Ongoing weakness in the U.S. economy from the coronavirus pandemic is keeping inflation low, but that isn't stopping social inflation from driving up the cost of risk in casualty lines.
A number of factors are causing social inflation — a term that includes changing attitudes toward litigation, rollbacks of tort reform, and legal trends such as litigation funding — primarily in commercial casualty. Lines affected most by social inflation are commercial automobile, general liability, management liability, and commercial umbrella. As a result, a recent survey found liability risk is one of the five most concerning risks for mid-sized businesses.
According to the 2020 Mid-Sized Company Risk Report, which QBE jointly commissioned with the Association for Corporate Growth, more than half of mid-sized U.S. companies have a "high level of concern" about liability risk, while only 2% consider it a low-level concern. An independent research firm gathered the report data between June 24 and July 8, in a survey of more than 300 decision makers at companies with $200 million to $3 billion in revenues. The complete findings are available from QBE at qbe.com/us/risk-report.
Mid-sized and large businesses are justified in their concern about liability risk. They increasingly are targets for lawsuits, because plaintiffs perceive them to have deep pockets and/or sizable insurance limits. Juries also continue to deliver outsize verdicts and award massive punitive damages against corporate defendants in numerous industries. In recent years, cases involving catastrophic injury or death have brought verdicts in the hundreds of millions of dollars, with some punitive awards exceeding $1 billion.
A 2018 Gallup poll found a high level of mistrust of big business. Gallup's findings suggest public attitudes and anger over perceived inequity are influencing litigation trends. Initial news reports of mega-verdicts, which often are reduced on appeal or ultimately settled confidentially, serve to inflate plaintiffs' expectations of compensation.
Reviver statutes in a number of states, allowing a window of time in which to bring civil lawsuits that otherwise would be prevented by statutes of limitation, are leading to surges in lawsuits and unexpected liability exposures. Many of these claims are filed by adults who experienced the tragedy of childhood sexual abuse, and commonly charge corporate defendants with negligence.
Another trend in social inflation is litigation funding. Akin to venture capital, hedge funds and other investors advance money to plaintiffs and law firms for civil actions, with the goal of securing a big verdict or settlement. Litigation finance is widely permitted, but it nevertheless raises ethical questions about whether litigation funders influence how lawyers represent plaintiffs. For example, the New York Bar Association Litigation Funding Working Group in February released a study calling for changes to professional conduct rules, to "accommodate the reality of litigation funding."
Mitigating the risks
Social inflation will only slow down through legislative changes and tort reforms that limit punitive damages and restrict litigation funding. Changes in attitudes can happen, but they typically take a long time. In the interim, the drawback for society is higher insurance costs that ultimately get passed on to consumers.
To help minimize the pressure from social inflation on prices in the short-term, there are generally two courses of action:
Prevent claims. Loss control and risk management services may offer the best return on investment because they can stop liability claims from occurring in the first place.
Mid-sized businesses express strong interest in this approach. The report on mid-sized businesses found that 65% of respondents are very interested in loss control services, while 35% are somewhat interested, and only 1% are not interested. But a gap between interest and action seems to exist. The report also found they were interacting with the loss control team more often after a loss, instead of other reasons.
Improve claim outcomes. Enhancing claims service to promote faster recovery and return to pre-loss condition, particularly involving personal injuries, is another way to mitigate liability risks.
As a longtime underwriter of specialty property and casualty risks, QBE North America has developed strong risk mitigation tools. QBE customers are benefiting from tools including:
Fleet safety. QBE can help with implementing the latest policies and best practices for ensuring safe operation of company-owned vehicles.
AI-powered worker safety apps. QBE offers access to a service that allows for easy digital image capture of specific job tasks via smartphone. The images are uploaded and analyzed by an artificial intelligence system to precisely identify potential bodily injury points throughout the work process.
Employment practices liability advice. QBE provides its EPL customers with complimentary access to an independent firm that specializes in providing pre-claim advice and a suite of training and educational resources to help companies stay on top of the latest employment laws and regulations.
Early resolution services. QBE is leveraging innovative tech platforms that engage opposing parties in new ways to speed the arbitration process.
Enhanced training. To counter the plaintiff's bar's tactics to win astronomical verdicts by convincing jurors that the defendant represents a threat to their family and community, QBE has improved training and coordination with defense counsel.
Outcomes-based analytics. QBE is using data and analytics in multiple ways, from selecting defense counsel based on litigation outcomes, to identifying the best medical providers in the early stages of treatment.
For more insights on managing specialty and commercial property and casualty risks, please visit www.qbe.com/us.
John Beckman is Chief Underwriting Officer at QBE North America and Chair of the company's North America Underwriting Committee. He is based in Chicago and leads QBE's efforts to enhance underwriting practices and processes, including product development, technical leadership and risk appetites. He can be reached at firstname.lastname@example.org.
QBE North America is part of QBE Insurance Group Limited, one of the largest insurers and reinsurers worldwide. QBE NA reported Gross Written Premiums in 2019 of $4.6 billion. QBE Insurance Group's 2019 results can be found at www.qbe.com. Headquartered in Sydney, Australia, QBE operates out of 27 countries around the globe, with a presence in every key insurance market. The North America division, headquartered in New York, conducts business through its property and casualty insurance subsidiaries. The actual terms and coverage for all lines of business are subject to the language of the policies as issued. QBE insurance companies are rated "A" (Excellent) by A.M. Best and "A+" by Standard & Poor's. Additional information can be found at www.qbe.com/us or follow QBE North America on Twitter.