Tag Archives: social inflation

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.

Business Risk, Insurance Industry, Legal Environment, Risk Management, Webinars

Experts discuss social inflation in a Tobin College of Business webinar

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Social inflation – increasing insurance claims costs related to legislative and litigation trends – may be spreading beyond the United States, attendees were told at a webinar with the Greenberg School of Risk Management of St. John’s Tobin College of Business.

The webinar, held on February 10, was aimed to help lawyers and claims professionals understand the phenomenon, which is characterized by claims costs rising faster than general economic inflation can explain.

Annette Hofmann, Ph.D., professor of actuarial science at the Maurice R. Greenberg School of Risk Management, Insurance and Actuarial Science, pointed out that “though it is largely a U.S. issue, there are signs of social inflation in other countries with potential for further international contagion, albeit not to the same degree as in the U.S.”

She added that the impact of social inflation in the U.S. has been most evident in commercial auto liability insurance.

“Litigation finance, societal attitudes toward corporations and large jury payouts are all behind the phenomenon,” according to James Lynch, Chief Actuary of Triple-I and one of the presenters.

In his presentation, Lynch showed how incurred losses in commercial auto liability have been climbing steeply since 2010.

Lynch said Triple-I studied the link between social inflation and trends in actuarial data (rising loss development factors) by focusing on long-tailed liability lines including Commercial Auto, Medical Malpractice and Other Liability.

He said actuaries look at the pattern of reported losses – the sum of claims experts’ estimates of every known loss. Even if the ultimate amount of claims rises or falls from year to year, the pattern of emergence should stay the same. That hypothesis is at the core of standard actuarial practices.

In this case, it is increasing.

One interesting offshoot of this work is that actuaries can also predict how much in losses will be reported in any 12-month period. The chart on the right shows how actuaries analyzing countrywide data have not been able to do this in commercial auto. And this is not just happening in auto, medical malpractice occurrence, and other liability are seeing the same effect.

Lynch went on to discuss some of the potential reasons behind large jury payouts. One explanation is the darker view of life that people have. Confidence in government has plummeted, incomes and life expectancy have declined, and Google Trends indicates that searches for the word “dystopia” have increased by over 400 percent from 2005 to 2020.

In the meantime, Lynch and another presenter, Julie Campanini of Magna Legal Services, noted that huge amounts of money have been normalized by billion-dollar lottery jackpots, sky-high celebrity net-worth, and news reports of “nuclear” awards verdicts.

Other speakers included:

  • Jonathan E. Meer, partner at Wilson Elser, who spoke about the state of tort reform.
  • Jeff Cordray, a vice president and economist at Christensen Associates, who discussed the importance of determining economic damages, particularly when there is a potential for punitive damages in a case.

To view the slides from the webinar click here.

Auto Insurance, Homeowners Insurance, Legal Environment

Poverty and opioids unexpectedly tied to rise in personal umbrella claim severity: Gen Re

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Insurers saw  more costly personal umbrella claims before the start of 2020, according to a Gen Re analysis, and the reinsurer expects  such claims  to continue as we emerge from the COVID-19 pandemic.

Personal umbrella insurance covers liability costs beyond the limits of the policyholders’ homeowners or auto policies.

Gen Re has uncovered some of the top drivers for the large claims, and they have to do with some of society’s harshest ills. Top reasons cited were increases in:

  • the annual poverty rate;
  • opioid prescription rates;
  • fatal accidents;
  • brain injuries;
  • attorney representation; and
  • injuries involving a fatality and multiple claimants.

Other notable predictors linked with higher claims severity include laws permitting recreational marijuana and a lack of motorcycle helmet laws.

Gen Re said poverty, opioid use, and marijuana laws were unexpected predictors of umbrella claim severity and that all of the analysis’ findings “will facilitate deeper client interaction on this line of business.”

 “Social inflation” – a term used to describe growth in liability risks and costs related to litigation trends – has been a growing concern for insurers. The phenomenon has mostly affected the commercial auto and general liability lines, but the findings here – particularly the increase in attorney representation – suggest that it might be making inroads into personal lines.

Emerging Risks, Legal Environment

What Is Social Inflation? What Can InsurersDo About It?

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A recent study by the Geneva Association on the topic of “social inflation” addresses the challenges of defining and quantifying the phenomenon. More important, it takes on the question of what insurers and reinsurers can actually do about it.

“Social inflation is a term that is widely cited in insurance debates but it is often ill-defined or at best only loosely explained,” the report begins. Broadly speaking, it “refers to all ways in which insurers’ claims costs rise over and above general economic inflation.”

Actuaries typically label such growth in claims costs “superimposed inflation,” the study says, but their measures “may not adequately account for advances in medical technology, which create new therapies, change the costs of treatment, and increase the lifespan of seriously injured claimants,” as well as other considerations.

More narrowly, the report says, “social inflation refers to legislative and litigation developments which impact insurers’ legal liabilities and claims costs.”

The definitional difficulties are well illustrated in the rendering below, from the study.

Understanding what drives these costs – and whether they are temporary phenomena or a long-term trend – is essential to adequately pricing insurers’ exposures and enabling them to pay claims.

