The gap between liability loss trends and median liability insurance limits is growing, continuing the trend of the last 10 years, according to research from Chubb.

The “16th annual Liability Limit Benchmark & Large Loss Profile” report from Chubb provides data to help businesses determine appropriate liability insurance limits in today’s risky environment, fueled in part by the rise of nuclear verdicts and increasing punitive damages.

“This information is critical for building adequate liability towers that can adequately protect clients and their businesses, especially in the face of economic and social inflation, litigation funding, and nuclear verdicts, all of which continue to drive elevated liability-related loss costs,” the report stated. “The number of nuclear jury verdicts – that is, verdicts for awards of more than $10 million – is rising rapidly as cases that had been pending due to the pandemic continued making their way back into court.”

In 2022, nuclear verdicts totaled more than $18.3 billion, a significant jump from $4.9 billion in 2020, the report noted, citing Verisk data.

The Chubb report analyzed 11 industry sectors to help companies benchmark their liability insurance limits against others in their field, and highlight loss trends and significant losses in each sector.

Median liability insurance limits purchased nearly a decade ago declined across nine out of the 11 sectors analyzed, Chubb found. For example, median limits purchased in 2023 were 44% lower than in 2014 for the construction sector; nearly 31% lower for health care companies; and 28% lower for consumer products companies. Only the utilities sector had more coverage last year than 2014 with a 9% increase in the median limits purchased.

Liability Trends Across Industry Sectors

Here’s a closer look at the median liability limits purchased and loss cost trends in 2023 for 11 key sectors.

Life Sciences: In the life sciences sector, median insurance limits reached $241 million in 2023, a slight increase from $237 million in 2022 and $236 million in 2021. However, loss costs for this sector have  consistently outpaced median limits, reaching $600 million in 2023.

Health Care: Health care companies saw median insurance limits of $168 million in 2023, a decrease from $180 million in 2022 and $170 million in 2021. Over the past decade, median limits purchased by healthcare companies have declined by 30%, while loss costs continue to rise, hitting $450 million in 2023.

Consumer Products: The consumer products sector experienced a drop in median limits purchased, with $263 million in 2023, down from $300 million, which remained unchanged from 2016 to 2022. Meanwhile loss costs exceeded $800 million in 2023.

Real Estate/Hospitality: Median insurance limits purchased in the real estate/hospitality sector were $298 million in 2023, a slight decrease from $300 million in 2022 but an increase from $265 million in 2021. Loss costs, however, reached $700 million in 2023.

Transportation/Road: In the transportation/road sector, median limits purchased were $170 million in 2023, down from $175 million in 2022 and $183 million in 2021. Loss costs surpassed $450 million in 2023.

Transportation/Rail: The transportation/rail sector saw median limits of $323 million in 2023, a decrease from $348 million in 2022 and on par with median limits in 2021. Loss costs for this sector, however, reached $1.5 billion in 2023.

Construction: Median insurance limits purchased in the construction sector remained at $250 million, unchanged from 2022 and down from $260 million in 2021. Loss costs were nearly $700 million in 2023.

Manufacturing: The manufacturing sector experienced a decline in median insurance limits, with $340 million in 2023, down from $350 million in 2022 and $355 million in 2021. Loss costs were nearly double, approaching $700 million in 2023.

Oil/Gas: Oil/gas companies saw median limits purchased of $498 million, an increase from $469 million in 2022 and $475 million in 2021. The loss costs for the sector exceeded $1.2 billion in 2023.

Utilities: In the utilities sector, median limits were $375 million, a decrease from $385 million in 2022 but a slight increase from $371 million in 2021. Loss costs exceeded $700 million.

Chemical: The chemical sector saw median insurance limits purchased of $350 million, unchanged from 2022 and down from $400 million in 2021. Loss costs topped $1 billion in 2023.

