Analysts at Credit Suisse have highlighted litigation financing as a driver of social inflation, stating that the impact from litigation finance is adding more than USD 3.8 billion of additional costs into the US Court system each year.
Social inflationary factors such as the #MeToo movement, opioid-related lawsuits, the erosion of tort reform, negative public sentiment towards larger corporations and increased litigation funding is having an impact on both the US Court system and the insurance industry.
Legislative changes in certain states have made it easier for victims to file lawsuits for some crimes, and combined with the heightened use of litigation financiers (firms that agree to cover all or part of the costs to pursue litigation for a share of the proceeds) and other social inflationary trends, is driving up the number of cases being pursued.
For insurers, this signals additional pressure on loss costs as a result of longer litigation cycle, defense costs, and also potentially higher jury awards.
According to Credit Suisse analysts, litigation finance is adding more than USD 3.8 billion of added costs into the US Court system, annually. Net, this amounts to 1.2% of total annual litigation spend of around USD 326 billion.
In its report, Credit Suisse notes the views of certain re/insurance industry executives, including Swiss Re Chief Economist of Americas, Thomas Holzheu, who explained in November of 2019 that social inflation is a worry and might well lead to reserving issues for some.
“I think it’s the uncertainty around these trends are so large that it’s probably not prudent to do this at this point and come up with a specific number. But it’s a risk to watch out for,” said Holzheu.
Other industry executives have highlighted a higher frequency of large claims, warning that this might well have an impact on prior-year business claims and that it’s coming from across the business, with D&O and auto lines being noted numerous times.
Back in October, reports Credit Suisse, the Chief Executive Officer (CEO) of AJG, J. Patrick Gallagher, said that the firm is seeing tort inflation across its book, particular in areas like sexual misconduct, D&O, and transportation.
“Our liability book and severity — in the liability book at Gallagher Bassett, it’s both up in terms of numbers of claims as well as the settlement amounts that are being paid to close. There’s clearly tort inflation,” said Gallagher.
