Insurance coverage has long been “a grudge purchase – a once-or-twice-a-year transaction that many consumers didn’t want to think about,” Triple-I CEO Sean Kevelighan said in a recent episode of the “All Eyes on Economics” podcast.
But in today’s dynamic economic environment – marked by inflation the likes of which most insurance purchasers have never experienced – it has become more important than ever for consumers and policymakers to understand how insurance is underwritten and priced.
One of Triple-I’s chief objectives is “helping people understand what insurance can do for you, but also what you can do to change the situation,” Kevelighan told podcast host and Triple-I Chief Economist and Data Scientist Michel Léonard. “The narrative seems, at least from my standpoint, to be less about, ‘Why is my insurance so high?’ It’s more about, ‘What can we do to get it lower?’”
Rising insurance premium rates are the effect of risk levels, loss costs, and economic considerations like inflation. Too often, though, they’re discussed as if they were the cause.
High property/casualty premium rates are the result of numerous coalescing factors: Increased litigation, inflation, antiquated state regulations, losses from natural catastrophes, and pervasive post-pandemic high-risk behaviors, to name a few.
Every dollar invested in disaster resilience could save 13 in property damage, remediation, and economic impact costs, according to a recent joint report from Allstate and the U.S. Chamber of Commerce. As areas vulnerable to climate disasters become increasingly populated, it’s important for policyholders to develop resilience measures against the wildfire, hurricane, severe convective storm, and flood risks their property faces.
Consumer education and community involvement in mitigation and resilience offer a path toward greater control over claims.
However, regulatory barriers to fair, accurate underwriting also contribute to higher insurance costs. Despite tort reforms, rampant litigation has kept upward pressure on rates in Florida and Louisiana. California’s outdated Proposition 103 – by barring insurers from using modeling to price risk prospectively and from taking reinsurance costs into account when setting rates – has impeded insurers from using actuarially sound insurance pricing.
Confusion around industry practices and effective mitigation is understandable, and during periods of economic instability and unforeseen disasters, blaming the insurance industry may seem the most direct way to regain control.
But rising rates are “not just an insurance problem,” Kevelighan said. “It’s a risk problem, and we all play a role in addressing that risk.”
Hurricane Beryl’s rapid escalation from a tropical storm to a Category 5 hurricane does not bode well for the 2024 Atlantic Hurricane season, which is already projected to be of above-average intensity, warns Triple-I non-resident scholar Dr. Philip Klotzbach.
“This early-season storm activity is breaking records that were set in 1933 and 2005, two of the busiest Atlantic hurricane seasons on record,” Dr. Klotzbach, a research scientist in the Department of Atmospheric Science at Colorado State University, recently told The New York Times.
The quick escalation was a result of above-average sea surface temperatures. A hurricane that intensifies faster can be more dangerous as it leaves less time for people in its path to prepare and evacuate. Last October, Hurricane Otis moved up by multiple categories in just one day before striking Acapulco, Mexico, as a Cat-5 that killed more than 50 people.
After weakening to a tropical storm, Beryl made landfall as a Cat-1 hurricane near Matagorda, Texas, around 4 a.m. on July 8, according to the National Hurricane Center, making it the first named storm in the 2024 season to make landfall in the United States. Beryl unleashed flooding rains and winds that transformed roads into rivers and ripped through power lines and tossed trees onto homes, roads, and cars. Restoring power to millions of Texans could take days or even weeks, subjecting residents who will not have air conditioning to further risk as a sweltering heatwave settles over the state.
Extreme heat was just one climate-related topic addressed by Triple-I Chief Insurance Officer Dale Porfilio in an interview with CNBC’s “Last Call” on July 9. While most farmers are insured against crop damage due to heat conditions and homeowners insurance typically covers wildfire-related losses, Porfilio noted, a “more subtle impact is on roofs that we thought were built to a 20-year lifespan.”
