Tort Temperature and what it means for personal injury claims

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1 d finitive [ tort temperature ] Measuring the liability claims climate. MAY 2014 Tort Temperature and what it means for personal injury claims What is Tort Temperature? Tort Temperature describes the pressure on claims arising from the legal environment, such as level of legal activity, court decisions, and legislation. When there is more legal activity, the Tort Temperature is said to be higher. Finity has measured the Tort Temperature after considering a range of factors impacting on liability claims and the effect that those factors are expected to have on costs. Measuring the Tort Temperature will lead to insurers being better informed when making decisions relating to their liability policies. Overview Understanding Tort Temperature can improve the way an insurer might manage its reserves or claims management strategy. It is also a useful tool to identify new business opportunities and set underwriting strategy. This d finitive will discuss the following: >> How we have measured Tort Temperature >> Recent Tort Temperature indications >> Why understanding Tort Temperature is important for insurers. Sydney Auckland Melbourne Wellington

2 How hot is it? Finity has analysed personal injury claims over the last two years and, while some pressures on claims costs exist, the current industry Tort Temperature is not as hot as the late 1990s (see chart below). The litigation environment is not expected to lead to significant levels of above normal inflation for personal injury claims that settle over the next few years. This is illustrated in the diagram below. For comparison purposes, we have estimated (with the benefit of hindsight) what the Tort Temperature might have been since HOT Tort Temperature Index 5 NEUTRAL? 0 COLD Year Hindsight (indicative only) Tort Temperature Index The following historical events have influenced the Tort Temperature: >> Liability claims costs escalated rapidly in the late 1990s due to increasingly plaintiff friendly settlements. This was the precursor to the liability market crisis of the early 2000s. >> By 2000, liability claims pressures had grown substantially leading, along with the HIH collapse, to pressure to reform tort laws. The result of this market failure was a major program of tort reform legislation across Australia. However, even before tort reform, court settlements were showing signs of moderating. >> The years following tort reform were characterised by a substantial reduction in claims activity. This period can be described as the Tort Reform Honeymoon. The effectiveness of the tort reforms gradually eroded towards the end of the decade. By around 2009 there were some worrying signs of a higher Tort Temperature arising from increasing litigation activity. >> Since 2009, our assessment of Tort Temperature has moderated. The level of litigation appears to have stabilised and recent judgements from superior courts have (with the notable exception of Kelly vs State of Queensland [2014] QCA 27 see Finity Consulting Tort Temperature Update) been consistent with the initial objectives of the 2002 tort reforms. 2 d finitive MAY 2014

3 Understanding the Tort Marketplace High Court Courts of Appeal Gauging the Tort Temperature We measure the tort temperature by considering the experience across the tort system, starting from the Claims Marketplace up to the High Court. Cases Finalised by Court Cases Going to Court Civil Liability Claims Market Plaintiffs Defendants When a claim is made by a plaintiff to a defendant, each participant has some expectation of the market value of the claim, based on similar recent cases. These claims will generally settle through negotiation out of court when there are only minor differences in expectations. Where expectations differ significantly, claims will be taken to court. Most of these claims will settle before or during the case, while the remainder will be decided by court judgement. The outcomes of any individual case may not raise eyebrows, but over time will change the expectations in the civil liability claims market. A small proportion of civil liability claims will ultimately end up at the Courts of Appeal, and a handful at the High Court. At this stage, while arguments are usually around quite specific points of the law, the outcomes do have an influence on the litigation climate. The Tort Temperature can be influenced at each step of the litigation process. When we describe Tort Temperature, what we are trying to do is to measure the temperature of this system, i.e. of the whole tort marketplace. MAY 2014 d finitive 3

4 How have key court decisions influenced Tort Temperature? COOL NEUTRAL HOT 2009 Adeels Palace Pty Ltd v Anthony Moubarak and Antoin Fayex Bou Najem Cal No 14 Pty Ltd t/as Tandara Motor Inn & Anor v Motor Accidents Insurance Board and Sandra Scott 2010 State Rail Authority of NSW v Wicks and Sheehan 2011 Insight Vacations Pty Ltd t/as Insight Vacations v Young Kuhl v Zurich Financial Services Australia Ltd & Anor 2012 Strong v Woolworths limited t/as Big W & Anor 2013 Weis Restaurant Toowoomba v Gillogly Taylor v Owners Strata Plan Action Paintball Games Pty Ltd v Barker Meneghello v Coles 2014 Appealed to the High Court Kelly vs State of QLD Taylor v Owners Strata Plan In 2012, Finity undertook a detailed review of Tort Temperature. This review found some liability insurers facing claims costs pressure, due to an increase in the number of claims being litigated and greater level of lawyer involvement for each claim. Since then, we have continued to monitor Tort Temperature. A number of superior court decisions in 2013 continued to support a moderate Tort Temperature, and arguably suggesting a slight cooling. On the other hand, looking at court decisions in the early part of 2014 we ve seen two cases that are clearly warmer (Kelly and the appeal decision for Taylor). 4 d finitive MAY 2014

