A study conducted by our colleagues at the Insurance Information Institute (Triple-I) and by the Casualty Actuarial Society found that legal system abuse and related litigation trends contributed to between $231.6 billion and $281.2 billion in increased liability insurance losses over the past decade.
That elicits a WOW from me. We've all been aware of social inflation for years now, and I've certainly read (and published) a lot about third-party litigation funding and new tactics by plaintiffs lawyers, but I had no idea the dollars involved were that large.
Let's take a look at the report — and at some ways the insurance industry can fight back.
I won't be a total cheerleader for the insurance industry here. We all know that insurance policies are complex, that legal disagreements occur, and that insurers can be in the wrong. Sometimes, they deserve to be sued and deserve to lose. But the treatment of insurance lawsuits as an asset class that can be packaged and sold to big money investors, the use of AI to blanket insurers with claims and overwhelm their legal departments.... Those sorts of tactics, for me, cross the line into abuse.
The report, Increasing Inflation on Liability Insurance – Impact as of Year-End 2024, found that "rising jury awards, litigation financing and evolving legal dynamics have driven higher claims costs and defense expenses" that have increased insurers' claims costs far beyond what economic inflation would lead you to expect. By category, the findings are:
- Personal Auto Liability: Legal system abuse and inflation increased losses and defense and cost containment by $91.6 billion–$102.3 billion, or 8.7%–9.7% of booked losses.
- Commercial Auto Liability: $52 billion–$70.8 billion, or 23%–31% of booked losses.
- Other Liability – Occurrence: $83.4 billion–$103.3 billion, or 27%–34% of booked losses.
- Product Liability – Occurrence: $4.6 billion–$4.8 billion, or 27%–28% of losses and DCC.
- Total: $231.6 billion - $281.2 billion
Claim severity, not frequency, is driving the rise in costs. "While the number of claims has generally declined, the average cost per claim has soared," the report says.
Those increased costs translate, of course, into higher premiums, so it's not just insurers who are losing. The broad population of policyholders is, too.
What can be done?
In the long term, the sort of work that the Triple-I is doing to highlight abuses feels like the answer. Getting state legislatures to require the disclosure of third-party litigation financing, for instance, would go a long way toward changing public perception. Suits against insurers have historically been seen as little guy versus deep pockets. Increasingly, though, the kind of third-party money being thrown into lawsuits means the contests are between big money and insurers struggling to keep premiums reasonable— a hot issue especially in the wake of COVID's disruptions and now in the face of hefty tariffs. The change in perception could influence juries that otherwise would be inclined to award "nuclear" verdicts against insurers.
In the short term, insurers can also use data analytics, including AI, to fight back, in ways laid out in four articles that Taylor Smith and John Burge have published with ITL in the past two years.
In the first, they show how "The Plaintiff Bar Is Winning in AI" and explore how insurance attorneys can level the playing field.
In the second, "Are We Losing Our Negotiating Power?", they describe how the plaintiff bar has investigated a staggering amount of money to improve its data on claims settlements and explain how the insurance industry can catch up.
In the third, "The Tripling of Verdict Size Post-COVID," they not only provide the data to back up that headline but get deeper into how the insurance industry can (and must) combat the data advantage that the plaintiff bar has worked so hard to build.
Most recently, in "We're Losing Billions--Before We Ever Get to Court," they argue that settlement negotiations, not the courtroom, are where the real battle is being waged — and lost by the insurance industry. They suggest new tactics.
Stay tuned. This issue will be with us for a long time, and we'll keep publishing as much smart thinking as we can find on the issue, as often as we can. This is important.
Cheers,
Paul