When subjected to extreme heat, roofs can become more brittle and prone to damage from wind or hail.
“So, you have to think about the roof coverage on your home insurance policy,” Porfilio said.
He also pointed out that flood risk represents “one of the biggest insurance gaps in this country. Over 90 percent of homeowners do not have the coverage.”
Many people incorrectly believe homeowners insurance covers flood damage or that they don’t need the coverage if their mortgage lender does not require it.
In an interview on CNBC’s “Squawk Box,” Triple-I CEO Sean Kevelighan discussed the potential impact of the predicted “well above-average” 2024 season on the U.S. property/casualty market.
“This is what the insurance industry is prepared for,” Kevelighan said. “It keeps capital on hand after writing policies to make sure that those promises can be kept.” The P/C industry has $1.1. trillion in surplus as of March 31, 2024.
Kevelighan pointed out that the challenges to the industry go beyond climate-related trends, explaining how legal system abuse, regulatory environments, shifting populations, and inflation are impacting insurers’ loss costs.
In Florida, for example, “you’ve got over 70 percent of all homeowners insurance litigation residing in that state, whereas it represents less than 10 percent of the overall claims.”
He pointed out that Florida’s insurance market has improved – with homeowners insurance premium growth flattening somewhat – as a result of tort reform legislation and added that Louisiana’s legislature addressed insurance reform during its most recent session.
“In California, insurers can’t catch up with inflationary costs because of regulatory constraints,” Kevelighan noted. “They are not able to model [climate risk] and are not able price reinsurance into their policies.”
California’s wildfire situation is complex, and the state’s Proposition 103 has hindered insurers’ ability to profitably write homeowners coverage in that disaster-prone state. In late September 2023, California Insurance Commissioner Ricardo Lara announced a package of executive actions aimed at addressing some of the challenges included in Proposition 103. Lara has given the department a deadline of December 2024 to have the new rules completed.
Home and auto insurance premium rates have been a topic of considerable public discussion as rising replacement costs and other factors – from climate-related losses to fraud and legal system abuse – have driven rates up and, in some states, crimped availability and affordability of coverage.
It’s important for policyholders and policymakers to understand the role of economic conditions and trends in setting rates. Jennifer Kyung, Property and Casualty Chief Underwriting Officer at USAA, opens a window into the complex world of underwriting and economics in a recent episode of Triple-I’s All Eyes on Economics podcast.
Kyung told podcast host and Triple-I Chief Economist and Data Scientist Dr. Michel Léonard that economic analysis “is critical to us in underwriting and as we manage our plan.” She described economics as “part of our muscle memory as underwriters” – adding that the economic uncertainty of recent years reinforces the need for underwriters to have “a very agile mindset.”
Underwriting and economics are “a little bit art and science,” representing a balancing act between sophisticated data analytics and creative problem-solving.
“When we think about sales and premiums for homeowners, we may look at things like mortgage rates or new home starts to indicate how the market is going,” Kyung said. “In auto, we might look at new vehicle sales or auto loan rates. These, in combination, help us look at macro-economic trends and the environment and how that might interplay with our volume projections. That helps us with financial planning, as well as operational planning.”
“It’s really critical to keep these on the forefront on an ongoing basis throughout the year,” she said, “so we can adjust as needed…. As our results come in, this gives context to the results.”
Through continual analyses of external market conditions and the internal quality and growth of your business, Kyung said, underwriters “can manage and mitigate some of the volatility and risk for our organizations.”
A tool she recommends for evaluating economic indicators is Triple-I’s replacement cost indices, which track the evolution of replacement costs throughout time across various lines of insurance and geographic regions. These indices enable insurers to synthesize raw economic data and insurance market trends, providing an auxiliary framework to bolster financial and operational planning.
Kyung said Triple-I offers additional insight into “local flavor,” or “understanding what the emerging issues are…related to the local environment,” through such tools as Issues Briefs and Insurance Economics Profilers. Recent supply-chain disruptions have accentuated the relationship between local and global economies, revealing the importance of employing local economic analytics to interpretations of broader insurance market patterns.