Rise in Nuclear Verdicts and Punitive Damages

In recent years, there has been a notable increase in liability loss trends as a result of juries awarding punitive damages, Chubb noted. This trend is driven by several factors, including increased social consciousness and desire to punish corporations for perceived negligent behavior. Additionally, ideological divides and desensitization to awards in the billions of dollars have contributed to this trend, the report stated.

As a result of these factors, the risk, prevalence and quantum of punitive damage awards continue to rise, Chubb said, citing a 2022 report on punitive damages liability. The objective measures that dictate the amount of compensatory damages awarded to a plaintiff, such as actual medical costs and lost wages, are non-existent in the assessment of punitive damages, leading to a greater potential for large awards, according to Chubb.

Many organizations and businesses are seeking to mitigate the risk of punitive damages through insurance coverage. However, in several states, including California, Colorado, New York, Rhode Island and Utah, purchasing insurance that protects against punitive damages is restricted, Chubb said, noting that these states also happen to be where the majority of U.S. economic activity occurs and where nearly all punitive damage awards are made.

Despite the restrictions on punitive damage insurance in certain states, there are insurance solutions available for organizations looking to mitigate this risk, the insurer said. One such solution is seeking out punitive damage wrap (puni-wrap) policies, which are separate, standalone policies procured and issued outside of the U.S.

Industry Expert Insights on Factors Contributing to Punitive Damages

Different market segments have their own unique exposures and risk factors that contribute to the risk of nuclear verdicts and punitive damages. Three Chubb experts weighed in on the factors impacting their industries.

In the construction industry, Lyndsey Christofer, Construction and Real Estate & Hospitality Practice Leader at Chubb, noted, “One of the factors driving nuclear verdicts in the construction industry is the sheer size of the projects. They just keep getting bigger….When jurors see the amount that goes into a project, that can color the amount that they believe a plaintiff is entitled to.”

Caroline Clouser, Healthcare Industry Practice Leader at Chubb, highlighted the increasing sophistication of plaintiffs in bringing complex medical cases. “Plaintiffs used to shy away from the complexities of medical malpractice cases, but over the past several years have become very practiced in bringing complex medical cases and explaining the care and treatment in such a way that inflames the jurors, opening a potential for very large awards.”

“In the life sciences industry, it is especially important that jurors receive the full, factual scientific picture when it comes to product liability cases,” said Lee Farrow, Life Sciences Industry Practice Leader at Chubb. “In many instances, it is difficult for judges to decide what should be admissible, and that could lead to the admissibility of junk science. In those cases, jurors could be taking a paid expert’s opinion as fact, leading to excessive jury verdicts.”

To view the full report, visit Chubb website.

A new Trusted Choice survey revealed that many consumers do not fully understand the details of their insurance coverage, despite 86% saying they have a strong grasp of their policies.

The survey, conducted in advance of National Insurance Awareness Day on June 28, exposes significant insurance knowledge gaps that can be addressed by consulting with independent insurance agents to ensure consumers have the right coverage and understand what is and is not included in their policies, Trusted Choice stated.

“Because insurance protects people’s most important assets, it’s crucial that policyholders understand their coverage. But unfortunately, our survey shows there is a considerable insurance knowledge gap among consumers,” said Charles Symington, president and CEO of the Independent Insurance Agents of America (Big “I”).

Key Findings from the Survey

The survey found that 56% of Americans are unaware that a standard homeowners policy does not cover flood damage. This lack of knowledge can lead to significant financial losses in the event of a flood, as homeowners may assume they are protected when they are not.

In addition, 70% of respondents do not know that materials or fixtures intended for installation during renovations are not covered by a standard homeowners policy. Also, 46% of respondents do not have or are unsure if they have a home inventory of major household items in case they need to file a claim, the survey found.

The survey also revealed misconceptions about vehicle coverage.

Over half, or 55%, of respondents do not realize that a standard auto policy does not cover business use of a vehicle. Additionally, 44% incorrectly believe that personal items stolen from their car are covered by their auto insurance, when in fact, it is typically a standard home or renters insurance policy that covers such theft, the survey noted.

