003); Insurance Information Institute
Council of Insurance Agents & Brokers Rate Survey
Second Quarter 2003
Rate Increases By Line of BusinessRate Increases By Line of Business
No Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%Change Up 1-10% 10-20% 20-30% 30-50% 50%-100% >100%
Comm. Auto 8% 31% 43% 8% 2% 0% 0%
Workers Comp 11% 27% 28% 15% 3% 0% 2%
General Liability 10% 32% 41% 9% 1% 0% 0%
Comm. Umbrella 8% 21% 28% 27% 6% 3% 0%
D&O 3% 17% 30% 19% 13% 2% 1%
Comm. Property* 17% 32% 23% 5% 2% 0% 0%
Construction Risk 8% 18% 26% 17% 7% 1% 1%
Terrorism* 27% 18% 13% 4% 1% 0% 1%
Business Interr. 21% 38% 16% 3% 0% 0% 0%
Surety Bonds 12% 17% 13% 9% 2% 0% 1%
Med Mal 1% 2% 4% 20% 11% 12% 6%Source: Council of Insurance Agents & Brokers.
Proportion of Accounts Renewing With Increase of 20% or More,
(Select Lines)
Source: Council of Insurance Agents and Brokers; Insurance Information Institute
54%
38% 38%32%
20%
78%
53% 53% 53%
35%
10%
23%
48%
38%
63%
5%
14%
23%
2002:II 2002:III 2002:IV 2003:I 2003:II
D&O Construction Risk GL Terrorism
P/C Soft Spots: % Accounts With Negative Price Change(2nd Qtr 2003)
17%
9%
3%2% 2%
1%
9%
2%
0%
5%
10%
15%
20%
Comm Prop BizInterruption
Terror Comm Auto WC GL EPL Umbrella
Source: Council of Insurance Agents & Brokers; Insurance Information Institute
Property-related coverages are clearly the softest segment
of the p/c market today.
Cost of Risk per $1,000 of Revenues: 1990-2002E
$6.10
$6.40
$8.30$7.70
$7.30
$6.49
$5.70$5.25
$5.71
$5.20$4.83
$5.55
$6.94
$4
$5
$6
$7
$8
$9
$10
90 91 92 93 94 95 96 97 98 99 00 01E 02E
Source: 2001 RIMS Benchmark Survey; Insurance Information Institute estimates.
•Cost of risk to corporations fell 42% between 1992 and 2000
•Estimated 15% increase in 2001, 25% in 2002
• About half of 2002 increase due to 9/11
Liability: Average Cost per $1,000 of Revenue*2001 to 2003
$1.2
5
$0.6
5
$0.6
7
$0.3
3
$0.1
7
$0.1
1
$0.2
3
$1.9
6
$0.9
4
$2.3
1
$1.3
0
$1.0
3
$0.6
7
$0.4
2
$0.1
7 $0.4
0
$0.7
2
$0.3
8
$0.2
4
$0.2
6
$0.1
3
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$0 - $200M $201M-$500M $501M-$1B $1B-$5B $5B-$10B $10B+ All
200120022003
*Across entire liability program
Source: Marsh, 2003 Limits of Liability Report
Average Cost per $1 Million Liability Coverage2001 to 2003
$3,8
01
$3,8
30 $5,3
17
$5,3
68
$5,5
31
$8,2
13
$5,4
11
$4,8
78
$5,6
09
$6,4
64
$6,0
54 $7,6
06
$7,1
06
$6,3
30
$8,5
97 $9,9
64 $11,
933
$13,
949
$16,
882
$11,
614
$12,649
$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
$16,000
$18,000
$0 - $200M $201M-$500M
$501M-$1B $1B-$5B $5B-$10B $10B+ All
($00
0)
200120022003
Source: Marsh, 2003 Limits of Liability Report
Casualty Cost of Risk Per $1,000 of Revenue
$2.77$1.78 $2.34
$4.54 $4.34
$5.94
$3.71$3.66
$1.13 $1.05
$0.23
$1.81 $0.54 $0.62 $0.75
$0$1$2$3$4$5
$6$7$8$9
$10
Governmental TransportationServices
Educational,Non-Profits
Construction Personal,BusinessServices,Hotels,
Amusements
Workers Compensation General Liability Auto Liability
Bil
lion
s
Source: Marsh Casualty Cost of Risk 2003
Construction ranks 4th highest of 23 industries in casualty cost of risk, spending on average $6.28 per $1,000 of revenue on its primary casualty program
$0.18 $0.21
$0.86
$1.61$1.76
$1.44
$0.71
$0.21$0.16$0.06
$0.00$0.20$0.40$0.60$0.80$1.00$1.20$1.40$1.60$1.80$2.00
Liability Limits – Industry Rankings: Average Cost/$1000 Revenue
Source: Marsh, 2003 Limits of Liability* Non-Nuclear
Bottom 5 Top 5
Excess Layer Hit With Leveraged Impact of Increase in Trend
Assumptions: Primary Limit of $1 M
Ground Up Trend of 7.0%
ClaimTotal Loss
Primary Loss
Excess Loss
% Loss Trend
Total Loss
Primary Loss
Excess Loss
1 0.900 0.900 0 7.0 0.963 0.963 02 1.000 1.000 0 7.0 1.070 1.000 0.0703 2.000 1.000 1.00 7.0 2.140 1.000 1.140
Total 3.900 2.900 1.00 4.173 2.963 1.210
7.0% 2.2% 21.0%Loss Trend:Trend in excess layers is 3 times the ground-up
trend and nearly 10 times the primary trend
Why Substantial Rate Increases are Necessary
High loss ratios of 150+ indicate need for triple digit rate increases
Except in very isolated instances, no tort reform on the horizon
Medical severities increasing Poor investment performance
Pricing & underwriting must do all the “heavy lifting” Costs could be driven up further by:
Increase in erratic behavior of juries Increasing frequency/severity trend Spike in severity in recent years Newly (re)emerging exposures Political shift in Congress/states
Insurance Information Institute On-Line
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