Such fusions can help facilitate efficient planning in the face of shifts in the insurance landscape.
The full interview is available now on Spotify, Audible, and Apple.
Homeowners insurance premium growth in Florida has slowed since the state implemented legal system abuse reforms in 2022, according to a Triple-I analysis.
As shown in the chart below, average annual premiums climbed sharply after 2020. This was due in part to inflation spurred by the COVID-19 pandemic and the war in Ukraine as well as longtime challenges in the state with claim fraud and legal system abuse.
Source: Triple-I analysis of NAIC and OIR data
According to the state’s Office of Insurance Regulation (OIR), Florida accounted for nearly 71% of the nation’s homeowners claim-related litigation, despite representing only 15% of homeowners claims in 2022, the year Category 4 Hurricane Ian struck the state. In that same year, and prior to Ian making landfall in the state as a first major hurricane since 2018’s Hurricane Michael, six insurers declared insolvency. Hurricane Ian became the second largest on record by insured losses, in large part because of the extraordinary litigation costs estimated to result in Florida in the aftermath.
The Florida Legislature responded to the growing crisis by passing several pieces of insurance reform, primarily tackling problems with assignment of benefits (AOB), bad-faith claims, and excessive fees. For example, the new laws eliminated one-way attorney fees in property insurance litigation, forbid using appraisal awards to file a bad-faith lawsuit, and prohibited third parties from taking AOBs for any property claims. The legislation also ensures transparency and efficiency in the claims process and encourages more efficient, less costly alternatives to litigation.
A surge in litigation
Litigation spiked when backlogged courts reopened following the pandemic, then again when the reforms were passed in 2022 and 2023, as plaintiffs’ attorneys raced to file suits ahead of implementation of the legislation.
This increase in litigation, combined with persistently strong inflation, contributed to increased loss costs and premium increases. In 2022, average homeowners premium rates rose more than 17 percent, to $3,040. Premiums continued to rise in 2023, although at a decreasing rate, as inflation has moderated and legal reforms have kicked in.
There are early signs that the reforms are beginning to bear fruit. In 2023, Florida’s defense and cost-containment expense (DCCE) ratio – a key measure of the impact of litigation – fell to 3.1, from 8.4 in 2022, according to S&P Global. In dollar terms, 2023 saw $739 million in direct incurred legal defense expenses – a major decline from 2022’s $1.6 billion. For perspective, incurred defense costs in the two largest U.S. insurance markets in 2023 were $401.6 million in California, followed by $284.7 million in Texas. As the chart below shows, Florida’s DCCE ratio – even during its best years – regularly exceeds the nation’s.
As insurers have failed or left the state, Citizens Property Insurance Corp. – the state-run insurer of last resort and currently Florida’s largest residential insurance writer – has swelled with new business and lawsuits. Citizens’ depopulation efforts to move policyholders to private insurers contributed to policy counts falling to 1.23 million by the end of 2023.
It’s important to remember that all premium estimates are based on the best information available at the time and actual results may differ due to changes in market conditions. For example, earlier Triple-I projections that average annual homeowners premiums in Florida would exceed $4,300 in 2022 and $6,000 in 2023 assumed significant rate increases would be needed to restore profitability to the state’s homeowners market. These projections did not assume legislative reform or that Citizens would become the state’s largest homeowners insurance company, with many risks priced below the admitted and excess and surplus markets. Our projections also assumed inflation would continue to grow at rates similar to those prevailing at the time.
In light of the reforms and moderating inflation, we are now reporting lower average annual premiums of $3,040 (2022) and $3,340 (2023). The Florida OIR has reported average premium rate filings are running below 2.0 percent in 2024 year-to-date in the private market. Further, OIR indicated eight domestic carriers have filed for rate decreases and 10 have filed for no increase this year. Additionally, eight property insurers have been approved to enter the Florida market, with more expected this year.
