Medical Malpractice Insurance & TheInsurance Cycle

Medical Professional Liability & the P/C Insurance Industry

Robert P. Hartwig, Ph.D., CPCU, PresidentInsurance Information Institute ♦ 110 William Street ♦ New York, NY 10038

Tel: (212) 346-5520 ♦ Fax: (212) 732-1916 ♦ bobh@iii.org ♦ www.iii.org

31st Annual Physician Insurance Association of America Meeting

Philadelphia, PAMay 15, 2008

Presentation Outline• P/C Operating Overview & Outlook

ProfitabilityUnderwriting TrendsPremium Growth & Price DriversCapacity & Surplus

• Medical Professional Liability Insurance OverviewMedical & Health Care Cost InflationMed Mal Operating ResultsMed Mal Investment Performance

• Med Mal Tort Environment• P/C Investment Overview & Outlook• Weakening Economy: Insurance Impacts & Implications

Implications of Treasury reform “Blueprint” for insurers• Catastrophic Loss: Spillover Effects? • Shifting Legal Liability & Tort Environment: P/C

P/C INSURANCE OPERATING OVERVIEW

The Cycle is Alive and Well

PROFITABILITYInsurer Profits in 2006/07

Reached Their Cyclical Peak

P/C Net Income After Taxes1991-2008F ($ Millions)*$1

4,17

8

$5,8

40

$19,

316

$10,

870

$20,

598

$24,

404 $3

6,81

9

$30,

773

$21,

865

$3,0

46

$30,

029

$61,

940

$49,

900

-$6,970

$65,

777

$44,

155

$20,

559

$38,

501

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F

*ROE figures are GAAP; 1Return on avg. surplus. **Return on Average Surplus; Sources: A.M. Best, ISO, Insurance Information Inst.

2001 ROE = -1.2%2002 ROE = 2.2%2003 ROE = 8.9%2004 ROE = 9.4%2005 ROE= 9.6%2006 ROE = 12.2%2007 ROAS1 = 12.3%**

Insurer profits peaked in 2006

-5%

0%

5%

10%

15%

20%

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08F

US P/C Insurers All US Industries

ROE: P/C vs. All Industries 1987–2008E

2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute; Fortune

Andrew Northridge

Hugo Lowest CAT losses in 15 years

Sept. 11

4 Hurricanes

Katrina, Rita, Wilma

P/C profitability is cyclical, volatile and vulnerable

-5%

0%

5%

10%

15%

20%

25%

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 0607

E08

F

Profitability Peaks & Troughs in the P/C Insurance Industry,1975 – 2008F*

1975: 2.4%

1977:19.0% 1987:17.3%

1997:11.6%

2006:12.2%

1984: 1.8% 1992: 4.5% 2001: -1.2%

10 Years

10 Years 9 Years

*GAAP ROE for all years except 2007 which is actual ROAS of 12.3%. 2008 P/C insurer ROE is I.I.I. estimate.Source: Insurance Information Institute, ISO; Fortune

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

ROE Cost of Capital

ROE vs. Equity Cost of Capital:US P/C Insurance:1991-2007

Source: The Geneva Association, Ins. Information Inst.

The p/c insurance industry achieved its cost of capital in 2005/6 for the first time in many years

-13.

2 pt

s

+0.2

pts

US P/C insurers missed their cost of capital by an average 6.7 points from 1991 to 2002, but on

target or better 2003-07

-0.1

pts

+1.7

pts

-9.0

pts

The cost of capitalis the rate of return

insurers need to attract and retain

capital to the business

+2.3

pts

P/C, L/H Stocks: Lagging the S&P 500 Index in 2008

-4.30%

-54.41%

-17.48%

-24.75%-8.22%

-7.89%

-17.47%

-5.41%

-60.0% -50.0% -40.0% -30.0% -20.0% -10.0% 0.0%

S&P 500

All Insurers

P/C

Life/Health

Multiline

Reinsurance

Mortgage*

Brokers

*Includes Financial Guarantee.Source: SNL Securities, Standard & Poor’s, Insurance Information Inst.

Total YTD Returns Through May 9, 2008

P/C, Life insurance stocks underperforming S&P—

concerns about soft market, credit/subprime exposure of

some companies

Mortgage & Financial Guarantee insurers were

down 69% in 2008

Factors that Will Influence theLength and Depth of the Cycle

• Capacity: Rapid surplus growth in recent years has left the industry with between $85 billion and $100 billion in excess capital, according to analysts

All else equal, rising capital leads to greater price competition and a liberalization of terms and conditions

• Reserves: Reserves are in the best shape (in terms of adequacy) in decades, which could extend the depth and length of the cycle

Looming reserve deficiencies are not hanging over insurers they way they did during the last soft market in the late 1990sMany companies have been releasing redundant reserves, which allows them to boost net income even as underwriting results deteriorateReserve releases will diminish in 2008; Even more so in 2009

• Investment Gains: 2007 was the 5th consecutive up year on Wall Street. With sharp declines in stock prices and falling interest rates, portfolio yields are certain to fall Contributes to discipline

Realized capital gains are already rising as underwriting profits shrink, but like redundant reserves, realized capital gains are a finite resourceA sustained equity market decline (and potentially a drop in bond prices at some point) could reduce policyholder surplus

Source: Insurance Information Institute.

Factors that Will Influence the Length and Depth of the Cycle (cont’d)

• Sarbanes-Oxley: Presumably SOX will lead to better and more conservative management of company finances, including rapid recognition of deficient or redundant reserves

With more “eyes” on the industry, the theory is that cyclical swings should shrink• Ratings Agencies: Focus on Cycle Management; Quicker to downgrade

Ratings agencies more concerned with successful cycle management strategyMany insurers have already had ratings “haircut” over the last several years they way they did during the last soft market in the late 1990s; Less of a margin today

• Finite Reinsurance: Had smoothing effect on earnings; Finite market is gone• Information Systems: Management has more and better tools that allow

faster adjustments to price, underwriting and changing market conditions than it had during previous soft markets

• Analysts/Investors: Less fixated on growth, more on ROE through soft mkt.Management has backing of investors of Wall Street to remain disciplined

• M&A Activity: More consolidation implies greater disciplineLiberty Mutual/Safeco deal creates 5th largest p/c insurer. More to come?

