This multi-billion dollar global industry is growing rapidly, according to a new publication from the Swiss Re Institute, titled “US Litigation Funding and Social Inflation: The Rising Costs of Legal Liability”. Swiss Re forecasts that TPLF could represent an industry worth more than US$30 billion by 2028, with the US market driving this growth.
This could have a significant impact on the liability insurance market, as TPLF encourages protracted litigation and larger monetary awards that ultimately benefit funders. As such, Swiss Re identifies TPLF as a growing contributor to US social inflation due to its tendency to drive higher, sometimes nuclear, claims costs.
“We see that TPLF is growing strongly […] and funds are [often] invested in cases related to certain areas of insurance, such as commercial auto, trucking, general liability and medical malpractice – and we are seeing a higher incidence of very large jury verdicts in these areas,” said Thomas Holzheu (pictured), chief economist for the Americas at the Swiss Re Institute.
“We know that the nature of these investments is to better prepare cases so that they result in higher indemnities. Assembling all the evidence we have together – [bearing in mind that] many of these lawsuits are not public, and the existence of funding is not disclosed – we conclude that the TPLF is a significant factor contributing to social inflation and increased […] the number of very large claims.
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Swiss Re’s report details how TPLF investments have produced internal rates of return (IRRs) of 25% on the rise in recent years, even outperforming risky asset classes such as venture capital and others investment capital. This is a very attractive IRR proposition for investors. The TPLF typically diverts a greater share of legal rewards to the funder rather than the plaintiff, resulting in what Swiss Re describes as “an opaque, upward shift of wealth from consumers to investors and law firms.” sophisticated”.
The problem, explained bluntly by Holzheu, is: “Someone has to pay the final bill. I think that’s where the awareness is lacking. If the insurance industry has to pay higher claims for trucking, that has consequences. First, underwriting results for insurers in these lines of business, such as commercial liability and commercial auto, have been negative for several years now. We are seeing an increase in premium rates, but they are only catching up with the cost of claims. So these are still not profitable business sectors.
“At the same time – as always in insurance when profitability becomes an issue – premiums need to be increased, certain risks need to be underwritten in different ways and the capacity of high-risk industries becomes smaller. As a result, trucking companies face high insurance bills and have a harder time obtaining coverage. As claims increase, the costs fall on the shoulders of companies, their customers and other insurance customers in related industries.
“That’s the problem here. Nuclear verdicts are distributed through the insurance system – that’s how it’s supposed to work – but the risk has to be borne or paid for by the industry and the customers of those industries where the risks lie in. And that’s one side of this business that’s not necessarily seen or discussed. There’s not a lot of advocacy for the companies and for the customers of those companies.
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Social inflation has had a significant impact on liability insurance results in recent years. According to Swiss Re, the 2020 average combined ratio for general liability was estimated at 105.7% and for medical malpractice at 117.5%, the seventh consecutive year of underwriting losses for both lines.
“Many of these trends are far removed from direct industry actions, and exposures are difficult to control,” Holzheu said. Insurance company. “But the insurance industry is really in between, and that’s another reason why we wrote this report. When assuming liability risks, insurers should be aware of this trend and should be aware of this potential for these nuclear verdicts.
“When underwriting certain industries and figuring out how much limit to put in place, all of that can be adapted and adjusted, and that really forces insurers to watch that space a lot more carefully and look at the drivers and the trends. I think that’s an important lesson. Although it may be difficult in the short term to change the underlying trend, the underwriting of these trends is more flexible and it is very important that the insurance industry takes action.