Tag Archives: insurance affordability

Auto Insurance, Emerging Risks, Homeowners Insurance, Insurance Industry

New Triple-I Issue Brief Takes a Deep Dive into Legal System Abuse

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The increasing frequency and severity of claims costs beyond insurer expectations continue to threaten insurance coverage and affordability. Triple-I’s latest Issue Brief, Legal System Abuse – State of the Risk describes how trends in claims litigation can drive social inflation, leading to higher insurance premiums for policyholders and losses for insurers.

Key Takeaways

  • Insured losses continue to exceed expectations and surpass inflation, notably impacting coverage affordability and availability in Florida and Louisiana.
  • In promoting the term “legal system abuse”, Triple-I seeks to capture how litigation and related systemic trends amplify social inflation.
  • Progress has been made toward increased awareness about the risks of third-party litigation funding (TPLF), but more work is needed.

What we mean when we talk about legal system abuse

Legal system abuse occurs when policyholders, plaintiff attorneys, or other third parties use fraudulent or unnecessary tactics in pursuing an insurance claim payout, increasing the time and cost of settling insurance claims. These actions can include illegal maneuvers, such as claims inflation and frivolous or outright fraudulent claims. Unscrupulous contractors, for example, seek to profit from Assignment of Benefits (AOBs) by overstating repair costs and then filing lawsuits against the insurer – sometimes even without the homeowner’s knowledge. Filing a lawsuit to reap an outsized payout when it’s evident the claims process will likely provide a fair, reasonable, and timely claim settlement can also be considered legal system abuse.

The latest brief provides a round-up of several studies Triple-I and other organizations conducted on elements of these litigation trends. The report, “Impact of Increasing Inflation on Personal and Commercial Auto Liability Insurance,” describes the $96 billion to $105 billion increase in combined claim payouts for U.S. personal and commercial auto insurer liability. The Insurance Research Council highlighted the dire lack of affordability for personal auto and homeowners insurance coverage in Louisiana, along with the state’s exceptionally high claim litigation rates.

Readers will also find an update on the discussion of legal industry trends associated with increased claims litigation. The lack of transparency around TPLF arrangements and the fear of outside influence on cases are attracting the attention of legislators at the state and federal levels. The brief also describes how some law firms may use TPLF resources to encourage large windfall-seeking lawsuits instead of speedy and fair claims litigation. Research findings suggest that consumers have become aware of how ubiquitous attorney ads can influence the frequency of lawsuits, increasing claims costs.

Florida: a case study in the consequences of excessive litigation

While several states, such as California, Colorado, and Louisiana, are experiencing a drastic rise in the cost of homeowners’ insurance, this brief discusses Florida. Property insurance premiums there rank the highest in the nation. Several insurers facing insurmountable losses have stopped writing new policies or left the state in the last few years. In some areas, residents are leaving, too, because of skyrocketing premiums.

Excessive claims litigation isn’t a new issue for insurers, but it can work with other elements to shift loss ratios and disrupt forecasts, rendering cost management more challenging. In Florida, factors such as the rise in home values and frequency of extreme weather events play a significant role, along with the challenges homeowners face in the aftermath: soaring construction costs, supply chain bottlenecks, and new building codes. However, Florida also leads the nation in litigating property claims. While 15 percent of all homeowners claims in the nation originate in the state, Floridians file 71 percent of homeowners insurance lawsuits.

In Florida and elsewhere, increasing time to settle a claim puts a financial strain on insurers, which is passed on to policyholders in the form of higher premiums. Legal system abuse activities are difficult (if not impossible) to forecast and mitigate, hampering insurers’ ability to remain in the market. Therefore, legal system abuse could be one of the biggest underlying drivers of social inflation. Without preventive measures, such as policy intervention and increased policyholder awareness, coverage affordability and availability is at risk.

Triple-I remains committed to advancing the conversation and exploring actionable strategies with all stakeholders. Learn more about legal system abuse and its components, such as third-party litigation funding by following our blog and checking out our social inflation knowledge hub.

Auto Insurance

Auto Premiums Climbing; Are They “Affordable”?

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Car insurance premiums have risen steadily since 2009 at a faster pace than inflation, according to a recent paper in the Journal of Insurance Regulation.

Transportation is essential to opportunity in the United States. Cost of driving, therefore, isn’t a trivial issue.

When you hear a stat like that, what’s your instinctive response? To blame “greedy insurers” who are making money hand over fist and still aren’t satisfied? It might be, if you don’t follow insurance profitability trends. If you do, you know they’ve been losing money on auto insurance for years, despite increasing rates.

Rising rates have caused some to call for regulation to help make car insurance more affordable. Transportation is essential to opportunity in the United States, and most Americans rely on cars. Cost of driving, therefore, isn’t a trivial issue.

But the authors of the paper – Cost Trends and Affordability of Automobile Insurance in the U.S. –  found rate regulation could do more harm than good.

Frequency and severity

The year 2009 was the beginning of the end of the “Great Recession.” In a recovering economy, more people drive – to work, stores, restaurants, et cetera. More vehicles traveling more miles means more accidents and more insurance claims.

The insurance term for this is “frequency.” In addition to more cars on the road, the report finds, distracted driving due to use of digital devices may contribute to increased accident frequency.

In an improving economy, more cars are on the road. More vehicles mean more accidents and insurance claims. Distracted driving due to use of hand-held digital devices also may contribute to increased accident frequency.

Another key term is “severity” – the average cost of claims. Severity has been high for several reasons:

Safety and fuel efficiency are expensive. Cars are safer and cheaper to operate than ever before – thanks to sensors and computers and new materials, all of which are expensive to repair or replace after an accident. This affects loss costs, which are reflected in premiums.

Medical costs are on the rise – especially for hospitalization. The paper cites U.S. Bureau of Labor Statistics data showing that medical and auto insurance inflation growth track closely and hospital cost inflation by far outstrips both. Since many crash victims wind up in the hospital, it’s possible these costs aren’t fully reflected in insurance rates.  The paper also cites research indicating that hospitals may charge insurers more than other payers.

Litigation and generous juries. The report doesn’t go into detail about litigation, but the trend known as “social inflation” – marked by growing jury awards and “litigation funding,” in which investors pay plaintiffs to sue large companies in return for a share in the settlement – is well documented.

These factors drive up rates as insurers seek a return that justifies risk taking and operational spending. Nevertheless, the report finds no correlation between rising rates and insurer profitability.

Cracking the affordability nut

Literature on insurance affordability is diverse, with little consensus on the key term. The paper cites research that strongly suggests aggressive rate regulation actually reduces affordability.

“When rate regulation suppresses costs for the riskiest insureds,” the study states, “average premiums, losses, and injuries increase.”

So, what might improve auto insurance affordability?

Some contributors to rising rates – such as repair costs – “should partially self-correct over time,” the paper says. Others, like medical costs and “non-economic” damages (pain and suffering awards) could be addressed through changes in personal injury protection (PIP) laws, antifraud efforts, transparency in medical pricing, or civil justice reform. Stricter “distracted driving” laws and improved enforcement of existing ones could help reduce losses and premiums.

Insurers are investing in technology and improved analytics to streamline their workflows, improve service, and bolster their bottom lines. Some are even discussing getting out of auto entirely – which, should it become a trend, would not bode well for affordability or availability.