Source: Insurance Information Institute.

FINANCIAL STRENGTH &

RATINGSIndustry Has Weathered

the Storms Well, But Cycle May Takes Its Toll

P/C Insurer Impairment Frequency vs. Combined Ratio, 1969-2007E

90

95

100

105

110

115

120

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 07E

Com

bine

d R

ati o

00.20.40.60.811.21.41.61.82

Impa

irmen

t Rat

e

Combined Ratio after DivP/C Impairment Frequency

Impairment rates are highly correlated

underwriting performance and could reach near-record low in 2007

Source: A.M. Best; Insurance Information Institute

2006 impairment rate was 0.43%, or 1-in-233 companies, half the 0.86% average since 1969;

2007 will be lower; Record is 0.24% in 1972

Reasons for US P/C Insurer Impairments, 1969-2005

*Includes overstatement of assets.Source: A.M. Best: P/C Impairments Hit Near-Term Lows Despite Surging Hurricane Activity, Special Report, Nov. 2005;

Catastrophe Losses8.6%

Alleged Fraud11.4%

Deficient Loss

Reserves/In-adequate Pricing62.8%

Affiliate Problems

8.6%

Rapid Growth

8.6%

2003-2005 1969-2005

Deficient reserves,

CAT losses are more important factors in

recent years

Reinsurance Failure3.5%

Rapid Growth16.5%

Misc.9.2%

Affiliate Problems

5.6%

Sig. Change in Business

4.6%

Deficient Loss

Reserves/In-adequate Pricing38.2%

Investment Problems*

7.3%

Alleged Fraud8.6%

Catastrophe Losses6.5%

UNDERWRITINGTRENDS

Extremely Strong 2006/07;Relying on Momentum &

Discipline for 2008

90

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 04 05 06 07 08F

Combined Ratios1970s: 100.31980s: 109.21990s: 107.82000s: 102.0*

Sources: A.M. Best; ISO, III *Full year 2008 estimates from III.

P/C Insurance Combined Ratio, 1970-2008F*

115.8

107.4

100.198.3

100.7

92.4

98.6

95.6

90

100

110

120

01 02 03 04 05 06 07 08F

P/C Insurance Combined Ratio, 2001-2008F

Sources: A.M. Best; ISO, III. *III estimates for 2008.

2005 figure benefited from heavy use of reinsurance which lowered net losses

2006 produced the best underwriting result

since the 87.6 combined ratio in 1949

As recently as 2001, insurers were paying out nearly $1.16 for

every dollar they earned in premiums

2007/8 deterioration due primarily to falling rates, but results still strong assuming

normal CAT activity

87.6

91.292.1 92.3 92.4 92.4

93.1 93.1 93.3

95.6

93.0

85

87

89

91

93

95

97

1949 1948 1943 1937 2006 1935 1950 1939 1953 1936 2007

Ten Lowest P/C Insurance Combined Ratios Since 1920 vs. 2007

Sources: Insurance Information Institute research from A.M. Best data. *2007: III Earlybird survey.

2007 was the 20th

best since 1920

The industry’s best underwriting years are associated with

periods of low interest rates

The 2006 combined ratio of 92.2 was the best since the 87.6 combined in 1949

-55-50-45-40-35-30-25-20-15-10-505

101520253035

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

Source: A.M. Best, Insurance Information Institute

$ B

illio

ns

Insurers earned a record underwriting profit of $31.7 billion in 2006, the largest ever but only the

second since 1978. Cumulative underwriting deficit from 1975 through 2007 is $422 billion.

Underwriting Gain (Loss)1975-2008F*

110.

3

110.

2

107.

6

103.

9 109.

7

112.

3

111.

1

122.

3

110.

2

102.

5 105.

4

91.2 94

.7 97.5

102.

0

112.

5

85

90

95

100

105

110

115

120

125

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07E 08F

Recent results benefited from favorable loss cost trends, improved tort environment, low CAT losses, WC reforms and reserve releases

Commercial coverages have exhibited significant

variability over time.

Commercial Lines Combined Ratio, 1993-2008F

Outside CAT-affected lines, commercial

insurance is doing fairly well. Caution is required in

underwriting long-tail commercial lines.

Sources: A.M. Best (historical and forecasts)

$10.

8 $22.

8 $33.

4

$36.

9

$18.

9

($5.0)($6.0)($5.3)

$0.4

($7.0)

8.9

-1.1-1.3-1.6

4.5

-1.20.1

3.5

8.6

6.5

($10)($5)$0$5

$10$15$20$25$30$35$40

00 01 02 03 04 05 06 07F 08F 09F

Res

erve

Dev

elop

men

t ($B

)

(3)(2)(1)012345678910

Com

bine

d R

atio

Poi

nts

PY Reserve DevelopmentCombined Ratio Points

Impact of Reserve Changes on Combined Ratio

Source: A.M. Best, Lehman Brothers estimates for years 2007-2009

Reserve adequacy has

improved substantially

PREMIUM GROWTH

At a Virtual Standstillin 2007/08

-10%

-5%

0%

5%

10%

15%

20%

25%

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

F20

08F

Note: Shaded areas denote hard market periods.Source: A.M. Best, Insurance Information Institute

Strength of Recent Hard Markets by NWP Growth*

1975-78 1984-87 2001-04

Post-Katrina period resembles

1993-97 (post-Andrew)

2007: -0.6% premium growth was the first decline since 1943

Growth in Net Written Premium, 2000-2008F

*2008 forecast from A.M. Best.Source: A.M. Best; Forecasts from the Insurance Information Institute.