Major drivers, possible solutions

Rollbacks in tort reforms stemming from past insurance availability and affordable crises have been implicated by some for driving social inflation. The report finds that any such correlations are “weak at best.”

More significant, the study found, are shifting judge and jury attitudes in ways favorable to plaintiffs; growing anti-corporate bias; and aggressive tactics used by plaintiff attorneys, including third-party litigation funding.  

What can insurers do to battle social inflation? The report suggests four areas of focus:

  • Engage in the public-policy debate to promote legislative changes that further level the playing field between plaintiffs and defendants;
  • Get better at defending against aggressive and increasingly well-armed plaintiffs’ attorneys;
  • Upgrade underwriting to reduce opportunities for claims surprises. “Insurers need better early-warning systems,” the report says, drawing on information from across their organizations, their own and competitor liability cases, and data from social and digital media;
  • Develop products with an eye toward mitigating social inflation. Given the scale of potential liability exposures, the report says, “co-participation arrangements” to share risks among reinsurers could help maintain and even expand the boundaries of insurability. Parametric insurance also might have a role to play.

More on social inflation, from the Triple-I Blog

LITIGATION FUNDING RISES AS COMMON-LAW BANS ARE ERODED BY COURTS

SOCIAL INFLATION AND COVID-19

LAWYERS’ GROUP APPROVES BEST PRACTICES TO GUIDE LITIGATION FUNDING

IRC STUDY: SOCIAL INFLATION IS REAL, AND IT HURTS CONSUMERS, BUSINESSES

FLORIDA’S AOB CRISIS: A SOCIAL-INFLATION MICROCOSM

Legal Environment

Litigation Funding Rises as Common-Law Bans Are Eroded by Courts

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Litigation funding – the practice of third parties financing lawsuits in exchange for a share of any funds the plaintiffs might receive – was once widely prohibited. As these bans have been eroded in recent decades, the practice has grown, spread, and become a contributor to social inflation: increased insurance payouts and loss ratios beyond  what can be explained by economic inflation alone.

Social inflation is a broad term that insurers use to describe these rising expenses. Litigation funding is just one factor driving it.

The relevant legal doctrine – called “champerty” or “maintenance” – originated in France and arrived in the United States by way of British common law. The original purpose of champerty prohibitions, according to an analysis by Steptoe, an international law firm, was to prevent financial speculation in lawsuits, and it was rooted in a general mistrust of litigation and money lending.

The erosion of champerty prohibitions can be traced to the early 1990s in the United Kingdom and Australia.

“By the mid-1990s, a handful of Australian states had already done away with Maintenance and Champerty offenses such that they were no longer crimes or torts,” according to an article published by Harvard Law School’s Center on the Legal Profession. “Whether this rendered litigation finance permissible, however, remained doubtful. One jurisdiction [New South Wales] notably abolished Maintenance and Champerty offenses through formal legislation.”

These moves, the article goes on to say, “produced ambiguity around the use of litigation finance arrangements, where before they were more clearly prohibited.”

England, Canada, and Australia have since largely abandoned their laws against champerty, Steptoe writes, but Ireland, New Zealand, and Hong Kong continue to prohibit certain transactions as “champertous.”

Slow to take hold in U.S.

Despite the size of the potential market, litigation funding took time to gain traction in the United States because prohibitions on champerty are left to state legislatures and courts.  Some states have abandoned their anti-champerty laws over the past two decades. Others still prohibit champerty, either by statute or common law. Some, like New York, have adopted “safe harbors” that exempt transactions above a certain dollar amount from the reach of the champerty laws.

Minnesota recently became the latest state to abandon its champerty prohibition. In Maslowski v. Prospect Funding Partners LLC, the Minnesota Supreme Court held that the litigation funding agreement under consideration was champertous; however, it also held that champertous contracts no longer contravene “public policy as we understand it today.” 

The court explained that the common-law prohibition against champerty was originally based on a desire to prevent abuse of the court system by individuals wealthy enough to finance lawsuits. It held that the doctrine against champerty is no longer the only or best tool for achieving that goal – and, in fact, may “increase access to justice” by enabling individuals who might not otherwise have the financial means to pursue their claims in court. 

Courts drive decline of anti-champerty laws

The Minnesota Supreme Court was able to abolish the doctrine, Steptoe writes, because Minnesota’s prohibition was based on common law, rather than statute. This is in contrast to New York, where the prohibition is statutory. Re-examining it is the responsibility of the state legislature, not the courts.

As the popularity of litigation funding – along with awareness of its impact on insurers and policyholders – grows, the practice has come under increased scrutiny.  The policymaking arm of the American Bar Association (ABA) recently approved a set of best practices for such arrangements. 

The resolution – adopted by the ABA’s House of Delegates by a vote of 366 to 10 – lists the issues lawyers should consider before entering into agreements with outside funders. While it avoids taking a position on the use of such funding, it recommends that lawyers detail all arrangements in writing and advises them to ensure that the client retains control.

The resolution also cautions attorneys against giving funders advice about the merits of a case, warning that this could raise concerns about the waiver of attorney-client privilege and expose lawyers to claims that they have an obligation to update this guidance as the litigation develops.