Those involved in the insurance sector have always been sensitive to their operational environment. Everything revolves around contractual obligations.

We are paid premiums and, in return, policyholders are entitled to coverage. However, things are thrown off-balance when premiums received are not matched with eligibility parameters and assumptions regarding underwriting parameters and loss payouts.

For the longest time, insurer assumptions have interplayed with legislators, regulators, lawyers, and the insuring public to shape things. They often play out in insurance market cycles, going from soft to hard and back again. Lately "social inflation" has been mentioned as a serious driver toward another hard market.

Social Inflation, roughly, refers to various factors found on the societal have evolved to the point where insurers are forced to pay significantly more in claims than are, from the insurers' perspective, justified. In other words, coverage intent is not aligned with coverage expectations. Common components of social inflation are anti-large business sentiment litigation funding, normalization of large jury awards, and tort reform erosion.

Anti-Large Business Sentiment

This argument revolves around the build-up of negative feelings against businesses, due mostly to the ability of social media to publicize negative stories freely. It is also connected to the growing level of economic disparity between the wealthy and everyone else. Large business is increasingly seen as a sector that maximizes its financial well-being at the expense of other considerations such as environmental issues and employee pay and benefits.

Litigation Funding

In recent years, investors have found an attractive opportunity, bankrolling lawsuits. It has gotten to the point where entities specializing in financing litigation are actively being formed. With regard to insurance, funding increases claims litigation costs. Policyholders and insurance companies, regardless of the merits of a given claim, have substantial unequal access to litigation. The expense of filing and pursuing legal action often dissuades policyholders/claimants from suing. The entry of third parties willing to pay for costs in exchange for a share of a potential award evens the field, increasing the number of lawsuits and awards.

Normalization Of Large Jury Awards

This issue is strongly connected to the Anti-large business issue. Lawsuits and wrongdoing involving large businesses are increasingly publicized on a wider scale. This activity is accompanied by feelings among citizens that the financial priorities and advantages of wealthy business are unfair. Allegedly, a loop has been created in which very large awards (also known as nuclear verdicts) have become normalized. In turn, nuclear verdicts become a tool for economic equalization as well as punishment.

Tort Reform Erosion

Tort reform refers to systemic changes to civil (rather than criminal) justice that reduces the financial impact of lawsuits. Examples are shortening the length of time in which legal action can be pursued after a loss occurs. For instance, a law that changes the time period to file a lawsuit from three years after a loss to two years can significantly lower the level of litigation. Another example is laws that either add or reduce the maximum level of rewards available to successful litigants. Yet another method of tort reform is the use of mandatory, binding alternate dispute resolution in insurance policies. In recent years, some state legislatures have been re-examining tort reform laws, questioning the evidence of their effectiveness. On another front, courts have had an impact on decisions that tackle whether such laws are constitutional. Both developments act to roll back the intent of tort reform.

If you have more questions about any of these topics, contact Williams Insurance. With over 80 years of experience, we have the knowledge you need.


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