5.0%

8.4%

15.3%

10.0%

3.9%

0.5%

4.3%

-0.6% -1.0%2000 2001 2002 2003 2004 2005 2006 2007 2008F

P/C insurers are experiencing their slowest growth rates since 1943… underwriting results are deteriorating

WEAK PRICING

Under Pressure in 2007/08, Especially Commercial Lines

Average Commercial Rate Change,All Lines, (1Q:2004 – 1Q:2008)

-3.2

%

-5.9

%

-7.0

%

-9.4

%

-9.7

% -8.2

%

-4.6

% -2.7

%

-3.0

%

-5.3

%

-9.6

%

-11.

3%

-11.

8%

-13.

3% -12.

0%

-13.

5%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%1Q

04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

2Q07

3Q07

4Q07

1Q08

Source: Council of Insurance Agents & Brokers; Insurance Information Institute

Magnitude of rate decreases diminished greatly after Katrina but have grown again

KRW Effect

-0.1

%

Cumulative Commercial Rate Change by Line: 4Q99 – 1Q08

Source: Council of Insurance Agents & Brokers

Commercial account pricing has been trending down for 3+ years and is now on par with prices in late 2001, early 2002

CAPACITY/SURPLUS

Accumulation of Capital/ Surplus Depresses ROEs

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

$550

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

U.S. Policyholder Surplus: 1975-2007*

Source: A.M. Best, ISO, Insurance Information Institute. *As of December 31, 2007

$ B

illio

ns

“Surplus” is a measure of underwriting capacity. It is analogous to “Owners Equity” or “Net Worth” in non-insurance organizations

Capacity as of 12/31/07 was $517.9B, 6.5% above year-end

2006, 81% above its 2002 trough and 55% above its 1999 peak.

The premium-to-surplus fell to $0.85:$1 at year-end 2007, approaching

its record low of $0.84:$1 in 1998

Annual Catastrophe Bond Transactions Volume, 1997-2007

$1,729.8

$966.9

$7,329.6

$4,693.4

$1,991.1

$1,142.8$1,219.5$846.1$984.8$1,139.0

$633.0

$0

$1,000$2,000

$3,000

$4,000

$5,000$6,000

$7,000

$8,000

97 98 99 00 01 02 03 04 05 06 07

Ris

k C

apita

l Iss

ues

($ M

ill)

0

5

10

15

20

25

30

35

Num

ber o

f Iss

uanc

es

Risk Capital Issued Number of Issuances

Source: MMC Securities Guy Carpenter, A.M. Best; Insurance Information Institute.

Catastrophe bond issuance has soared in the wake of

Hurricanes Katrina and the hurricane seasons of 2004/2005,

despite two quiet CAT years

Lloyd’s Insurance Market Capacity, 1998-2008 (£ billions)*

*Beginning of the year.Source: Lloyd’s Members’ Services Unit.

The capacity of the Lloyd’s market rose significantly during the period 2001 to 2004. In 2005, capacity reduced but increased again in 2006 and 2007 due to the impact of the U.S. hurricane season. Capacity reduced to £15.95 billion ($32 billion) in 2008.

£15.95 £16.1 £14.8

£13.7 £14.9 £14.4

£12.2 £11.3

£10.1 £9.9 £10.2

0

2

4

6

8

10

12

14

16

18

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

£bi

llion

s

P/C Insurer Share Repurchases,1987- Through Q4 2007 ($ Millions)

$564

.0

$646

.9

$311

.0

$952

.4

$418

.1

$566

.8

$310

.1

$658

.8

$769

.2

$4,5

86.5

$5,2

66.0

$763

.7

$5,2

42.3

$4,3

70.0

$7,0

94.1

$22,322.6

$4,4

97.5

$1,5

39.9

$2,7

64.2

$2,3

85.6

$4,2

97.3

$0

$5,000

$10,000

$15,000

$20,000

$25,000

87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Sources: Credit Suisse, Company Reports; Insurance Information Inst.

2007 share buybacks shattered the 2006 record, up 214%

Reasons Behind Capital Build-Up & Repurchase Surge

•Strong underwriting results•Moderate catastrophe losses

•Reasonable investment performance

•Lack of strategic alternatives (M&A, large-scale expansion)

Returning capital owners (shareholders) is one of the

few options available

2007 repurchases to date equate to 3.9% of industry surplus, the highest in 20 years

MEDICAL PROFESSIONAL

LIABILITY OVERVIEW

Significant Improvements

MEDICAL & HEALTH CARE

COST INFLATION

National Problem & Insurer Cost Driver

Consumer Price Index for Medical Care vs. All Items, 1960-2007

207.3

351.1

0

100

200

300

400

60 61 62 63 64 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

All Items Medical Care

Source: Department of Labor (Bureau of Labor Statistics).

(Base: 1982-84=100)

Inflation for Medical Care has been surging ahead of general inflation (CPI) for

25 years. Since 1982-84, the cost of medical care has more than tripled.

National Health Expenditures and Health Expenditures as a Share of GDP,

1960-2017F ($ Billions)$2

8

$1,9

73$2

,106

$2,2

46$2

,394

$2,5

55$2

,726

$2,9

05$3

,098

$3,3

05$3

,524 $3,7

57 $4,0

08$4

,277

$1,6

03

$1,7

32

$253

$714

$1,3

54

$75

$1,1

91

$1,8

52

$1,4

70

$1,1

25$9

13 $1,2

66

5.2%

7.2%

9.1%

13.7

%

14.5

%15

.3%

15.9

%15

.9%

16.0

%16

.3%

16.6

% 19.1

%19

.5%

16.9

%

17.1

%17

.4%

17.7

%18

.0%

18.4

%18

.8%

12.3

% 13.6

%

13.8

% 15.8

%

13.6

%

13.7

%

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

60 70 80 90 93 97 98 99 00 01 02 03 04 05 06 07E

08E

09E

10E

11E

12E

13E

14E

15E

16E

17E

Nat

iona

l Hea

lth E

xps

0%

5%

10%

15%

20%

25%

Nat

iona

l Hea

lth E

xp. a

s % o

f GD

P

National Health Expenditures National Health Expenditures as % of GDP

Health care expenditures will consumed 16.6% of GDP in

2008 and are expected to rise to 19.5% by 2017

Source: Centers for Medicare & Medicaid Services, Office of the Actuary; Insurance Information Institute.