In addition, 57% do not know that parking tickets generally do not impact auto insurance premiums.

The Role of Independent Agents

Independent agents serve as an unbiased resource to help consumers better understand their coverage needs and navigate policies, according to Trusted Choice.

Kevin Brandt, executive director of Trusted Choice, explained, “An independent agent is best equipped to walk consumers through the entire process–from shopping for coverage to purchasing a plan and filing a claim. With their unbiased guidance and personalized approach, they empower individuals to navigate policies with clarity and confidence, ensuring they truly understand their coverage and make informed decisions.”

Learn about Triple-I’s Independent Agent Pro™ subscription, exclusively for independent insurance agents.

The global market for electric vehicle (EV) insurance is rapidly expanding, estimated to quadruple by 2030, but higher accident rates and steeper repair costs for EVs are creating challenges for insurers to maintain underwriting profitability in this burgeoning market segment, according to a new report from the Swiss Re Institute.

The electric vehicle market has experienced a surge in growth in recent years, with global EV sales reaching nearly 14 million units in 2023, a 35% increase compared to the previous year. EVs now account for 18% of all new car sales worldwide, highlighting their move into the mainstream, the report notes.

Industry experts predict this robust growth will continue in the coming years. The International Energy Agency (IEA) projects that global EV sales will increase at an average annual rate of approximately 30% from 2022 through 2030.

The rapid rise in EV adoption is fueling corresponding growth in adjacent industries like EV insurance. Research by Allied Market Research projects that the global EV insurance market will expand from $51 billion in 2022 to over $200 billion by 2030, driven by double-digit annual growth rates throughout the decade. As more consumers switch to electric vehicles, demand for specialized EV insurance policies is poised to skyrocket.

Challenges for EV Insurance Underwriting Profitability

The rapid rise of electric vehicles is introducing new challenges for auto insurers in maintaining underwriting profitability, according to Swiss Re.

One emerging issue is that EVs are exhibiting higher accident rates compared to traditional internal combustion engine (ICE) vehicles. In China, one insurer has reported that the accident frequency for EVs is nearly double that of ICE vehicles, partly attributed to a higher proportion of EVs being used commercially.

When accidents do occur, EVs are proving significantly more expensive to repair. A 2022 study in the U.S. found that on average, total repair costs for EVs were 26.6% higher than for ICE vehicles. Similar trends have been observed in Europe, with a German study showing EV repair costs 30% to 35% higher, while data from the U.K. revealed a 35% increase in accidental damage costs for electric models.

Several factors are contributing to the elevated repair expenses for EVs, per Swiss Re. The main engine and battery are typically located at the front of the vehicle, an area prone to damage in a collision. Electric cars also incorporate more advanced technology like digital sensors, lasers and radar that add significantly to repair costs when damaged.

The high degree of embedded software and driver assistance systems in EVs means more labor time is required for diagnostics and calibrations by mechanics. Additionally, the integrated design of many electric models makes them inherently more difficult and time-consuming to repair.

For auto insurers, these higher accident rates and steeper repair costs are putting pressure on underwriting margins for EV policies, necessitating new risk models and pricing approaches to ensure sustainable profitability as electric vehicle adoption continues to accelerate, Swiss Re explained.

Potential Solutions to Address EV Insurance Challenges

As the electric vehicle market continues to grow, some automakers are taking steps to tackle insurance challenges head-on. A number of EV producers have begun acquiring their own insurance licenses, allowing them to underwrite policies for their vehicles directly, the report states.

Others are partnering with established insurance companies to offer risk coverage as part of the vehicle purchase process. By bringing insurance in-house or aligning with experienced insurers, EV manufacturers aim to streamline the buying experience and alleviate coverage concerns for potential customers.

While these individual initiatives are a good start, deeper cooperation between the auto and insurance industries may be key to overcoming near-term obstacles in the EV insurance market.

“EV producers know their vehicles’ risk features and are accumulating driving data, while insurers are accumulating claims experience,” the report’s authors stated.