Triple-I will continue to monitor and report on the evolving property insurance market in Florida.
Triple-I has published a great deal regarding the potential impact of TPLF on costs for insurers and policyholders. Bellino’s gaze focused on potential risks for the judiciary:
Increased judicial workload
More fraudulent claims
Longer litigation and slower settlements
Creation of potential appellate issues
And, like many insurance industry stakeholders, Lisa M. Bellino (VP Claims Judicial & Legislative Affairs for Zurich North America in Philadelphia) is fundamentally concerned about the lack of transparency surrounding TPLF’s involvement in a lawsuit.
TPLF is a growing and costly aspect of legal system abuse, a problem that Triple-I and other industry thought leaders define as policyholder or plaintiff attorney actions that unnecessarily increase the costs and time to settle insurance claims. Qualifying actions can arise, for example, when clients or attorneys draw out litigation in hopes of a larger settlement simply because TPLF investors take such a giant piece of the payout. As there is little transparency around the use of TPLF, insurers and the courts have virtually no leeway in mitigating any of this risk.
TPLF can lead to undue judicial burden and waste.
When judges are unaware of the funding arrangement, they would likely also be in the dark about potential conflicts of interest or improper claims and, therefore, be unable to mitigate these risks. However, Bellino argues that the de facto practice of secrecy can cause judicial waste even in the limited number of jurisdictions and courts that require disclosure. Judges may feel compelled to spend a significant amount of time ascertaining attorney compliance. As funding often involves parties not directly related to the case, the judiciary may need to hold additional hearings and reviews to uncover the real parties in interest. Bellino cites a case in which the real parties were not the named plaintiffs.
TPLF can be a driving factor behind lawsuit generation.
When law firms pursue class action litigation, they may engage “lead generators,” companies that help find plaintiffs for a specific tort. Advertising tactics can include traditional and social media. When prospective claimants respond to these ads, they are directed to a law firm or a call center that distributes the recruited claimants to law firms. This service comes at a steep price – in dollars and justice. As funding may often come from TPLF, Bellino describes how the profit model behind lead generation companies working with law firms can increase the risk of fraudulent claims.
The risk of bogus claims and claimants can surge with TPLF.
Funders of class action litigation have a financial incentive to drive up the number of plaintiffs. As neither the defense nor the judge is typically aware of the third party’s potential conflict of interests, judicial resources can be wasted, and justice can be delayed for legitimate claimants. Bellino cites, among other examples, a New York case to illustrate how litigation funders and attorneys may even collaborate in multi-million dollar fraud schemes.
TPLF funders may encourage drawn-out litigation and hinder settlements
Bellino cites a case highlighting how funders might control litigation and delay resolutions to maximize their returns. A publicly traded TPLF giant allegedly blocked a settlement agreement between a plaintiff and the defendants, resulting in prolonged litigation across multiple jurisdictions. The interference may have led to additional motions, hearings, and opinions, diverting judicial resources from resolving the dispute between the named parties. As a result, costs for the plaintiff, defendant, and the courts likely would’ve soared.
Undisclosed TPLF involvement can spark appellate concerns.
Undisclosed funding agreements can also prevent parties from adequately preparing their cases and preserving appellate issues. For example, a TPLF investor may fund medical testing that leads to recruiting plaintiffs for a class action against a drug manufacturer. If this fact wasn’t disclosed to the defendants or court, at the very least, the defendant wouldn’t have access to information needed for defense or subsequent appeals. Also, the judiciary wouldn’t be able to perform its duty to monitor red flags for potential bias or fraud. It is also possible that the interests of the plaintiff will be affected by other appellate concerns, too.
Increases in litigation and claim costs have threatened the affordability and availability of many areas of insurance coverage. TPLF involvement, like other channels for potential legal system abuse, is nearly impossible to forecast and mitigate. And despite its original intended purpose–to help plaintiffs seek justice– it can extract a disproportionate amount of value from settlements, weakening the primary purpose of a financial payout.