National Health Expenditures Per Capita, 1960-2017E ($Bill)

$4,5

23$4

,790

$5,1

48$5

,560

$5,9

52$6

,301

$6,6

49$7

,026

$7,4

39$7

,868

$8,3

29$8

,816

$9,3

22$9

,862

$10,

439

$11,

043

$11,

684

$12,

369

$13,

101

$356

$2,8

13$1

,100

$148

$3,4

69$4

,104

$4,2

97

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

$10,000$11,000$12,000$13,000$14,000$15,000

60 70 80 90 93 97 98 99 00 01 02 03 04 05 06 07E

08E

09E

10E

11E

12E

13E

14E

15E

16E

17E

Source: Centers for Medicare & Medicaid Services, Office of the Actuary; Insurance Information Institute.

Health costs on a per capita basis continue to rise rapidly, as health expenditures rise faster

than population growth

Average Annual Growth in US Per Capital Health Care Costs, 1960-2017F

14.1%

20.9%

15.6%

7.0% 7.9% 7.6%

0%

5%

10%

15%

20%

25%

1960-1970 1970-1980 1980-1990 1990-2000 2000-2007 2007-2017

The 1970s were the most inflationary decade for medical costs at nearly

21% per year

Over the net decade health care expenditures will likely

increase well ahead of economic growth and the general pace of inflation

Source: Insurance Information Institute calculations based on data from the Centers for Medicare &Medicaid Services, Office of the Actuary.

4.5%3.6%

2.8% 3.2% 3.5%4.1% 4.6% 4.7%

4.0% 4.4% 4.2% 4.0%

5.1%

7.4%

10.1%

8.3%

10.6%

8.2%

14.0%

7.4%

9.0%

6.8%

11.7%

7.5%

0%

2%

4%

6%

8%

10%

12%

14%

16%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

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.

3.5

pts

WC medical severity rose more than twice as fast as the medical CPI (8.8% vs. 4.0%)

from 1995 through 2006

Med Costs Share of Total Costs is Increasing Steadily

Indemnity55%

Medical45%

Source: NCCI (based on states where NCCI provides ratemaking services).

Indemnity52%

Medical48%

Indemnity41%

Medical59%1986

1996

2006p

Auto Claim Costs Rise Faster than CPI or Health Care Costs

9%

4%

8%

6%

3%4%

0%1%2%3%4%5%6%7%8%9%

10%

Claimed BIEconomic

Loss

Total BIPayment

Claimed PIPEconomic

Loss

Total PIPPayment

CPI CPI-Medical

Sources: Insurance Research Council, Auto Insurance Claims: Countrywide Patterns in Treatment, Cost and Compensation, 2008 Edition; Insurance Information Institute.

Inflation in auto insurance claims is a significant and long-

term cost driver

Claimed BI economic

losses are 3 times the overall

inflation rate

MEDICAL MALPRACTICE

OPERATING ENVIRONMENT

Improved, But Still Vulnerable

103.

7

108.

0

96.4 99

.8

106.

6

107.

9 115.

7

129.

7

133.

7

154.

7

142.

5

137.

5

111.

0

101.

0

91.2

83.0

94.5

108.

8 115.

7

107.

0

108.

3

106.

7

106.

0

102.

0

105.

9

108.

0

110.

1 115.

8

107.

5

100.

1

98.4 10

0.8

92.5 95

.6 98.6

127.

9

80

90

100

110

120

130

140

150

160

170

91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07P 08E

Medical Malpractice All Lines Combined Ratio

Medical Malpractice Combined Ratio

Source: AM Best, Insurance Information Institute

Insurers in 2007 paid out an estimated $0.83 for every $1

they earned in premiums.As recently as 2002,

med mal insurers paid out $1.55 for

every dollar earned

The dramatic improvement has

restored med mal’s viability

Medical Malpractice: Losses & Expenses Paid vs. Premiums Earned

$ Billions

$4.0

$4.0

$4.1

$4.2 $4

.9 $5.2

$5.1 $5

.6 $6.1

$7.2

$8.5

$8.4

$9.5

$9.6

$4.2

$4.1

$5.2

$4.6

$4.5 $5

.1

$5.3 $6

.0 $6.6 $7

.5

$9.5 $1

0.3 $1

1.6

$9.3 $9.6

$8.8

$4.7

$4.8

$4.8

$4.8

$2$3$4$5$6$7$8$9

$10$11$12

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06Earned Premiums Losses & Expenses Paid

Source: Computed from A.M. Best data by the Insurance Information Institute

Before reforms took hold in the mid-2000s, premium earned rose 54% while losses and expenses rose 125% over the

period from 1990 through 2003,

Medical Malpractice:Underwriting Loss/Profit, 1990-2007p

$ Millions

-$147.8

-$1,135.9

-$344.1-$808.6

-$3,077.0

-$922.9

-$94.7

$848.3

$1,488.0

-$3,172.5-$3,353.1

-$1,890.6-$1,517.7

-$387.1-$289.3

$111.6$14.4

-$230.8

-$4,000

-$3,000

-$2,000

-$1,000

$0

$1,000

$2,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Source: Insurance Information Institute calculations based on data from A.M. Best.

Med Mal underwriting losses exploded by $3.1 billion or 1059%

between 1996 and 2001

Med Mal insurers

now operating

in the black

Medical Malpractice:Cumulative Underwriting Losses

$ Millions

-$23

1

-$37

9

-$1,

515

-$1,

859

-$1,

747

-$1,

733

-$2,

022

-$2,

409

-$3,

218

-$4,

735

-$6,

626

-$9,

979

-$13

,056

-$16

,229

-$17

,151

-$17

,246

-$16

,398

-$14

,910

-$20,000

-$18,000

-$16,000

-$14,000

-$12,000

-$10,000

-$8,000

-$6,000

-$4,000

-$2,000

$0

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

The cumulative underwriting loss in Med

Mal from 1990-2003 totaled more than $17 billion

Source: Insurance Information Institute calculations based on data from A.M. Best.

