Swiss Re Charts $17 Billion in Litigation Funding in 2021; Is It Any Wonder We’re Experiencing Social Inflation?

With third-party litigation funding reaching $17 billion in 2021, companies and their insurers are likely to see an uptick in social inflation in the years to come.

By: Autumn Demberger | January 11, 2022

Third-party litigation funding, or TPLF, has become a booming business onto its own.

An estimated $17 billion was invested into litigation funding globally in the year 2020, with the U.S. taking more than half of it. In return, these hedge funds, family offices and other litigation funding companies receive a cut of the potential jury awards.

This behavior, according to recent findings from Swiss Re, is likely driving up social inflation, as well as insurance premiums, liability availability and more.

“We find TPLF contributes to social inflation by incentivizing litigants to initiate and prolong lawsuits. Higher claims costs drive up insurance premiums, can reduce availability of liability cover, and lead to higher uninsured legal liability risks for U.S. businesses,” the report reads.

Here’s a closer look at Swiss Re’s findings in its December 2021 “U.S. Litigation Funding and Social Inflation” report.

By the Numbers

The U.S. makes up more than half the world’s TPLF market, accounting for 52% of global activity.
Legal verdicts have grown in size, reaching larger and larger awards each year. The median size of large awards rose by 26% for general liability cases between 2010 and 2019.
TPLF has shown to skew legal costs in commercial liability cases. In 2016, a plaintiff’s legal costs made up 26% of total costs. Now it’s at 38% due to TPLF investors’ share.
Conning, a U.S. insurance asset manager, estimated the average combined ratio for U.S. general liability in 2020 at 105.7% and for medical malpractice at 117.5%.
TPLF investments for 2021 primarily went into mass tort litigation (38%), commercial litigation (37%) and personal injury (25%).

What Is TPLF, Exactly?

At its core, third-party litigation funding is where companies help aid in the costs of litigation. It can be broken down, though, into two main categories: commercial litigation funding and consumer legal funding.

Commercial litigation funding involves large scale lawsuits like class actions or multidistrict litigation. Here, hedge funds or family offices offer a high price to plaintiffs in exchange for a piece of the jury award.

In consumer legal funding, these entities fund individuals with cash advances that pay for living expenses during a claim’s pursuit. Typically, these have to deal with personal injury cases.

“Traditional lenders such as banks typically do not fund litigation as they do not accept legal assets as collateral. TPLF is varied and can take equity-or debt-like forms,” the report explained.

Swiss Re also reported commercial litigation and mass torts tend to be the primary area of interest for funders, likely due to the payout amounts associated with these types of legal action.

Reaching $17 billion in 2021, the TPLF market is projected to grow quickly, averaging an 8.7% compound annual growth rate between 202o and 2028, according to the market research firm Research Nester. That could equal $31 billion by 2028.

Who Are the Key Players?

The U.S., by and large, is the biggest player in the TPLF market, utilizing 52% of that $17 billion price tag. Australia follows at 8%. The UK (7%) takes third and Germany (4%) fourth.

As for the dedicated funders, they tend to be specialty financial companies that specialize in litigation finance. These funders “are structured as investment funds, with fund managers raising capital from individual and institutional investors,” Swiss Re noted.

“Many funders operate internationally, and the domicile of a fund does not necessarily coincide with the geographies in which cases are
funded.”

There are also multi-strategy funders, which are made up of diversified investors such as hedge funds that have a dedicated litigation finance group. Then there are the ad hoc funders, which have no dedicated litigation finance group but have a risk appetite for funding and look for opportunities that will suit their needs.

Swiss Re further reported, “Companies are also growing to accept legal funding as a tool to monetize legal claims and manage legal risk. Legal assets create accounting issues for corporations. Money spent on litigation is not capitalized but immediately expensed, reducing operating profits.”

What Does This Mean for Social Inflation?

Because of the nature of TPLF, legal claims are becoming larger in scale. That, Swiss Re concluded, is driving up social inflation.

“Social inflation is strongly visible in the U.S. through a rise in nuclear verdicts (outsized awards for non-economic damages). This has mirrored the growth in the use of litigation finance over the past decade. There has been a consequent escalation in U.S. liability insurance claims concentrated on large verdicts and (large) commercial defendants.”

The average size for for general liability jury awards over $1 million rose from $8.2 million in 2010 to $10.3 million in 2019. The industry seeing the highest percentage jumps in verdict amounts is trucking, where the average size of claims increased by nearly 1000% from 2010 to 2018, a $2.3 million to $22.3 million increase, according to the American Transportation Research Institute.

TPLF is also associated with longer cases. The report found that a typical civil case in the U.S. took 28.6 months on average while a TPLF personal injury case can last anywhere from 36 to 43 months. The longer the case takes to settle, the more expensive it can become.

