According to a new report from Insurance Information Institute (Triple-I), social inflation has increased claim payouts for commercial auto insurance liability in the US alone by over $20 billion between 2010 and 2019.
The report, which was in partnership with the Casualty Actuarial Society (CAS), showed that Social Inflation and Loss Development confirms and quantifies as one of the primary factors driving up the cost of commercial auto insurance.
A separate report from Insurance Research Council (IRC) explained that losses across several insurance lines have accelerated in recent years much faster than economic inflation alone can explain.
Whilst the report focused on commercial auto insurance, it also identified evidence of similar trends in other lines, such as “other liability occurrence” and claims-made medical malpractice.
Considered to be a growing cost of doing business in the insurance industry, social inflation is influenced by negative public sentiment about larger corporations, litigation funding, and tort reform rollbacks at the state legislative level, all of which have increased liability costs.
The report also found that shifting public perceptions and attitudes is likely to lead jurors to sympathise with plaintiffs when awarding damages.
Jurors may also believe the business, or the insurance company, has unlimited financial resources, leading to what’s commonly known as “shock” verdicts.
These monetary damage awards are much higher than expected based on the evidence presented at trial, often exceeding $10 million.
Emotional appeals to juries from plaintiff’s attorneys are nothing new. Neither are class action lawsuits. But the plaintiff’s bar has gone to a new level with tactics like third-party litigation funding and litigation lending, the report notes.
Funding of lawsuits by international hedge funds and other financial third parties, with no stake 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 larger, estimating it as a $39 billion global industry in 2019, according to Bloomberg.
Some states have implemented rules requiring disclosure of third-party litigation funding in lawsuits, which would give defence attorneys and juries insight into the entities other than the plaintiff who are financing the legal fees of plaintiff’s attorneys.
However, this has been met with resistance from third-party litigation funders. In 2020, the 13 largest commercial litigation funders in the world formed the International Legal Finance Association (ILFA) to advocate for litigation funding and oppose blanket disclosure requirements.
Commercial transportation is among the sectors most severely affected by more frequent lawsuits generating higher insurance claim payouts.
A 2020 study by the American Transportation Research Institute found that, from 2010 to 2018, the size of jury verdict awards grew 33 percent annually, as overall inflation grew 1.7 percent and healthcare costs grew 2.9 percent.