kpmg Automobile Insurance and Tort Reform Jacqueline Friedland November 27, 2003

2 kpmg Nothing Particularly New or Unique in Tort Reform Elimination of collateral source rule Caps or limits on awards Change from gross to net income basis Greater use of structured settlements

3 kpmg Elimination of Collateral Source Rule According to collateral source rule, damages are not reduced by other “collateral” sources Collateral sources: private or employer health and disability plans, workers’ compensation, Canadian Pension Plan Collateral source rule reflects negligence and deterrence principles of tort law Liability today is increasingly focused on compensation Result is overcompensation, with increased costs of system borne by all

4 kpmg Caps or Limits on Awards Most well-known of all tort reforms Cap on pain and suffering for minor injuries Only pain and suffering cap – full access to tort system for all other categories of damages Difficulties: –What should the cap be? –How do you quantify impact with limited data? –What is a minor injury? –Is psychological injury included with physical?

5 kpmg Change from Gross to Net Income Basis Some argue that using gross income overcompensates Cost of overcompensation passed to all through higher premiums Compensation at 100% of gross wages is a disincentive to return to work Primary argument for use of gross is the implicit “gross up” for future taxes and investment management fees

6 kpmg Greater Use of Structured Settlements Lump sum award for future care and future loss of income replaced by annuity Always on list of suggested tort reforms However, impact rarely quantified Benefits to: –Insurer –Injured party –Society

7 kpmg Proposed Changes in Rating Variables Another significant area of consideration and debate Remove age, sex and marital status Territorial rating is also an issue Actuarial Standard of Practice