Tillinghast has just released its 2007 update on U.S. Tort Cost Trends. The good news is that tort costs declined by 5.5 percent to $247 billion in 2006. That approximates $825 per person Ã¢â‚¬“ $57 less per person than in 2005. The $13.4 billion decrease in costs over 2005 marks the first downward trend since 1997. A significant drop in commercial tort costs, due in part to the waning impact of asbestos costs was a contributing factor. But the near-term outlook is not so rosy, according to Tillinghast. It warns that several factors, including the potential fallout from the current subprime loan crisis, are expected to reverse the figures in 2007. As it notes: when people lose money, litigation tends to follow. Looking ahead Tillinghast expects growth in U.S. tort costs of around 2.5 percent in 2007, with slightly higher growth of 4.5 percent in the following two years. As well as subprime mortgages, global warming and backdating of options are just some of the issues that it expects will impact future trends. Check out I.I.I.’s update on the liability system.Ã‚
Reinsurance broker Guy Carpenter has released aÃ‚ briefing on the threat of errors & omissions (E&O) litigation on U.S. real estate professionals. To more accurately gauge the likelihood of litigation Guy Carp has developed its own subprime E&O litigation index. The index measures a combination of factors influencing the E&O litigation climate including foreclosure rate, subprime mortgage delinquency rate, litigation attorneys per mortgage professional, truth in lending legislation and banking litigation ranking. According to the index, Illinois, Michigan and Massachusetts claim the highest overall E&O litigation risk levels, with Mississippi, Indiana and Ohio close behind. The study throws up an interesting fact: there is little to no correlation between the highest risk states for subprime-related E&O litigation and those states such as Arizona and Nevada with the greatest number of subprime mortgage delinquencies and/or foreclosures. Guy Carp also notes that the riskiest states are those with average rankings in most categories and an extremely high result in a single category.
In our September 21 posting we cited future predictions of an uptick in securities class actions as a result of the subprime market turmoil. Willis has just released another alert from the companyÃ¢â‚¬â„¢s financial institutions practice in which it confirms this trend. It notes that claims in the U.S. against directors and officers of financial institutions have started coming as a result of nearly 40 class actions and there will undoubtedly be more. At first these suits were predominantly restricted to U.S. subprime lenders and certain real estate investment trusts (REITs). However, Willis says it has become apparent that class actions are now touching financial institutions not directly related to subprime loan default exposures. Such cases allege that directors failed to disclose their companiesÃ¢â‚¬â„¢ exposures to losses in the subprime market and misled shareholders. A trend to monitor. Further commentary on securities class actions can be found at The D&O Diary, a blog focused on D&O liability issues.Ã‚
The news snuck in just after we had posted Friday, but we should mention that the Senate has approved extension of the federal terrorism risk insurance program. The move would extend the program for a further seven years from December 31. The Senate version is very different to House legislation passed a couple of months ago (see our September 21 posting). However, like the House, the Senate version would expand coverage under the program to include domestic acts of terrorism. Coming just days before Thanksgiving, this is a timely and positive step for the industry. Final consensus on the program will now need to be reached so that it can be reauthorized before year-end. Check out further I.I.I. information on terrorism risk.
Those of you in the alternative risk transfer business may be interested in todayÃ¢â‚¬â„¢s item. Two prominent captive insurance associations have teamed up to form a coalition to battle a proposed Internal Revenue Service (IRS) rule change that would significantly alter the landscape for captive insurers in the U.S.Ã‚ Issued September 28, the proposed IRS regulation would eliminate the right of U.S.-sponsored captives to claim reserve deductions against their domestic tax for future claims and losses on consolidated, or related, business. Instead, they would only be allowed to claim deductions when claims are actually paid. The change would essentially result in treating the transaction as non-insurance for tax purposes. We donÃ¢â‚¬â„¢t need to remind you that captive insurers are the oldest form of alternative risk transfer vehicle, dating back to the 1950s. Use of captives by corporations has grown exponentially during the last 30 years in the U.S. In 2006, the U.S. was the largest captive domicileÃ¢â‚¬“ with 1,251 licensed captives Ã¢â‚¬“ followed by Bermuda with 989. If the IRS proposal goes ahead, it seems likely that it would drive more business offshore. The Coalition for Fairness to Captive Insurers (CFCI) has been formed by the Captive Insurance Companies Association (CICA) and the Vermont Captive Insurance Association (VCIA). Those interested in joining the coalition should contact either association. Check out further I.I.I. information on captive insurers.
