Financial Crisis Among Top Factors Seen for Continued Escalation in 2008, Company Says
STAMFORD, CT, November 18, 2008 – Fueled by the first increase in automobile accident frequency since 1999, tort costs in the United States rose by 2.1% in 2007, according to the 2008 Update on U.S. Tort Cost Trends from global professional services firm Towers Perrin. The $5.1 billion climb from 2006 costs marks the first cost escalation since 2005 and comes on the heels of a 5.6% decline in 2006.
Further, due to the continuing fallout of the 2007 subprime mortgage debacle and the current global financial crisis – as well as such factors as the impact of mercurial fuel prices on personal auto liability costs and the potential for increased activity in the area of employment practices liability – Towers Perrin is estimating that U.S. tort costs will increase 4% in 2008 and an additional 5% in both 2009 and 2010.
“The current global economic climate could very well lead to a surge in tort activity here in the U.S,” said Russ Sutter, a Towers Perrin principal and author of the report. “For 2008 and beyond, we see the list of potential defendants growing to groups such as mortgage brokers, appraisers and investment banks, as well as peripheral defendants such as auditing firms and attorneys advising the targeted firms.”
“The implosion and resulting government involvement in firms such as Bear Stearns, Lehman Brothers, Fannie Mae and AIG will undoubtedly lead to further litigation in 2008 and 2009,” added Mr. Sutter. “What remains unclear is how many dollars will change hands as a consequence of this litigation.”
From a statistical standpoint, the U.S. tort system cost $252 billion in 2007, or $835 per person – $9 per person more than in 2006. The 2008 report analyzes U.S. tort costs from 1950 through 2007, with projections through 2010.
Among the report’s key findings:
- Overall economic growth in 2007 was 4.8%. As such, the ratio of tort costs to gross domestic product (GDP) shrank in 2007, marking four consecutive years of a decline in the ratio. Since 1950, growth in tort costs has exceeded growth in GDP by an average of approximately two percentage points.
- The total tort costs from commercial lines in 2007 increased 1.0% over 2006. However, the 2007 costs were below the levels seen in each of 2003 through 2005. The reduction from those prior years appears to be attributable to a reduction in the number of claims.
- The smaller increase in commercial tort costs can be attributed in part to asbestos. Insured asbestos losses increased approximately $1.2 billion in 2007. This was lower than the comparable increases in 2004, 2005 and 2006 ($7.3 billion, $7.0 billion and $1.8 billion, respectively).
Methodology
The methodology used in the Towers Perrin study 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 Towers Perrin 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.
Towers Perrin has not included costs incurred by federal and state court systems in administering actual suits in the report. Certain indirect costs are also omitted, such as those associated with litigation avoidance.
The 2008 Update on U.S. Tort Cost Trends is the 12th study of U.S. tort costs published by Towers Perrin. The study examines only one side of the U.S. tort system: the costs. No attempt has been made to measure or quantify the benefits of the tort system, such as a systematic resolution of disputes, and the study makes no conclusion that the costs of the U.S. tort system outweigh the benefits or vice versa. The report is conducted entirely by Towers Perrin; it is not funded or subject to approval by any outside organization.
About Towers Perrin
Towers Perrin is a global professional services firm that helps organizations improve performance through effective people, risk and financial management. The firm provides innovative solutions in the areas of human capital strategy, program design and management, and in the areas of risk and capital management, insurance and reinsurance intermediary services, and actuarial consulting. Towers Perrin has offices and alliance partners in the United States, Canada, Europe, Asia, Latin America, South Africa, Australia and New Zealand. More information is available at www.towersperrin.com .
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