Overall, the shroud of secrecy around TPLF can undermine the legal system, posing threats to unbiased and fair legal outcomes. Bellino strongly advocates for mandatory disclosure of TPLF agreements at the beginning of litigation. A system-wide requirement for early transparency would allow courts and involved parties to address potential conflicts, biases, and fraud early in the process. In her words, “Disclosure may restore reality and close the door on the TPLF Twilight Zone.”
The total value of lightning-caused homeowners insurance claims rose more than 30 percent in 2023, to $1.27 billion from $950 million in 2022, Triple-I estimates based on national claims data provided by State Farm.
The number of claims rose 13.8 percent during the same period, to 70,787 from 62,189, 10 states accounting for 57 percent of the total. The average cost per lightning-caused claim increased 14.6 percent, to $17,513 from $15,280.
“Rising inflation, including higher replacement, construction and labor costs impacted claim costs for the year,” said Triple-I CEO Sean Kevelighan. Triple-I released these estimates to in advance of Lightning Safety Awareness Week, which runs from June 23 to June 29.
“Lightning Safety Awareness Week highlights the dangers lightning poses to life and property and how insurers and policyholders are reducing these risks through effective mitigation efforts,” Kevelighan said.
Florida – the state with the most thunderstorms – remained the top state for number of lightning claims in 2023, with 6,003. However, Texas had the highest average cost per claim at $41,654.
Much of this damage is due to severe convective storms, which are among the most common, and most damaging natural catastrophes in the United States. The result of warm, moist air rising from the earth, these storms manifest in various ways, depending on atmospheric conditions – from drenching thunderstorms with lightning, to tornadoes, hail, or destructive straight-line winds.
Damage caused by lightning, such as fire, is covered by standard homeowners insurance policies. Some homeowners policies provide coverage for power surges that are the direct result of a lightning strike.
“Mitigating the risks of lightning strikes starts with a thorough assessment before a storm,” said Tim Harger, executive director at the Lightning Protection Institute, which provides resources for the design, installation, and inspection of lightning protection systems. “Lightning protection systems play a crucial role in safeguarding homes, businesses, and communities from the potential downtime and destruction caused by lightning strikes.
Hosted by Triple-I Chief Economist and Data Scientist Dr. Michel Léonard, PhD, CBE, the series equips listeners with insights to manage economic uncertainty at the intersection of economics and insurance. It features interviews with insurance practitioners, technologists, academics, educators, analysts, and economists from various industries who discuss their perspectives and how they integrate economic trends and developments into their day-to-day responsibilities.
Early episodes include discussions with:
Jennifer Kyung, Chief Underwriting Officer at USAA,
Ken Simonson, Chief Economist of the Associated General Contractors of America,
Dale Porfilio, Triple-I Chief Insurance Officer,
Sean Kevelighan, Triple-I CEO, and
Pete Miller, President and CEO at The Institutes.
Dr. Léonard brings more than 20 years’ expertise in senior and leadership positions as Chief Economist for Trade Credit and Political Risk at Aon; Chief Economist at JLT; Chief Economist and Data Scientist at Alliant; and Chief Data Scientist at MaKro. He also is adjunct faculty in New York University’s Economics Department.
Several metrics that influence auto insurance premium rates are starting to improve, but it will take time for these improvements to be reflected in flattening rates, according to a recent Triple-I Issues Brief.
Direct premiums written and underwriting profitability improved dramatically in 2023. Additionally, 2023 net written premium growth of 14.3 percent is the highest in over 15 years. These are great gains, but it’s important to remember that they come on top of results in 2022 that were the worst in recent years.