Another day, another broker brief on the subprime market turmoil and its potential impact on insurance markets. Willis has released an alert from the companyÃ¢â‚¬â„¢s financial institutions practice. It notes that Directors & Officers (D&O) and Errors & Omissions (E&O) insurers have seen a number of claims arising from the subprime issue, though these could be just the tip of a huge iceberg. Other key points from Willis: a worst-case loss scenario for D&O insurers could be in the realm of $3 billion; the downturn in the real estate market resulted in a 52 percent increase in the amount of title insurance claims paid in the second quarter of 2007 as compared to 2006; foreclosure activity in the first half of 2007 was up 55 percent from 2006; foreclosures for the month of July rose 93 percent from the prior July; and 43 states have reported an increase in foreclosure activity in 2007. Willis plans to issue alerts on some insurance coverages that will receive more prominence as a result of the crisis, such as mortgage impairment, foreclosed and forced placed covers, in coming weeks. For I.I.I.Ã¢â‚¬â„¢s take on the subprime issue, check out a paper authored by Dr. Steven Weisbart, I.I.I. vice president and chief economist.Ã‚
We’re in D.C. today at the Professional Liability Underwriting Society (PLUS) International Conference. Much to talk about for professional liability lines, especially given recent headlines on the subprime market turmoil. Reinsurance broker Guy Carpenter just released a briefing on this very topic titled: “Credit Market Aftershock Threatens Professional Lines Profits.” In its analysis Guy Carp notes that estimates of the insurance impact range from $1 billion to $3 billion, but when the dust settles total insured losses are likely to be at the top end of that scale. Most of the credit crunch’s impact will affect the D&O product line, although E&O suits, ERISA actions and other suits have been filed and could lead to substantial further insurance losses, according to the briefing. Guy Carp puts the potential D&O loss at in excess of $2 billion, but cautions that the full impact will not be known until 2008 or 2009. For our take on the subprime issue, check out a paper authored by Dr. Steven Weisbart, I.I.I. vice president and chief economist.
Financial institutions are prime targets of identity theft because they hold their customers money and store large quantities of personal data, so rules issued by Federal regulators on steps these companies must take to prevent ID theft could increase their potential liability. Under the final rules issued by the Federal Trade Commission (FTC) and other Federal regulatory agencies, all financial institutions will be required to develop and implement a program to prevent identity theft on new and existing consumer accounts. The program must include reasonable policies and procedures for detecting, preventing, and mitigating ID theft and enable a financial institution or creditor to: identify relevant patterns, practices, and specific forms of activity that are Ã¢â‚¬Å“red flagsÃ¢â‚¬ signaling possible identity theft and incorporate those red flags into the program; detect red flags that have been incorporated into the program; respond appropriately to any red flags that are detected to prevent and mitigate ID theft; and ensure the program is updated periodically to reflect changes in risks from ID theft. The rules, which implement sections of the Fair and Accurate Credit Transactions Act of 2003, take effect January 1, 2008. Covered financial institutions and creditors have until November 1, 2008, to comply. Check out further I.I.I. facts & stats on ID theft.
U.S. companies may afford themselves a sigh of relief, albeit brief, when they take in the headline findings of the fourth annual Litigation Trends Survey by Fulbright & Jaworski showing a distinct drop in the number of new lawsuits and regulatory actions filed against them. Based on interviews with in-house counsel at 250 major U.S. corporations, 17 percent of respondents said their companies had escaped the past year without having to defend a single new lawsuit, a sharp increase from just 11 percent in 2005-06. But despite the fact that internal investigations are down and fewer businesses are filing suit, Fulbright cautions that the litigation landscape remains fully loaded, with one-third of U.S. companies facing at least 25 lawsuits, and 18 percent defending 100+ cases domestically. As industries go, it appears insurers along with retailers faced the most litigation. Some 93 percent reported having to defend at least one new case this past year, and more than half from both sectors got stung with one or more $20 million dispute Ã¢â‚¬“ the highest of 10 industry segments represented. Insurers contended with the most $20 million-plus cases with 54 percent taking on more than 20 such actions. The upshot is that even with fewer companies reporting new lawsuits this past year, Fulbright notes that the vast majority of U.S. businesses remain significantly exposed to litigation. Check out further I.I.I.Ã‚ factsÃ‚ & statsÃ‚ onÃ‚ litigiousness.
Keep your eye on Capitol Hill tomorrow where the U.S. Senate Banking Committee will consider both further extension of the federal terrorism risk insurance program and reform of the National Flood Insurance Program (NFIP). Votes on both measures are expectedÃ‚ in theÃ‚ morning. The House passed its version of the terrorism bill on September 19 (see our September 20 posting). Word on the street is that the Senate version is very different to the House bill in scope, as it would extend the program for seven years and not extend coverage to group life. The debate on extending coverage to chemical, nuclear, biological and radiological (CNBR) terrorism also remains undecided. Check out I.I.I. information on terrorism risk and NFIPÃ‚ facts & statsÃ‚ online.