Casualty claims differ in the social inflation era

Casualty liability claims are not like red wine: “They don’t get better with age,” Zurich North America’s Head of Large Casualty Bill Chepulis said at a recent insurance conference in New York. That maxim is one reason Chepulis and his fellow panelists agreed that insurance carriers must invest in strong Claims teams who work proactively with claimants to reach fair and reasonable resolutions in a timely manner. If a claim goes to litigation, costs often spiral upward, particularly if third-party investors are providing funding in exchange for a share of the outcome. High litigation costs can wind up costing consumers, not just businesses, in the long run.

Chepulis and his fellow panelists spoke on litigation dynamics and other challenges during a discussion named “Riding the wave: Managing the latest trends in the commercial casualty cycle” at the Insurance Insider NYC 2024 conference. Other panelists included Brent Hoffman, Chief Claims Officer for Enstar Group; Stephen Perrella, Chief Claims Officer for Vantage Risk Holdings; Paul G. Smith, Corporate Senior Vice President for H. W. Kaufman Group; and Craig Kliethermes, President and CEO of RLI Insurance Company. The panel moderator was Amit Kumar, Director of Research for Insurance Insider US.

Rising severity, especially in Auto

One challenge Chepulis cited is rising severity of many types of Casualty claims.

“Severity is a theme across all the Casualty lines — Auto, GL (General Liability), Excess, Workers Comp,” Chepulis said. “That creates a problem. With the frequency issue, you can get your arms around that ... there’s a lot of data to go on. When we start bringing in severity, it brings a lot of unknowns, and that’s one of the bigger challenges.” 

Auto/Motor fleet risk has become an epicenter of claims severity, Chepulis said. Only recently have carriers begun to recognize the full gravity of Auto losses over the past five years. Some of the impact was masked during the COVID-19 pandemic when courts were closed. But claims costs were climbing. Vehicles and parts became more expensive to replace, in part because of embedded technology such as back-up cameras in vehicles. Litigation costs in liability claims also have increased over and above general economic inflation, which some call “social inflation.”

Although this specific research wasn’t cited by the panelists, the 2024 LexisNexis® Risk Solutions U.S. Auto Insurance Trends Report¹ offers data points illustrating many of the Auto challenges they discussed, including the following:

• Bodily injury claims severity has increased 20% since 2020.
• Material damage claims severity has risen 47% since 2020.
• Following an auto accident, 85% of claimants were approached by one attorney. About 60% heard from two or more.

During the discussion, Chepulis pointed out that society’s increasing reliance on delivery service during the pandemic had broader implications. For one, many more entities became involved in the logistics, not just commercial trucking.

“The world has gotten much more demanding in terms of instant delivery and instant gratification in terms of getting your goods the next day,” he said. “All of this makes the world of transporting goods a challenge.”

Many businesses may outsource last-mile or other portions of the journey to a third party. Chepulis said this makes it difficult for underwriters and customers to answer essential questions such as “Are drivers adequately trained and following safety best practices? Are they adequately insured? Are they representing your brand appropriately?” 

The National Highway Traffic Safety Administration estimates that 40,990 people died in traffic crashes in 2023, citing distracted driving as a major concern, saying it claimed 3,308 lives and injured nearly 290,000 people in 2022.²

Factors like these contribute to industrywide increases in commercial Auto insurance rates, retentions and/or deductibles.³

Carriers in some cases are taking on smaller chunks of a customer’s Auto fleet risk, to try to continue to provide support while ensuring they can cover potential losses and deliver on promises as loss costs escalate. This caution in deploying capacity requires brokers and customers to assemble towers of coverage with more carriers covering “skinnier” or “shorter” layers. This can add complexity. 

Helping customers enhance safety in their auto fleets is a priority for Zurich.

Advertising and third-party litigation funding

Panelists talked extensively about social inflation and what’s driving “nuclear verdicts,” involving damage awards to plaintiffs of $10 million or more.

Panelists shared observations of highway billboards and other advertising by plaintiff’s attorneys encouraging legal action for injuries and boasting of multimillion-dollar damages won in such cases (even if these awards were later reduced by judges).