Outlook for MPLIOperating Environment

• Short-Term: Soft market persists, driven by relatively good underlying underwriting performance

• Intermediate Term: Cyclical deterioration in profitability as underwriting begins to deteriorate under soft market conditions

• Long-Run: Erosion of reforms of recent years begins to take toll, further damaging results

• Conclusion: Underwriting Cycle can’t be banished, but its depth and length can be moderated via disciplined underwriting and pricing

• Tort Cycle: Med Mal tends to experience a tort crisis every 10-15 years. If history is any guide, the next crisis will be evident around 2012-2015

Investment Componentof Medical Malpractice

Operating Results

Investment Gain: Med Mal vs.All Commercial Lines*

*As a % of net earned premium. Investment gains consists primarily of interest, dividends andrealized capital gains and losses.

Source: A.M. Best; Insurance Information Institute estimate

12.5

%

14.3

%

14.1

%

16.8

%

16.9

%

15.1

%

16.8

%

14.3

%

9.6%

8.9% 9.4% 10

.3%

10.2

%

27.4

%

29.3

%

30.2

%

30.0

%

28.0

%

23.7

% 27.9

%

19.1

%

12.8

%

15.5

%

15.1

%

14.0

% 18.9

%

0%

5%

10%

15%

20%

25%

30%

35%

94 95 96 97 98 99 00 01 02 03 04 05 06Commercial Lines Med Mal

Investment returns have generally shrunk since 2000, but are still important. “Heavy Lifting” must be done through underwriting & pricing

Medical Malpractice Investment Gain*

$ Billions

$1.5 $1.5

$2.1

$1.8

$1.5 $1.4$1.2

$1.6

$1.2

$0.9

$1.3 $1.3 $1.3

$1.8

$1.3$1.4 $1.5

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06*Imputed from investment gain data as a % of net earned premium. Investment gains consistsprimarily of interest, dividends and realized capital gains and losses.

Source: A.M. Best; Insurance Information Institute estimate

Investment returns have risen, but poor investment environment today implies “Heavy Lifting” must be done through

underwriting & pricing

Medical Malpractice Tort

Environment

Harvesting the Fruitsof Reform

Medical Malpractice Tort Cost: Growth Continues, Though Modestly

$ Billions

$1.2

$1.4

$1.8

$2.2 $4

.8 $5.8 $6

.8$6

.7$6

.9$7

.3$7

.6 $8.5 $9.2 $1

0.1

$10.

6$1

1.5

$12.

5$1

3.3

$14.

1$1

5.5

$16.

4$1

7.9

$19.

6 $21.

7 $24.

2 $26.

5$2

8.2

$29.

4$3

0.3

$2.7

$3.4

$4.1

$0$2$4$6$8

$10$12$14$16$18$20$22$24$26$28$30$32

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

Sources: Tillinghast-Towers Perrin, US Bureau of Labor Statistics, Insurance Information Institute

•Over the period from 1990 through 2006, medical malpractice tort costs rose 229%, more than double the 90% increase in tort costs generally over the same period.

•Over the period from 1975 through 2006, medical malpractice tort costs have increased at an annual rate of 11.1 percent, versus 8.2 percent for all other tort costs.

ME

NH

MACT

PA

WVVA

NC

LATX

OK

NE

ND

MN

MI

IL

IA

ID

WA

OR

AZ

HI

NJ

RI

MDDE

AL

VT

NY

DC

SC

GA

TN

AL

FL

MS

ARNM

KYMOKS

SD WI

INOH

MT

CA

NVUT

WY

CO

Medical Crises across the U.S.*

Crisis states at height of 2000s

AMA: Crises reached in 22 states in the 2000s

PR

AK

*The AMA is no longer categorizing states as crisis states.

Source: American Medical Association, February 2008

2007 Top Ten Verdicts

Source: LawyersWeekly USA, January 22, 2008.

FloridaAuto Crash, Death$45 Million

New JerseyVioxx$47.5 Million

NevadaPrempro$47.6 Million

AlabamaProduct Liability, Death$50 Million

FloridaDUI Crash$50 Million

New MexicoNursing Home, Death$54 Million

FloridaPrivate Air Crash$54 Million

CaliforniaProduct Liability, Death$55.2 Million

FloridaPremises Liability, Death$102.7 Million

New YorkMedical Malpractice$109 Million

StateIssueValue

2002 Top Ten Verdicts

Source: LawyersWeekly USA, January 2003.

New YorkMed Mal (Birth Injury)$80 Million

MissouriProd. Liab/Personal Inj. (Auto)$80 Million

New YorkMedical Malpractice$91 MillionNew YorkMed Mal (Birth Injury)$95.2 Million

CaliforniaBusiness Fraud$97.2 Million

VirginiaProduct Liab. (Auto Accident)$122 Million

OregonTobacco (Product Liability)$150 Million

TexasProduct Liability (Rollover)$225 Million

KentuckyPersonal Injury (Burn)$270 Million

MissouriNegligence (Pharmacy Mal)$2.2 Billion

FloridaTobacco (Product Liability)$28 Billion

StateIssueValue

2001 Top Ten Verdicts

Source: LawyersWeekly USA, January 2002.

CaliforniaReal Estate$94.5 MillionNew YorkMedical Malpractice$107.8 MillionTexasInheritance Dispute$108.2 MillionNew YorkMedical Malpractice$114.9 MillionVirginiaIntellectual Property Theft$116 Million

ColoradoPolice Auto Crash$ 256 MillionTexasNursing Home$312.8 MillionFloridaPrivate Airplane Crash$480 MillionLouisianaLand Contamination$1 BillionCaliforniaTobacco$3 BillionStateIssueValue

Average Jury Award inMedical Malpractice Cases*

$ Millions

$1.14

$2.02 $1.88 $1.93

$3.29

$4.78

$3.74

$4.26$3.83

$2.92 $2.89$3.24

$0.0$0.5$1.0$1.5$2.0$2.5$3.0$3.5$4.0$4.5$5.0

94 95 96 97 98 99 00 01 02 03 04 05*Ultimate award may be reduced by judge or upon appeal.Source: Jury Verdict Research; Insurance Information Institute.