The number of drivers on the road and miles driven have returned to pre-pandemic levels – but the risky driving behaviors that led to high losses during the pandemic have not improved. More accidents with severe injuries and fatalities have driven up claims and losses in terms of both vehicle damage and liability, while attracting greater attorney involvement and legal system abuse. Compounding these conditions has been historically high inflation, which puts upward pressure on the material and labor costs, increasing the cost of claims.
Telematics technologies, which allow insurers to analyze risk profiles and tailor rates based on individual driving habits, offer the possibility of some relief. By providing feedback that can influence driving behavior, telematics has been shown to lower risk and help reduce the cost of insurance. An Insurance Research Council survey found 45 percent of drivers said they made significant safety-related changes in how they drove after participating in a telematics program. Another 35 percent said they made small changes.
But broader risk and economic factors are likely to keep premium rates high in most cases for the foreseeable future.
William Nibbelin, Senior Research Actuary, Triple-I
The recent National Council on Compensation Insurance (NCCI) Annual Insights Symposium (AIS) in Orlando, Fla., provided important context and clarity around the state of the workers compensation line of business. As a new senior research actuary for Triple-I, my prior knowledge of this line could best be summarized by the following words from one peer-reviewed study of a reserving project I conducted more than two decades ago: Long-tail, unprofitable.
I recently assumed responsibility for forecast modeling of the property/casualty industry, which includes workers comp. In this role, I’d seen the line’s 2023 net combined ratio at 87 – the lowest (ie., most profitable) in the past five years. But I did not yet have deep understanding of the underlying trends driving these numbers.
I saw the AIS as an opportunity to gain that knowledge, and the event delivered.
The net combined ratio of 87 – as reported by Triple-I using National Association of Insurance Commissioners (NAIC) data sourced by S&P Global Market Intelligence – was also the ninth straight calendar year in a row under 100. According to NCCI, the success of the workers comp line in recent years represents the convergence of three factors:
Payroll increases
Moderate severity increases, and
Larger-than-expected frequency declines.
“The overall numbers for workers compensation show a financially healthy system,” said Donna Glenn, NCCI’s chief actuary.
Payroll increases
The line’s 2023 direct written premium (DWP) increased 2.6 percent nationally – due primarily to another strong year of payroll growth at 6.2 percent, according to NCCI.Rising wages contributed the most to that figure, with increases in all industry sectors resulting in a combined wage growth of 3.9 percent. Improved job creation contributed 2.3 percent, with all sectors except transportation and warehousing seeing increased employment. Payroll growth was partially offset by state-approved premium rate decreases.
Moderate severity increases
Claim severity remains moderate year over year, at 3 percent in 2023, despite indemnity claim severity at 5 percent. Medical claim severity for 2023 trended at a low 2 percent, in line with the 20-year trend of 1.8 percent and below the 3.5 percent in 2022. Medical claims less than $500,000 increased 5 percent; however, claims above $500,000 decreased 16 percent, driven primarily by several large losses in 2022.
Also, more states have adopted physician medical fee schedules from 2012 to 2022, which has shifted medical cost category shares from more expensive inpatient claims to outpatient claims, as well as lower drug claims. Outpatient claims increased from 23 percent of all claims to 27 percent and drug claims decreased from 12 percent to 7 percent of all claims.
Larger-than-expected frequency declines
Overall claim frequency decreased 8 percent in 2023, compared to the 20-year average decrease of 3.4 percent. Workers compensation claims frequency has only increased twice in the past 20 years – once in 2010 from the destabilization in the construction sector in 2009 and again in 2021 from COVID-19 impacts in 2020.
From 2015 to 2022, workers comp claims frequency benefited from workplace safety improvements and technology advances, which helped the decline in all cause of injury categories, including the two largest shares of strain and slip/falls. During this same period, the largest decline in claim frequency by part of the body was in lower-back claims. Finally, the recent slowing employment market churn has also improved claim frequency as claims decline when job tenure rises.