Panelists said jurors often seem inclined to punish businesses even if the facts of the case don’t support it. Some surveys indicate many jurors view their role as being to address broader social issues, choosing to ignore instructions they receive from the judge.⁴

Third-party litigation funding is another key driver⁵ of social inflation, according to the U.S. Chamber of Commerce’s Institute for Legal Reform. The ILF, the American Property Casualty Insurance Association and others are advocating for greater awareness and disclosure of third-party litigation funding. This funding, which is sometimes lent to plaintiffs at high interest rates, can create disincentives to settle for reasonable sums because investors want to maximize their return. This can prolong litigation and result in the plaintiff receiving a smaller share of the award after the investors get their cut. Concerns also have been raised that overseas entities could use investments in U.S. lawsuits to undermine national security, which is one reason some states recently have passed laws requiring disclosure.⁶

Chepulis said there’s a need to raise awareness among the public that rising lawsuit awards and claims costs may contribute to higher insurance premiums and the cost of goods. It may not be direct or immediate, but when the costs of doing business increase, the costs of goods and services follow.

“We have to connect the dots that insurance isn't this magical pot of gold and it just gets paid out,” Chepulis said. “Somebody is paying the premiums.”

The voices of businesses beyond the insurance industry are critical to raising awareness, Chepulis said. “It really comes down to the state and local level and getting customers engaged in change,” he said.

The importance of Claims professionals

Panelists said claims teams play a critical role in the battle against social inflation. Carriers need to view their claims professionals not just as someone who writes a check but as someone who is a strategic thinker and who can help to get a fair resolution to a claim for all involved. Claims professionals need to be involved in conversations across functions and teams within their organization, sharing their observations and insights with underwriters, actuaries and others involved at every link in the insurance chain.

Strategic claims handling may in some cases involve deciding to settle sooner because of the jurisdiction or judge involved in a given claim. In other cases, it may mean standing firm, lest an outsized settlement set a new floor for such cases and turn a carrier or carriers into a soft target, inviting frivolous or fraudulent claims in the future.

Other percolating trends

Panelists highlighted additional unknowns to monitor, such as the impact that self-driving vehicles may have on casualty claims trends. Another issue is negligent security in auto fleet claims. This can involve a company being accused of inadequately screening drivers’ safety records or behaviors when behind the wheel.

On the positive side, Chepulis said he thinks that many carriers are moving past the most dramatic corrections needed in Auto.

“Compared to today, I view the market as a little more stable but still trending higher,” he said.

Worker’s Compensation continues to be a stabilizing force amid volatility elsewhere, but it is not immune to litigation trends that are driving up costs. One study found that for Workers’ Compensation claims with attorney involvement, the average indemnity costs are 390% higher than for unrepresented claims.⁷

1. LexisNexis® Risk Solutions. “Key Insights for the Road Ahead: 2024 LexisNexis®  U.S. Auto Insurance Trends Report.” 2024. https://risk.lexisnexis.com/insights-resources/white-paper/auto-insurance-trends-report
2. Schulman, Sophie. “Distracted Driving Event; Traffic Fatality Data Release.” 1 April 2024. https://www.nhtsa.gov/speeches-presentations/distracted-driving-event-put-phone-away-or-pay-campaign
3. MarketScout. “Commercial Rates in US Up 3.9% on all Property and Casualty Placements.” 5 April 2024. https://marketscout.com/commercial-rates-in-us-up-3-9-on-all-property-and-casualty-placements/
4. Magna Legal Services. “How the Pandemic Affects Juror Perspectives.” June 2021. https://magnals.com/newsletter/magnafyi-june-2021/how-the-pandemic-affects-juror-perspectives/
5. U.S. Chamber of Commerce Institute for Legal Reform. “What You Need to Know About Third Party Litigation Funding.” 7 June 2024. https://instituteforlegalreform.com/what-you-need-to-know-about-third-party-litigation-funding/
6. Merken, Sara. “Louisiana law places new rules on litigation funders.” 24 June 2024. Reuters. https://www.reuters.com/legal/government/louisiana-law-places-new-rules-litigation-funders-2024-06-24/
7. Rabbani, Mubbin. “Attorney involvement keeps claims soaring.” InsuranceThoughtLeadership.com, Affiliated with The Institutes. 26 June 2023. https://www.insurancethoughtleadership.com/claims/attorney-involvement-keeps-claims-soaring