Pooling this wealth of knowledge through joint innovation efforts could support the development of customized EV insurance products that better serve consumers’ need, Swiss Re concludes.

For a copy of the report, visit the Swiss Re website.

The insurance industry is facing its toughest market conditions in a generation, with rising rates and stricter underwriting creating headaches for agents in the form of difficult renewal conversations and challenges placing new business.

The 2024 Agent-Customer Connection Study, conducted by Liberty Mutual and Safeco Insurance, examined how independent agencies and their clients are navigating this hard market environment. The research found 83% of agents say it’s the hardest market they’ve ever experienced, while 90% of consumers reported their insurance rates increased over the past year. However, despite the difficult conditions, the study also identified opportunities for savvy independent agencies to continue growing their business.

Communication Gap

A concerning gap exists between insurance agents and their customers when it comes to understanding and communicating about rising insurance rates. The survey found that only about 20% of customers say they understand the market forces driving rate increases. The vast majority, 62%, said it’s important for their agent to educate them on the changing dynamics of the insurance market.

This gap persists despite efforts by agents to address the issue. While 70% of independent agents surveyed said they proactively discuss market conditions with clients, about one in three customers still expressed dissatisfaction with their agent’s explanation of market forces and the impacts on their specific policy.

Perhaps most troubling, customers are more likely to first learn about rate increases from their bill than from their agent. The survey found that only 20% of customers first heard about their rate hike from their agent, while 58% said they noticed their bill amount change before receiving any communication about it.

So, what do customers want from their insurance agents? Overwhelmingly, they are looking for help understanding their policies and coverages, the survey found. Eighty-five percent said it’s important for agents to review policy coverages with them, and 79% want their agent’s help to better understand their policy. Additionally, one-third of customers said they want more frequent reviews of their coverages and insurance needs.

Opportunities to Show Value

Insurance agents have clear opportunities to demonstrate their value to customers, according to survey findings. To build trust, agents should focus on the traits customers value most highly: experience with insurance (cited by 79% of respondents), responsiveness to requests (77%), and making insurance options easy to understand (75%).

At the same time, the survey revealed areas where agents have room for improvement. While 67% of customers value proactivity in knowing their needs, only 31% of agents consider this a strength. Similarly, 64% of customers appreciate excellent listening skills, but just 22% of agents self-identify listening as one of their strong suits. Closing these perception gaps represents a major opportunity for agents to better meet customer expectations.

“Insurance is a relationship business. In a hard market, those relationships have become even more important,” said Luke Bills, president of independent agent distribution at Liberty Mutual.  He added that “today’s customers are turning to their agent for even more. They want their agent to educate them on changing market conditions, help them better understand policy changes and provide advice on risk mitigation.”

Growth Strategies

Our research examined agencies that reported annual revenue growth of more than 10% and found three strategies that set their agencies apart. These strategies are working to fuel success today and prepare for when market conditions improve:

• Diversifying book of business: Higher-growth agencies were 50% more likely than lower-growth agencies (32% vs. 21%) to report that they are diversifying their book of business. This often means shifting toward markets less impacted by the hard market, such as commercial lines.
• Investing in new retention programs: Higher-growth agencies were twice as likely (14%) as lower-growth agencies (7%) to invest in new retention programs aimed at keeping existing clients satisfied. While retention is always important for sustainable growth, it’s even more crucial during a hard market when carriers restrict new business.
• Positioning for future success: Agencies experiencing increased retention rates and growth are continuing to invest in new client acquisition programs and hiring additional staff members. By investing today, they’ll be well-positioned for future success.

Rising to the Challenge

Independent agents maintain a strategic advantage due to the ease, choice and expertise they provide to insurance customers.

Many agencies have nimbly adapted to the changing market conditions, implementing strategies to maintain customer satisfaction and keep their businesses afloat. In fact, 65% of agents said their customer retention is stable or better than a year ago, while 69% reported acquiring new clients at the same or better rate. Agencies focused on commercial lines saw even stronger year-over-year retention and growth compared to those concentrated on personal lines or with an equal focus.