Stephen Cooper, senior economist at NCCI, speaking on the state of the economy and its impact on workers comp, said job growth and steadily increasing wage rates continue to favor the workers compensation system. He also gave an overview of the contribution to labor force by age and generation from 1980 to 2030, including changes in claim share from 2020 actuals to 2030 forecasts. Overall, the double-digit growth in labor force of 24 percent in 2000 over 1980 and 18 percent in 2020 over 2000 is expected to fall to only 4 percent in 2030 over 2020.
The only age group with an expected increasing contribution to the labor force from 2020 to 2030 are those age 65 and older. The contribution to labor force for the age group 16 to 24 is expected to remain flat from 2020 to 2030 however their representative share of Workers Compensation claims has the largest expected increase from 9% to 11 percent.
Beyond the numbers
The symposium provided valuable insight into several factors affecting workers comp, including the role of AI and innovation in workplace safety technology. In a panel moderated by Damian England, NCCI’s executive director of affiliate services, the audience got to see a demonstration of AI camera monitoring of warehouse employee activity and the use of wearable technology to highlight improper lifting techniques.
“It is clear that safety technologies will be a vital part of future safety initiatives,” England said. “They may even be a gamechanger for evaluating and improving workplaces and reducing injuries.”
AIS also touched on challenges facing today’s workers, from climate to mental health.
“Our new NCCI research shows worker injuries increase by as much as 10 percent on very hot days, as well as on wet and freezing days, compared to mild weather,” said Patrick Coate, NCCI senior economist. “High temperatures impact construction and other outdoor workers most, while cold and wet weather leads to a lot more slip and fall injuries.”
Anae Myers, assistant actuary at NCCI, focused on the difference between claims that include mental health diagnosis versus those that do not.
“New research from NCCI shows that claims exceeding $500,000 are 12 times more likely to be diagnosed with an associated mental condition during the course of treatment, underscoring the potential for the impact of mental health in large claims,” Myers said.
I left the conference with a better understanding of workers comp rate making and the indices to track for future forecasts. Many thanks to Cristine Pike and Madison White at NCCI for their hospitality and guidance, as well as to all the attendees who patiently provided their expertise and generously offered their support when I introduced myself to them and to this stunning line of insurance.
An annual report on securities class actions from Cornerstone Research indicates the median settlement amount increased 11%, and the proportion of settlements of at least $100 million climbed to nearly two-thirds of the total settlement dollars in 2023.
Research from Westfleet Advisors focused on third-party litigation funding (TPLF) for US commercial litigation suggests the David versus Goliath narrative surrounding the early years of the market is growing tenuous. The overall percentage of commitments allocated to Big Law continues to increase, from 28% in 2022 to 35% in 2023.
These and other persistent upward trends in litigation, settlement, and other legal costs continue to have implications for insurers, the policyholders they serve, and, ultimately, consumer prices.
Mega settlements and institutional investors as lead plaintiffs are increasing.
Cornerstone reports that despite a more than 20% decline in the number of settlements, total settlement dollars remained approximately the same, standing at little over half of the 2016 peak.
There were 83 securities class action settlements in 2023, with an approximate total value of $3.9 billion, versus 105 settlements in 2022, totaling $4.0 billion. Other highlights in the 2023 data:
The median settlement amount of $15 million is the highest since 2010.
The nine “mega” settlements in 2023–the highest annual frequency since 2016–ranged from $102.5 million to $1 billion.
All of the mega settlements included an institutional investor as the lead plaintiff.
Only 6% of cases settled for less than $2 million, the lowest percentage since 2013.
Analysis indicates that settlements were also higher in cases involving certain factors: “accounting allegations, a corresponding SEC action, criminal charges, an accompanying derivative action, an institutional investor lead plaintiff, or securities.” Further, an increasing number of cases that settle at later stages involved an institutional lead plaintiff, continuing the trend from 2022.
