Insurance Information Institute: Rising Litigation Expenses Are Driving Up Cost of Insurance

NEW YORK, Feb. 12 -- The Insurance Information Institute issued the following news release:

The U.S.'s commercial auto insurers saw their liability losses nearly triple between 2010 and 2019, an era in which the median jury verdict's monetary award almost doubled, according to James Lynch, the Insurance Information Institute's (Triple-I) Chief Actuary.

"Litigation finance, societal attitudes towards corporations and large jury payouts are all behind the phenomenon of social inflation," Lynch said, in a webinar presentation yesterday sponsored by the Greenberg School of Risk Management of St. John's Tobin College of Business. Social inflation describes how rising litigation costs affect insurers' claim payouts and ultimately the amount policyholders pay for coverage.

Litigation finance firms have no direct involvement in a legal dispute but finance them as an investment.

It is an industry which has grown dramatically over the past decade. For example, eight years ago, seven percent of law firms employed litigation finance companies. In 2017, 36 percent of law firms did so. The litigation finance firm sees a return on its investment when the lawsuit is either settled or a jury issues a monetary award.

The U.S.'s commercial auto insurers saw their incurred liability losses increase to $24.1 billion in 2019 from $9.6 billion in 2010, Lynch said, the same timeframe in which the median monetary award arising from the 50 largest U.S. jury verdicts grew to $54.3 million from $27.7 million (2014-2017).

"The old rules don't apply anymore," Lynch stated, referring to the way actuaries estimate an insurance company's future loss costs, the portion of an insurance rate used to cover claims. "Starting around 2015, something made the previous process of estimating future loss costs yield a weak estimate," he continued, with the Triple-I's Chief Actuary citing ample evidence indicating litigation finance, societal attitudes toward corporations, and large jury payouts were among the factors in this trend.

Other webinar panelists indicated social inflation was impacting not only the U.S. commercial auto insurance market but also insurers who write directors & officers (D&O), errors & omissions (E&O), and medical malpractice insurance policies.