The average med mal jury award more than tripled

between 1994 and 2005, but has moderated since 2002

Trends in Million Dollar Verdicts*4%

10%

8%

23%

22%

36%

48%

4%

8%

12%

31% 37

%

49%

59%

13%

14%

29%

51%

62%

5%

17%

13%

32%

41%

55%

64%

4%

39%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

VehicularLiability

PersonalNegligence

PremisesLiability

BusinessNegligence

GovernmentNegligence

MedicalMalpractice

ProductsLiability

1996-1998 1999-2001 2002-2003 2004-2005

*Verdicts of $1 million or more.Source: Jury Verdict Research; Insurance Information Institute.

Sharp jumps in multi-million dollar awards in recent years across most types of defendants. In med mal, million dollar-plus awards rose from 36% of all awards from 1996-98 to 55% in 2004-05, well above most other categories.

MERGER & ACQUISITION

Catalysts for P/C Consolidation Growing

in 2008

P/C Insurance-Related M&A Activity, 1988-2006

$2,4

35

$5,1

00

$19,

118

$40,

032

$1,2

49$4

86$2

0,35

3$4

25$9

,264

$35,

221

$55,825

$30,

873

$8,0

59$1

1,53

4

$1,8

82

$3,4

50$2

,780

$5,1

37

$5,6

38

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Tran

sact

ion

Valu

e ($

Mill

)

0

20

40

60

80

100

120

140

Num

ber o

f Tra

nsac

tions

Transaction Values Number of Transactions

Source: Conning Research & Consulting.

M&A activity began to accelerate during the second

half of 2007

No model for successful

consolidation has emerged

Motivating Factors for Increased P/C Insurer Consolidation

Motivating Factors for P/C M&As• Slow Growth: Growth is at its lowest levels since the late 1990s

NWP growth was 0% in 2007; Appears similarly flat in 2008Prices are falling or flat in most non-coastal markets

• Accumulation of Capital: Excess capital depresses ROEsPolicyholder Surplus up 6-7%% in 2007 and up 80% since 2002Insurers hard pressed to maintain earnings momentum Options: Share Buybacks, Boost Dividends, Invest in Operation, AcquireOption B: Engage in destructive price war and destroy capital

• Reserve Adequacy: No longer a drag on earningsFavorable development in recent years offsets pre-2002 adverse develop.

• Favorable Fundamentals/Drop-Off in CAT ActivityUnderlying claims inflation (frequency and severity trends) are benign

Lower CAT activity took some pressure of capital baseSource: Insurance Information Institute.

P/C INVESTMENT OVERVIEW

More Pain, Little Gain

Property/Casualty Insurance Industry Investment Gain1

$ Billions

$35.4

$42.8$47.2

$52.3

$44.4

$36.0

$45.3$48.9

$59.4$55.8

$63.6$56.9

$51.9

$57.9

$0

$10

$20

$30

$40

$50

$60

94 95 96 97 98 99 00 01 02 03 04 05* 06 071Investment gains consist primarily of interest, stock dividends and realized capital gains and losses. 2006 figure consists of $52.3B net investment income and $3.4B realized investment gain.*2005 figure includes special one-time dividend of $3.2B.

Sources: ISO; Insurance Information Institute.

Investment rose in 2007 but are just 9.8% higher than what they were

nearly a decade earlier in 1998

Property/Casualty Industry Investment Results, 1994-2007

$33.

7

$36.

8

$38.

0

$41.

5

$37.

1

$36.

7

$38.

7

$39.

6 $49.

5

$52.

3

$54.

6

$1.7

$6.0 $9

.2 $10.

8

$18.

0

$13.

7 $16.

9

$6.9 $6

.9 $9.3

$9.7

$3.5

$9.0

$40.

8

$38.

6

$39.

9

$20

$30

$40

$50

$60

$70

94 95 96 97 98 99 00 01 02** 03 04 05 06 07E

Bill

ions

Capital Gains/LossesInvestment Income

*Primarily interest, stock dividends, and realized capital gains and losses.**Not shown: $1.1B capital loss in 2002.2005 figure includes special one-time dividend of $3.2B. Sources: ISO; Insurance Information Institute.

$52.3

$57.7

$44.0

$35.6

$45.6$48.9

$59.2$55.8

$63.6Realized capital gains rising as underwriting

results slip$57.9

US P/C Net Realized Capital Gains,1990-2007 ($ Millions)

$2,8

80 $4,8

06

$9,8

93

$1,6

64

$5,9

97

$9,2

44 $10,

808

$13,

016 $1

6,20

5

$6,6

31

-$1,

214

$6,6

10 $8,9

71

$18,019

$3,5

24

$9,7

01

$9,1

25

$9,8

18

-$5,000

$0

$5,000

$10,000

$15,000

$20,000

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07Sources: A.M. Best, ISO, Insurance Information Institute.

Realized capital gains rebounded strongly in 2004/5

but fell sharply in 2006 despite strong stock market

as insurers “bank” their gains. Rising again in 2007 as underwriting results slip

-30%

-20%

-10%

0%

10%

20%

30%

40%

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

Source: Ibbotson Associates, Insurance Information Institute. *Through May 9, 2008.

Total Returns for Large Company Stocks: 1970-2008*

S&P 500 was up 3.5% in 2007, down 5.45% YTD 2008*

Markets were up in 2007 for the 5th consecutive year; 2008 could be first down

year since 2002

2%

3%

4%

5%

6%

7%

8%

9%

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08*

P-C Inv Income/Inv Assets 10-Year Treasury Note

P/C Investment Income as a % of Invested Assets Follows 10-Year US T-Note

*As of January 2008 month-end.Sources: Board of Governors, Federal Reserve System; A.M.Best; Insurance Information Institute.