Results also suggest that drawing out cases can amplify other factors, such as total assets and median “simplified tiered damages,” a Cornerstone term that refers to the model used to estimate settlement amounts. For both of these categories in 2023, median amounts for cases after class certification rulings were twice that of cases that settled before these rulings were made. However, in the five-year period from 2019 through 2023, over 90% of cases were settled before filing a motion for summary judgment.
Accompanying derivative actions are down.
Whereas a securities class action is filed on behalf of shareholders, a shareholder derivative action is typically brought by a shareholder on behalf of and (arguably) for the benefit of the company (usually against the company’s directors and/or officers). Derivative actions typically only happen in parallel with class action lawsuits, and the majority don’t result in monetary settlements (except for attorney fees). Instead, the plaintiff wins tend to center around measures for reforming corporate governance or operational controls.
Otherresearch from Cornerstone shows the probability of a monetary settlement for these lawsuits increases when the associated class action settlement is rather large. Also, historically, securities actions with accompanying derivative litigation tend to settle for higher amounts than those that don’t carry parallel derivative claims. Thus, Cornerstone also tracks the percentage of cases involving accompanying derivative actions. In 2023, the portion was 40%, the lowest since 2011.
New capital commitments decreased for commercial litigation TPLF, but claim monetization increased.
With a reported 39 active funders, 353 new deals, and $15.2 billion AUM, commercial litigation (versus consumer litigation) receives the majority of third-party litigation funding (TPLF). Investors target intellectual property, arbitration, business torts, contract breaches, and, of course, class action suits. These TPLF deals, also referred to as transactions or commitments, are arranged between funders and corporate litigants or law firms. Westfleet Advisors’ most recent market report on TPLF is the fifth edition, and it covers transactions from July 1, 2022, to June 30, 2023. Some noted exceptions and data adjustments are described in the report.
The report reveals that despite some funders leaving the market and a 14% decrease in new capital commitments, key data points remained close to amounts tracked for last year. For example, attorneys still make the majority of these deals with a 64% share of the agreements, in contrast to only 36% for clients. Patent litigation is still reaping the largest amount of funds for a single legal area, about 19% of new commitments. Figures for type of deal and average deal size also remain fairly stable.
However, some annual numbers have increased, highlighting an ongoing strategic shift in TPLF use. For the third year in a row, the report noted a rise in capital allocated for the monetization of claims, with 21% (versus 14% in 2022) going to new commitments. The biggest law firms (ranked in the AmLaw 200 according to gross revenue) have increased their use of TPLF, snagging 35% of the new deals. Arguably, both trends weaken the “David vs Goliath” narrative, and commercial TPLF may evolve to be less about helping scrappy firms and plaintiffs and more about extracting profits from litigation.
Drawn out litigation and more outsized settlements may have implications for insurance coverage.
Triple-I and other industry thought leaders define Legal System Abuse as policyholder or plaintiff attorney actions that unnecessarily increase the costs and time to settle insurance claims. Qualifying actions can arise from attorneys or clients drawing out litigation to reap a larger settlement simply because TPLF investors take such a giant piece of the settlement pie. As there is little transparency around the use of TPLF, insurers and courts have virtually no leeway in mitigating any of this risk.
Thus, as with other channels for potential legal system abuse, TPLF use is nearly impossible to forecast and mitigate. Increases in litigation and claim costs have threatened the affordability and availability of many other areas of insurance coverage. TPLF can impact product lines such as Directors and Officers (D&O) in commercial litigation via securities class actions. TPLF can produce a financially counterproductive effect for plaintiffs byextracting a disproportionate amount of value from settlements, weakening the primary purpose of a financial payout: to enable the claimant to restore losses.
Nonetheless, insurers seek to carefully manage these risks through underwriting practices, policy exclusions, and setting appropriate reserves to mitigate the financial impact. Meanwhile, Triple-I and various other stakeholders have called for a regulatory rein-in on TPLF to increase transparency. To keep abreast of the conversation, follow our blog and check out our regularly updated knowledge hub for Legal System Abuse.
