For P&C insurance carriers, the U.S. claims litigation landscape has shifted in recent years due to the prevalence of nuclear verdicts or mega verdicts, defined as jury awards above US $10 million, which are at an all-time high.
A key driver of this trend is social inflation, which refers to the rising costs associated with litigation and settlements above and beyond what can be explained by ordinary economic inflation. Social inflation makes loss experience unpredictable, which places significant stress on both the profitability and the reserving practices of insurance carriers.
In some cases, attorneys or law firms have turned to third-party litigation funding (TPLF), which enables hedge funds and other investors to finance lawsuits in exchange for a percentage of settlements and judgements. According to Research Nester, the litigation funding investment market could exceed $50.3 billion by the end of 2036.
Such practices have significantly increased financial pressures on insurance carriers, necessitating strategic responses to mitigate litigation risk and combat rising legal costs.
Social inflation drives up claim costs, increases insurance premiums, reduces the availability of adequate liability coverage (particularly in commercial trucking), and raises uninsured legal liability risks for businesses. Ultimately, these costs can be passed on to consumers. A report by the American Property Casualty Insurance Association (APCIA) revealed that nuclear verdicts significantly contribute to the "tort tax," a hidden cost passed onto consumers, which amounted to $443 billion in 2020. Each American household pays an estimated $3,600 annually in “tort tax”.
Best Practices for Combating Rising Claim Costs
To address these challenges, insurers can consider adopting a multifaceted approach that includes focusing on digitalization, innovation, efficiency, inter-industry collaboration, and leveraging artificial intelligence technologies. Here are some key strategies insurers can consider:
- Enhanced Settlement Processes: Streamlining settlement processes and using predictive analytics can help insurers identify cases suitable for early resolution, potentially reducing unnecessary expenses. Digital claims payments can further drive early claim closure, improve the policyholder experience, and lower litigation risks.
- Data-Driven Decision Making: Leveraging advanced analytics to spot patterns in litigation allows insurers to allocate resources strategically and mitigate risks more effectively. Large language models can scour prior case law, consider judge’s tendencies and prior rulings, assess witness risk, reputation risk, and more to help defense counsel. Consideration should be given to embedding data scientists across all areas of the claims organization.
- Investment in Cloud Technology: Embracing artificial intelligence (AI), machine learning, and cloud technology enhances automation, enables data access, reduces adjuster workloads, and optimizes claims processing and litigation management. Digital collaboration platforms and digital claim payment solutions drive data exchange, amplify transparency, and substantially streamline the policyholder experience.
- Providing Insights on Litigation Trends: Educating stakeholders including policyholders, industry partners, and the public on factors influencing claims costs, such as social inflation and litigation trends, can promote informed discussions. Transparency around these issues helps drive awareness and encourages balanced approaches to claims resolution.
- Industry Collaboration on Litigation Trends: Engaging with industry peers to exchange insights, data, and effective claims management approaches can enhance strategies for handling litigated claims. Collaboration on shared challenges, such as increasing litigation frequency and severity, supports more informed decision-making and improved outcomes.
Looking Ahead
By implementing cloud technology, harnessing data-driven insights (including large language models), and adopting comprehensive strategies, insurance carriers can transform their risk assessment and claims management practices, ultimately leading to potentially better outcomes and reduced litigation.
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*This document provides general guidance on claims handling practices for litigated matters and is not intended as legal advice. Claim professionals should consult with legal counsel for case-specific guidance.