Investment yield historically tracks 10-year Treasury note quite closely

Investment Outlook• Short-Term: Low interest rates, poor equity market

performance will reduce investment gains and depress profitability

• Intermediate Term: Fed likely to begin raising rates as early as late 2008, if credit market conditions continue to improve

Stock markets could begin recovery from first quarter lows• Long-Run: Interest rates and stock market returns are

modest• Conclusion: Insurers (including long-tail carriers

offering MPLI) cannot count on investment gains to offset underwriting losses

• Implication: Insurers Must Remain Disciplined in Termsof Underwriting and Pricing

REINSURANCE MARKETS

Reinsurance Prices are Falling in Non-Coastal Zones, Casualty Lines

Share of Losses Paid by Reinsurers, by Disaster*

30%25%

60%

20%

45%

0%

10%

20%

30%

40%

50%

60%

70%

Hurricane Hugo(1989)

Hurricane Andrew(1992)

Sept. 11 TerrorAttack (2001)

2004 HurricaneLosses

2005 HurricaneLosses

*Excludes losses paid by the Florida Hurricane Catastrophe Fund, a FL-only windstorm reinsurer, which was established in 1994 after Hurricane Andrew. FHCF payments to insurers are estimated at $3.85 billion for 2004 and $4.5 billion for 2005.Sources: Wharton Risk Center, Disaster Insurance Project; Insurance Information Institute.

Reinsurance is playing an increasingly

important role in the financing of mega-CATs; Reins. Costs

are skyrocketing

US Reinsurer Net Income& ROE, 1985-2007*

$1.9

4

$2.0

3

$1.9

5 $3.7

1$4

.53

$5.4

3$1

.47

$1.9

9

$1.3

1 $3.1

7$3

.41

$2.5

1$9

.68

$7.9

6

($2.98)

$0.1

2

$1.9

5

$1.3

8$1

.22

$1.8

7

$1.1

7 $2.5

2$1

.79

($4)

($2)

$0

$2

$4

$6

$8

$10

$12

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07*

Net

Inco

me

($ B

ill)

-10%

-5%

0%

5%

10%

15%

20%

RO

E

Net Income ROE

Source: Reinsurance Association of America. *2007 ROE figure is III estimate based return on average 2007 surplus.

Reinsurer profitability rebounded post-Katrina

but is now falling

Reinsurer Market Share Comparison: 1990 vs. 2006

U.S. Reinsurer

64.7%

Offshore Reinsurer

35.3%

1990 2006

Sources: Reinsurance Association of America; Insurance Information Institute.

U.S. Reinsurer

46.9%

Offshore Reinsurer

53.1%

U.S. Reinsurer market share fell precipitously between 1990 and 2006

Regional Distribution of Reinsurers by NWP, 2006

Other11%

U.K.6%

Switzerland12%

Ireland2%

Japan6%

Germany25%

France3%

Bermuda10%

U.S.25%

Source: Standard & Poor’s, Global Reinsurance Highlights, 2007 Edition

International reinsurers from

Germany, Switzerland and

France account for 40 percent of global reinsurance volume.

Bermuda is a growing market, with a 10 percent

share. Lloyd’s and London-based

reinsurers account for 6 percent of the

world market.

Eight countries account for 89 percent of global reinsurance volume.

A STORMY ECONOMIC FORECAST

What a Weakening Economy & Credit Crunch Mean for

the Insurance Industry

3.7%

0.8%

1.6%

2.5%

3.6%

3.1%

2.9%

0.6%

3.8%

4.9%

0.6%

2.1%

1.9% 2.0%

2.6% 2.

8% 2.9%

0.6%

0.1%

0%

1%

2%

3%

4%

5%

6%

20

00

20

01

20

02

20

03

20

04

20

05

20

06

07:1

Q

07:2

Q

07:3

Q

07:4

Q

08:1

Q

08:2

Q

08:3

Q

08:4

Q

09:1

Q

09:2

Q

09:3

Q

09:4

Q

Real GDP Growth*

*Yellow bars are Estimates/Forecasts.Source: US Department of Commerce, Blue Economic Indicators 4/08; Insurance Information Institute.

Economic growth has slowed dramatically

in 2007/2008

A Few Facts About the Relationship Between Insurance & Economy

• Vast Majority of Insurance Business is Tied to RenewalsApproximately 98+% of P/C business (units) is linked to renewalsA very large share of p/c insurance premiums are statutorily or de facto compulsory (e.g., WC, auto liability, surety, usually HO…)P/C insurers have marginal exposure impact due to economyMost life revenues and units are renewals, but some products (e.g., variable annuities are sensitive to market volatility)Life insurers who manage 401(k) assets seeing more loans and hardship withdrawals;

• Insurers are Sensitive to Interest RatesAbout 2/3 of P/C invested assets and 75% if Life assets are fixed incomeHistorically, yield on industry portfolios has tracked 10-year note closelyAll else equal, lower total investment gain implies greater emphasis on underwritingHistorically, industry’s best underwriting performances are rooted in periods when interests rates were low and/or equity market performance poor (1930s – 1950s, early 2000s gave rise to strong 2006/07)

Source: Insurance Information Institute.

5.2%

-0.9

%-7

.4%

-6.5

%-1

.5%

1.8%

4.3%

18.6

% 20.3

%5.

8%0.

3%-1

.6%

-1.0

%-1

.8%

-1.0

%3.

1%1.

1%0.

8%0.

4%0.

6%-0

.4%

-0.3

%1.

6%5.

6%13

.7%

7.7%

1.2%

-2.9

% -0.5

%-2

.9%

-2.7

%

-10%

-5%

0%

5%

10%

15%

20%

25%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 08F

Rea

l NW

P G

row

th

-4%

-2%

0%

2%

4%

6%

8%

Real

GDP

Gro

wth

Real NWP Growth Real GDP

Real GDP Growth vs. Real P/C Premium Growth: Modest Association

P/C insurance industry’s growth is influenced modestly by growth

in the overall economy

Sources: A.M. Best, US Bureau of Economic Analysis, Blue Chip Economic Indicators, 2/08; Insurance Information Inst.

Summary of Treasury “Blueprint”for

Financial Services Modernization

Impacts on Insurers

Treasury Regulatory Recommendations Affecting Insurers

Source: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.

