- It has been said that the best way to eat an elephant is “one bite at a time.”
Social inflation is an elephant-like topic so we’re starting a series of blog posts devoted to each part of it in turn, starting with litigation funding.
“Social inflation” refers to rising litigation costs and their impact on insurers’ claims payouts, claims ratios and ultimately how much policyholders pay for coverage. It is important to understand because – while the tactics involved typically involve companies that are perceived as “deep pockets” – social inflation has an impact on individuals and companies of all sizes.
The insurance lines most affected are commercial motor vehicle liability, professional liability, product liability, as well as managing directors and executives. There is also evidence that private car insurance is affected. As increased litigation costs drive premiums, those increases are typically passed on to consumers and can stifle investment in innovations that could create jobs and otherwise benefit the economy.
[For more on this, see: Social Inflation: Evidence and Impact on Property-Casualty Insurance by the Insurance Research Council (IRC).]
Much of what is discussed and published on this topic has been more anecdotal than data-based. Reliable quantification of social inflation for rating and reservation purposes is difficult as this is only one of many factors that put price formation under pressure. We found that the most sensible way to think about social inflation and its components is to compare its impact on loss-loss over time with the growth of inflation metrics such as the consumer price index (CPI).
It is said that the best way to eat an elephant is “one bite at a time.” Due to the variety and complexity of the causes and effects of social inflation, we are starting a series of blog posts devoted to each one in turn. The first set of posts delves deeply into litigation funding: the practice of third party funding of litigation in exchange for a share of any funds plaintiffs may receive.
Once largely banned, the bans on litigation funding have been eroded in recent decades, the practice has grown, spread, and contributes to social inflation.
[See: Litigation Funding Rises as Common-Law Bans Are Eroded by Courts on the Triple-I Blog]
Litigation funding seemed like a good starting point for this series, as it’s a standalone legal strategy with a clear story that doesn’t contain many of the sociological subtleties inherent in other aspects of social inflation. We will look at the genesis of this practice, how it entered the United States from abroad, and follow its evolution with that of social inflation. We will also discuss the current state of litigation funding, along with ethical concerns raised about it in the legal community.
This series is led by IRC Vice President David Corum with the support of our partners at The Institutes and input from our members and experts outside the insurance industry. As befits a discussion of a complex topic, we look forward to your reactions and insights.
More from the Triple-I blog
What is Social Inflation? What can insurers do about it? (January 25, 2021)
Litigation Funding Raises As Common Law Bans Are Eroded By Courts (December 29, 2020)
Lawyer Group Approves Litigation Fund Management Best Practices (August 19, 2020)
Social inflation and COVID-19 (July 6, 2020)
IRC Study: Social Inflation Is Real, Harming Consumers and Businesses (June 2nd, 2020)
Florida was removed from the list of “Judicial Hellholes” 2020 (January 14, 2020)
Florida’s AOB Crisis: A Microcosm of Social Inflation (November 8, 2019)