“Hard insurance markets are challenging, but they don’t last forever. It’s with a sense of optimism that I can say – and this research validates – that independent agents are well-positioned to weather this market and come out stronger, more resilient and customer-centric,” Bills said.

View the full report from Liberty Mutual and Safeco here.

The impacts of legal system abuse-driven social inflation has become a significant challenge for the U.S. casualty insurance industry, particularly driving up loss costs in lines such as products liability, general liability, commercial auto, and medical professional liability, according to AM Best.

Loss severity for these lines has exceeded the rate of economic inflation, in most cases by double or more, with social inflation likely being a key factor, Best noted. For example, the average loss severity increase over the past decade to 2023 in the product liability line was 20.4%, compared with average annual economic inflation of 2.7%.

On the other liability–occurrence line, which captures excess liability and umbrella coverage, loss severity increased by an average of 11.1% in the last decade, the report found.

The growing involvement of attorneys in commercial lines is leading to an ongoing rise in claims costs, which negatively affects insurer loss ratios.

The social inflation phenomenon is characterized by dramatic increases in verdicts and settlements without the necessary legal or factual basis to support them, Best stated.

“The ‘social’ part of social inflation refers to shifting cultural attitudes about who is responsible for absorbing risk—the insurer or the plaintiff—and these dynamics continue to evolve, which makes social inflation tough to quantify and even more difficult for insurers to predict and mitigate,” said Justin Aimone, associate analyst, AM Best.

Public sentiment toward large corporations has been declining, with approximately two-thirds of jurors believing that companies prioritize profits over safety. Attorneys have capitalized on this sentiment, employing strategies like “reptile theory” and “juror anchoring” to obtain outsized awards.

A 2022 study by the Insurance Information Institute and the Casualty Actuarial Society found that “social inflation accounted for $20 billion in commercial auto liability claims between 2010 and 2019,” AM Best noted.

The rise in legal spending on class action lawsuits has also contributed to the issue. According to Carlton Fields’ 2023 survey, defense spending on class actions rose 8% in 2022, following a 5% increase in 2021. Companies cite larger claims and more class actions as the primary reasons for this increase.

Nuclear verdicts, characterized as those exceeding $10 million in punitive and compensatory awards, have been growing in both amount and frequency. A U.S. Chamber of Commerce review found that median nuclear verdicts were up 27.5% from 2010 to 2019, outpacing inflation. Product liability, auto accident, and medical liability cases accounted for roughly two-thirds of reported nuclear verdicts.

“When a nuclear verdict is awarded, it affects not just the one claim, but also all other open claims, as plaintiffs, guided by their attorneys, seek a similar verdict or settlement, rendering an insurer’s existing reserves inadequate,” said David Blades, associate director, industry research and analytics, AM Best. “The impact on adverse loss development then flows into pricing, as insurers adjust their view for the affected lines.”

Third-party litigation funding has become a $17 billion global industry, with over half that amount spent in the United States. Swiss Re estimates that investment in this market will reach $31 billion by 2028. When third-party funders back plaintiffs, the pressure to settle early or for reasonable amounts declines significantly, leading to prolonged legal battles and increased costs for insurers, according to the AM Best report.

Insurers face challenges in quantifying and predicting the impact of social inflation, as it affects the adequacy of reserves and shifts development patterns. When a nuclear verdict is awarded, it impacts all open claims, rendering existing reserves inadequate. This, in turn, flows into pricing as insurers adjust their view for the affected lines.

To navigate the complexities of social inflation, insurers must improve their understanding of portfolio risks and claims duration for better actuarial adjustments. Pursuing tort reform legislation on litigation funding disclosure and consumer protection may also help mitigate the impact. However, as social dynamics continue to evolve, addressing social inflation will remain an ongoing challenge for the insurance industry, according to AM Best.

To view the full report, visit AM Best website.