How Unrelenting Litigation Funding, Social Inflation and Other Trends Affect E&S Markets
What Is Social Inflation?
Social inflation refers to the rising costs of insurance claims due to various factors, such as socioeconomic, legal and behavioral trends that change over time to drive more—and bigger—lawsuits.
Most experts agree that third-party litigation finance is the largest contributing factor to social inflation. When adversarial legal procedures are combined with a litigious culture, the result is lawsuits with high jury awards or settlements, otherwise known as nuclear verdicts.
Social inflation and nuclear verdicts work together to escalate higher damages awards.
The number of nuclear verdicts resulting in $20 million or more in 2019 has risen more than 300% from the annual average between 2001 and 2010. And, over the last five to six years, there’s been a steady increase in verdicts over $1 million.
Causes of Social Inflation
There are many underlying drivers of social inflation, including:
- Erosion of caps on punitive damages for pain and suffering
- Media outlets and social media impact on public opinion
- Perception of how the value of money has changed
- Broader definitions of liability
- Increasing litigation and changes to litigation funding
- Attorney technology, marketing and analytical advances
- Tort reform rollbacks
- Higher jury awards and changing jury composition
- Plaintiff-friendly legal decisions
- Public distrust of corporations
My Kansas City Chiefs’ quarterback, Patrick Mahomes, was awarded half a billion-dollar 10-year contract last year. Compare that to when Joe Montana played for Kansas City in 1993, where he earned $4 million for the season.
When you used to think the greatest active quarterback at the time was worth $4 million a year and now that same job goes for $50 million, your perception of the value of money changes.
Social Inflation Trends from the COVID-19 Pandemic
Ultimately, the pandemic has accelerated certain underlying drivers in the list above and made the claims landscape even more challenging and expensive for insurers.
Corporate mistrust and a growing animosity for large institutions increased during the past two years, especially towards companies that profited during the pandemic. It remains to be seen if these trends will translate into even larger nuclear verdicts.
General liability has already started to see the impacts, but it expands to almost every liability segment including professional, D&O, EPLI and cyber insurance.
Industries such as health care and tourism may see a rise in litigation when the pandemic ends. Currently, there are over 4,000 EPLI cases or claims that are awaiting court dates or completion.
It’s probable that liability claims caused by COVID-19 will be substantial, spread out over several years instead of several quarters, as legal procedures are bound to be lengthy and delay settlements.
The Impact of Social Inflation on the Insurance Industry
The E&S market is by no means immune from social inflation, and due to some of the unique exposures written on an E&S basis, it may be even more impacted by social inflation. The underlying drivers behind social inflation continue to grow at a rate higher than current inflation levels resulting in higher customer premiums and a hard E&S market.
Social inflation is also impacting underwriting by limiting the types of risks they choose to write, which affects the availability of coverage limits at industries that are at a higher risk for nuclear verdicts.
Any accounts that may have a longer tail are going to be more severely impacted by social inflation. As social inflation compounds over time, those longer tails mean more social inflation pressure will occur than shorter tail coverages.
Complex liability claims tend to take longer to settle and E&S coverage tends to attract more complex claims.
Insurers need to understand the current risk environment and the ever-evolving market to explain how these factors can impact an insured’s exposure. Additionally, carriers should have an efficient claims management process in place to identify and handle these types of risks.
Insurers and producers need to work hand-in-hand to ensure that insureds are properly covered for the higher exposure that social inflation will bring. Carriers need to look to offer excess coverage and producers need to help insureds understand the importance of excess coverage.
One-million dollars isn’t what it once was. &