• Establishment of an Optional Federal Charter (OFC)Would provide system for federal chartering, licensing, regulation and supervision of insurers, reinsurer and producers (agents & brokers)OFC insurers would still be subject to state taxes, provisions for compulsory coverage, residual market and guarantee funds OFC would specify specific lines covered by charter; Separate charters needed for P/C and Life

• OFC Would Incorporate Several Regulatory ConceptsEnsure safety and soundnessEnhance competition in national and international marketsIncrease efficiency through elimination of price controls, promote more rapid technological change, encourage product innovation, reduce regulatory costs and provide consumer protection

• Establishment of Office of National Insurance (ONI)Department within Treasury to regulate insurance pursuant to OFCHeaded by Commissioner of National InsuranceCommissioner has regulatory, supervisory, enforcement and rehabilitative powers to oversee organization, incorporation, operation, regulation of national insurers and national agencies

• Establishment of Office of Insurance Oversight (OIO)Department within Treasury to handle issues needing immediate attention such “reinsurance collateral”; OIO could focus immediately on “key areas of federal interest in the insurance sector”OIO: lead regulatory voice on international regulatory policyWould have authority to ensure states achieved uniform implementation of declared US international insurance policy goalsOIO would also serve as advisor to Treasury Secretary on major domestic and international policy issues

• UPDATE: HR 5840 Introduced April 17 Would Establish Office of Insurance Information (OII)

Very similar to OIOSource: Department of Treasury Blueprint for a Modernized Financial Regulatory System, March 2008.

Treasury Regulatory Recommendations Affecting Insurers (cont’d)

CATASTROPHICLOSS

No Appreciable Spillover Effects

U.S. Insured Catastrophe Losses*$7

.5$2

.7$4

.7$2

2.9

$5.5 $1

6.9

$8.3

$7.4

$2.6 $1

0.1

$8.3

$4.6

$26.

5$5

.9 $12.

9 $27.

5

$6.7

$3.4

$100

.0

$61.

9

$9.2

$0

$20

$40

$60

$80

$100

$120

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 0708

:Q1

20??

*Excludes $4B-$6b offshore energy losses from Hurricanes Katrina & Rita. Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Non-prop/BI losses = $12.2B.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions

2006/07 were welcome respites. 2005 was by far the worst year ever for insured catastrophe losses in the US. Few “spillover effects” into

non-property lines

$100 Billion CAT year is coming soon

Shifting Legal Liability & Tort

EnvironmentIs the Tort Pendulum

Swinging Against Insurers?

Bad Year for Tort Kingpins*“King of Class Actions” Bill Lerach

•Former partner in class action firm Milberg Weiss•Admitted felon. Guilty of paying 3 plaintiffs $11.4 million in 150+ cases over 25 years & lying about it repeatedly to courts•Will serves 1-2 years in prison and forfeit $7.75 million; $250,000 fine

“King of Torts” Dickie Scruggs•Won billions in tobacco, asbestos and Katrina litigation•Pleaded guilty for attempting to offer a judge $40,000 bribe to resolve attorney fee allocation from Katrina litigation in his firm’s favor. His son/others guilty on related charges•Could get 5 years in prison, $250,000 fine

Sour

ce: S

an D

iego

Uni

on T

ribun

e, 9

/19/

07So

urce

: Wal

l Stre

et Jo

urna

l, 3/

15/0

7

$17.0$49.6 $58.7

$85.6$17.1

$51.0$70.9

$85.6

$5.2

$20.4

$30.0

$45.5

$0

$50

$100

$150

$200

$250

1980 1990 2000 2006

Commercial Lines Personal Lines Self (Un)Insured

Bill

ions

Total = $39.3 Billion

*Excludes medical malpracticeSource: Tillinghast-Towers Perrin, 2007 Update on US Tort Cost Trends.

Total = $121.0 Billion

Total = $159.6 Billion

Total = $216.7 Billion

Personal, Commercial & Self (Un) Insured Tort Costs*

Tort System Costs, 1950-2009E

$1.8 $5.4 $7.9$13.9$20.0

$83.7

$130.2

$179.2

$246.0$265

$277

$158.5

$247.0

$42.7

$3.4

0.62%0.82%

1.03%

1.34%1.22%

1.98%2.14%

1.82% 1.83%1.83%1.87%

2.24%2.24%

1.53%

1.11%

$0

$50

$100

$150

$200

$250

$300

50 55 60 65 70 75 80 85 90 95 00 03 06 08E 09E

Tor

t Sys

tem

Cos

ts

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Tor

t Cos

ts a

s % o

f GD

P

Tort Sytem Costs Tort Costs as % of GDP

Source: Tillinghast-Towers Perrin, 2007 Update on U.S. Tort Costs as % of GDP

After a period of rapid escalation,

tort system costs as a % of GDP are

now falling

The Nation’s Judicial Hellholes (2007)

Source: American Tort Reform Association; Insurance Information Institute

TEXASRio Grande Valley and Gulf Coast

South Florida

ILLINOISCook County West Virginia

Some improvement in “Judicial

Hellholes” in 2007

Watch ListMadison County, ILSt. Clair County, IL

Northern New Mexico

Hillsborough County, FLDelawareCalifornia

Dishonorable MentionsDistrict of Columbia

MO Supreme CourtMI Legislature

GA Supreme CourtOklahoma

NEVADAClark County (Las Vegas)

NEW JERSEYAtlantic County (Atlantic City)

Business Leaders Ranking of Liability Systems for 2007

Best States1. Delaware2. Minnesota3. Nebraska4. Iowa5. Maine6. New Hampshire7. Tennessee8. Indiana9. Utah10. Wisconsin

Worst States41. Arkansas42. Hawaii43. Alaska44. Texas45. California46. Illinois47. Alabama48. Louisiana49. Mississippi50. West Virginia

Source: US Chamber of Commerce 2007 State Liability Systems Ranking Study; Insurance Info. Institute.

New in 2007ME, NH, TN,

UT, WI

Drop-OffsND, VA, SD,

WY, ID

NewlyNotorious

AK

RisingAbove

FL

Midwest/West has mix of good and bad states

Insurance Information Institute On-Line

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