5 Why is Tort Temperature important to insurers? Insurers have traditionally placed great emphasis on understanding and managing the risk of natural catastrophes. Natural catastrophes are geographically diversified, generally isolated events and can be effectively mitigated by reinsurance programs. Conversely, insurers devote little effort to understanding the Tort Temperature. Yet, it has the potential to impact each liability claim within a jurisdictional area and for a sustained period of time. The effect is leveraged because it affects the entire outstanding claims provisions, not just the new claims. This is in effect concentration risk, and one that is not well protected by reinsurance programs. The impact of claims escalation in a hot claims environment has the potential to cost an insurer more than natural catastrophes. Understanding Tort Temperature can not only improve the way an insurer might manage its reserves or claims management strategy; it can also be a useful tool to identify new business opportunities and set underwriting strategy. The effects of Tort Temperature are leveraged because it affects the outstanding claims provisions as well as new claims being reported. Due to the long tail nature of liability claims, it can take a few years before higher Tort Temperature is identified through analysis of claims data. Tort Temperature and your business Gather experience (from a range of sources) Consolidate findings to understand what has been observed and why Discussions with key experts Agree on a current view of Tort Temperature Incorporate findings into business processes Setting premiums Strategy Claims management Reserving Capital management Other MAY 2014 d finitive 5

6 Organisations impacted by Tort Temperature >> Liability insurers >> CTP insurers and schemes >> Medical indemnity insurers >> Workers compensation insurers and schemes >> Professional indemnity Taking the temperature for your liability business In addition to an industry-wide index, Finity can work with individual insurers to identify the Tort Temperature impacting on their specific business. An insurer s Tort Temperature will be influenced by the type of the business it writes and the governing legislation. For example, there are differences in the Tort Temperature influencing CTP and liability insurers. Strategic business decisions call for robust and rigorous evidence instead of looking backwards at claims history or relying on a range of anecdotes, which often inadequately address business needs. >> Self insurers >> Life insurers >> Reinsurers >> Government insurers >> Local councils Traditional actuarial analysis >> Retrospective, and generally extrapolates historical trends >> Focuses on quantifying superimposed inflation, which is hard to measure and virtually impossible to predict >> Doesn t offer any insight directly useful for the business >> Lacks a control cycle Move from outcome to root cause >> Links cause to outcome >> Meaningful assessments can be made >> Insights that can be used by the business to make decisions 6 d finitive MAY 2014

7 How can Finity help? Finity can help implement a sustainable Tort Temperature framework in your business. In the initial stages, we can: >> Help design the approach for your specific needs >> Specify information for you to collect >> Bring external information >> Facilitate workshops >> Assist with management and board deliverables, as well as deliverables to operational areas >> Assist with integration into business as usual processes, such as business planning processes, and actuarial processes Once an approach has been established, Finity can assist with ongoing reviews of the Tort Temperature, including: >> Challenging your analysis/assessment >> Critiquing deliverables If you engage Finity to help you implement a Tort Temperature framework, we will tailor the approach to fit with your business and your needs. We strongly believe that the Tort Temperature framework can benefit many areas of a liability insurer s operations. Benefits of the Finity approach Understanding your firm s Tort Temperature exposure can provide powerful insight on which to base strategic, financial decisions. The benefits of our approach include: >> Structured framework linked to underlying drivers >> Transparency >> Focus on insights >> Better communication >> Facilitates annual review and control cycle >> Incorporates views from various experts >> Distinction between observed trends and the future Since developing the Tort Temperature approach in 2012, Finity consultants have successfully implemented the process with individual companies portfolios. Please give us a call if you would like to discuss what the Tort Temperature process could achieve for your business. For more information, see the following: Gauging the Tort Temperature and the Tort Temperature Scorecard Pendulum 2012 Tort Temperature how hot is it? MAY 2014 d finitive 7

8 d finitive [ tort temperature ] Our upcoming issue of CTP News reviews the latest developments in Australia and NZ, and what they mean for insurers. Finity Expertise Finity is one of Australia and New Zealand s leading actuarial and management consulting firms. Our expertise in the insurance industry is highly regarded and has been developed by working with the industry since the early 1980s. Specialising in general and health insurance, Finity works closely with large and niche insurers as well as government agencies to deliver world-class actuarial, pricing and strategic advice. Finity was inducted into the Australian Insurance Industry Awards Hall of Fame in 2012 after being awarded Service Provider of the Year to the Insurance Industry in five of the previous six years. Our advice is innovative and practical. It is aimed at helping our clients make decisions that improve their business. Please contact us if you would like any further information, or would like to discuss your specific issues. Contacts Geoff Atkins geoff.atkins@finity.com.au Stephen Lee stephen.lee@finity.com.au This article does not constitute either actuarial or investment advice. While Finity has taken reasonable care in compiling the information presented, Finity does not warrant that the information is correct. Copyright 2014 Finity Consulting Pty Limited. Australia & New Zealand Insurance Industry Award Service Provider of the Year 2006, 2007, 2008, 2009 and Australian Insurance Industry Awards - Inaugural Inductee into the Hall of Fame Australia Sydney Tel Level 7, 155 George St The Rocks, NSW 2000 Melbourne Tel Level 3, 30 Collins Street Melbourne, VIC 3000 New Zealand Auckland Tel Level 27, 188 Quay St Auckland 1010 Wellington Tel Level 16, 157 Lambton Quay Wellington 6140 Contact the Author Stephen Lee Tel stephen.lee@finity.com.au Sydney Office Finity Consulting Pty Limited ABN