The 5.5% decline in tort costs was markedly less than overall U.S. economic growth of 6.1%, as measured by gross domestic product (GDP). Since 1950, growth in tort costs has exceeded growth in GDP by an average of 2% to 3%. However, over the last 20 years, the ratio of tort costs to GDP has stayed within a relatively narrow range, at approximately 2%. In 2006, the ratio slipped below 2% 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.
Auto Costs Remain Flat
Typically the greatest contributor 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."
Impact of Asbestos Lessens
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.
Medical Malpractice Costs Remain Stable
For 2006, medical malpractice tort costs totaled $30.3 billion, up from $29.4 billion in 2005. According to Tillinghast, since 1975, medical malpractice costs have increased at an annual rate of 11.1% versus 8.2% 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.
Future Implications
Looking ahead, Tillinghast anticipates growth of U.S. tort costs to be 2.5% in 2007, with slightly higher growth of 4.5% for the following two years.
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 com