“Paying attorneys is not the only expense of litigation: expert witnesses, court costs, travel and lost time from work all add up considerably,” Swiss Re noted.

What Can Be Done?

Currently, the legal landscape surrounding TPLF isn’t regulated. Swiss Re opines that disclosure of funding can go a long way in starting to handle the increased price tag of this practice.

Currently, U.S. lawmakers are working toward this transparency, even reintroducing in March 2021 the Litigation Funding Transparency Act, which would require plaintiffs to disclose third-party funding. No decision on this Act has been reached yet.

Companies looking for more concrete methods to mitigate the risk of TPLF can look toward legal expense insurance as a solution. This is designed to cover some or all costs associated with litigation brought against the insured, as well as action that the insured pursues against a third party. &

Autumn Demberger is a freelance writer and can be reached at [email protected].

Sustainability in All Markets

David Guild, Head of Financial Lines, MSIG USA

When looking for a financial lines insurance partner, sustainability should be top of mind. Knowing that an insurer can provide solutions in a hard market alongside the soft will not only provide peace of mind but also help build resilience.

“Leaders should have the room to concentrate on their vision for the company and what it can achieve — not be burdened by potential risks that keep them awake at night. “Your insurance partners should be able to understand the trials and tribulations of running a business, to respect that there is no single right answer to most challenges, and be prepared to assist wherever, whenever issues may arise,” Guild said.

Sustainability is proven in an insurer’s ability to come through on the promises it makes. For example, MSIG USA’s approach has earned it an A+ rating, proof that its team can back the promises it makes and see them through to completion. “We are confident in our ability to serve your insurance needs, on a global scale,” Guild added.

“Everything we speak of revolves around the credibility of our platform, which is reflected in our A+ rating, a 350-year legacy within our family of companies, and our experienced team here in the U.S.”

An Emphasis on Company and Culture

Successful partnerships are built on a solid relationship between insurer and client.

At MSIG USA, “we aim to be a stable and sustainable presence for our clients,” Guild said. “The value of long-term relationships is at the core of what MSIG USA is all about. Our underwriters deeply appreciate the importance of these connections.

“We believe that building and maintaining strong, long-lasting relationships with our customers is essential to navigating the inevitable fluctuations of the insurance market. We are confident in our abilities, and in yours.” he added.

Company culture, as Guild mentioned, is more than an internal commitment; it’s something that can also drive business relationships.

For insurance partners, analyzing and aligning with their clients’ culture helps to solidify partnerships, as well as open the lines of communication and understanding.

“Variables will change, oftentimes rapidly. From our view, what matters is the culture of that company when responding to change. It’s about trusting their character rather than just the policies and procedures in place,” Guild said.

A Source of Truth and Clear Communication

Effective communication goes a long way in clearly understanding an insured’s business and future potential. This allows for sustainable partners to develop coverage that fits and to work closely with their Claims team to understand the partnership in context.

With the amount of data available today, and the number of ways information can quickly be disseminated through different medium, a good insurance partner knows that companies must be the single source of truth for their stakeholders.

“Quarterly and annual earnings calls provide a platform to discuss financial results and respond to investor questions. Investor presentations offer a more comprehensive overview of the company’s strategy, performance and outlook,” Guild explained.

We will look at what analysts and other third parties think about the information provided to try to glean what the investor base will think and how they will act. But ultimately, it is what the company says, and the way they say it, that we will assist in defending, if need be, and so we make sure to listen and learn from the company leadership.

Bringing These Qualities Under One Roof

Leaders want to know that, at the end of the day, their business is a priority for their partners.

Clear communication, a strong relationship and emphasis on sustainability are just the start. Their insurance partners should strive to understand their business, identify areas of concern and craft coverage customized to meet their needs.

With an impressive 350-year legacy, MSIG USA is doing just that for its clients, utilizing its global presence to further its clients’ goals.

“The key elements of our approach are an intellectual pursuit of information, a well-honed practice of underwriting that identifies material aspects for risk assessment, and clear communication of our insights to our clients: brokers and buyers alike. We aim to provide a transparent and informed perspective on the risks we underwrite,” Guild said.

“We bring sustainable, predictable insurance capital and what we believe is best in class service philosophy, honed by working with some of the most sophisticated brokers and buyers of insurance in the world.”

To learn more, visit: https://www.msigusa.com/financial-lines/.

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with MSIG USA. The editorial staff of Risk & Insurance had no role in its preparation.

MSIG North America is a member of MS&AD Insurance Group Holdings, Inc. which is the 8th largest non-life insurance group in the world by revenue. Based in Tokyo, Japan, we operate in 48 countries/regions and generated $46B in 2021 with approximately 40,000 employees globally. MSIG North America is the marketing name used to refer to MSIG Holdings (U.S.A.), Inc. (“MSIGH”), and its subsidiary companies.