Litigation drives up U.S. commercial auto insurance costs, study finds

The Triple-I/CAS article, Social inflation and evolution of losses confirms and quantifies one of the major factors driving up the cost of commercial auto insurance. A separate paper by the Insurance Research Council (IRC) illustrated how losses in several lines of insurance have accelerated in recent years much faster than economic inflation alone can explain.

Further, while the Triple-I/CAS paper focused on commercial auto insurance, it also identified evidence of similar trends in other industries, such as “other liability cases” and fault claims. medical professional. An insurance policy pays for claims that arise during the term of the policy, even if they are filed many years later. Loss insurance can provide coverage when a loss occurs, even if it stems from an incident that happened years ago.

Drivers of social inflation
Seen as a rising cost of doing business in the insurance industry, social inflation is influenced by negative public sentiment towards big business, litigation funding and policy reform rollbacks. tort liability at the state legislative level, all of which have increased liability costs. Changing public perceptions and attitudes may cause jurors to sympathize with plaintiffs when awarding damages. Jurors may also believe that the business, or insurance company, has unlimited financial resources, leading to what are commonly referred to as “shock” verdicts. These pecuniary damages are much higher than expected based on the evidence presented at trial, often exceeding $10 million.

Emotional appeals to juries by plaintiff’s attorneys are not new. Neither do class actions. But the plaintiff bar has moved to a new level with tactics such as third-party litigation funding and litigation loans, the report notes. The funding of lawsuits by international hedge funds and other third-party financiers – with no interest in the outcome other than a share of the settlement – has become a $17 billion global industry, according to Swiss Re. Law firm Brown Rudnick sees the industry as even bigger, viewing it as a $39 billion the global industry in 2019, according to Bloomberg.

Some states have rules in place requiring disclosure of third-party litigation funding in lawsuits, which would give defense attorneys and juries insight into which entities other than the plaintiff are funding plaintiff attorneys’ legal fees. . Predictably, such efforts are met with resistance from third-party funders. In 2020, the world’s 13 largest commercial litigation funders formed the International Legal Finance Association (ILFA) to advocate for litigation funding and oppose general disclosure requirements.

Commercial transportation is one of the hardest hit industries with more frequent lawsuits resulting in higher insurance payouts. A 2020 study by the American Transportation Research Institute found that, from 2010 to 2018, the size of jury verdicts increased by 33% per year, with overall inflation increasing by 1.7% and the costs of 2.9% health care.

More frequent lawsuits and more expensive jury verdicts can lead to higher insurance costs as rates are adjusted to reflect changing risk profiles. It may even force insurers to stop underwriting certain forms of coverage. Higher claim costs tend to be passed on to policyholders in the form of higher premiums. In extreme cases, rising claims costs can reverberate throughout the economy, creating conditions analogous to the liability crisis of the 1980s, where liability claims negatively impacted the industry. American insurance industry to the point that some insurers were facing insolvency.

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Video: Social inflation
Summary of the problem: Triple-I state of risk: social inflation

SOURCE Insurance Information Institute