1 January renewals: Turning the page on social inflation
Straight talk from Michael Hudzik, Swiss Re's Head of Underwriting Casualty, U.S. & Canada.
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The most outrageous lawsuits of 2019 may provoke indignation, but they shouldn’t come as a surprise. They’re symptomatic of an ever-growing trend of litigiousness with far-reaching effects. For every frivolous suit that gets thrown out, there are hundreds more that reach trial and result in excessive – even unprecedented – jury awards.
More than ever, Fortune 1000 companies represent deep pockets for the plaintiffs’ bar. Of the 100 largest jury awards in 2018, the lowest was a hefty $22 million and the highest was the staggering $4.7 billion product liability award against Johnson & Johnson. Among large corporate risks, the largest 200 claims doubled in severity between 2014 and 2018.
Social inflation is driving up costs and stressing the U.S. liability system, which is resulting in hardening of general liability and product liability re/insurance markets. Large corporate entities are forced to pay significantly more for excess liability coverage and ceding commissions on quota share reinsurance for excess liability placements are being reduced. January 1 renewals also saw shifts in terms and conditions and this trend will likely continue for the foreseeable future.
Large corporate risks are a target for plaintiff attorneys, but recent nuclear verdicts have put risk managers, CFOs, CEOs and boards of directors on high alert.
Anti-corporate sentiment continues to churn at a fever pitch, and even socially responsible companies find themselves in the crosshairs of juries that are looking to punish perceived wrongdoing rather than compensate a legitimate plaintiff or class. Jury researchers maintain that the plaintiffs’ bar has taken a new tack in voir dire: inciting anger against the defendant instead of invoking sympathy for the plaintiff.
For decades, we’ve seen juries set punitive awards absent logic or rationale, but this is next level stuff. In response, defense attorneys usually seek legislative relief in the form of caps on noneconomic damages, but the plaintiffs’ bar has proven to be a formidable adversary with a track record of successfully overturning tort caps.
Public opinion paints with a broad brush. Case in point: local and state governments are suing opioid manufacturers and distributors, and with each headline pharmaceutical companies suffer damage to their reputation and large corporations in other industries see a simultaneous erosion of trust.
The global PR firm Edelman, which issues an annual Trust Barometer, writes, “The last decade has seen a loss of faith in traditional authority figures and institutions.” Indeed, the Edelman’s Trust Score for Business in the United States is an unexceptional 54 of 100.
Anti-corporate sentiment took flight with Occupy Wall Street and the financial crisis, and has become mainstream as a tidal wave of younger jurors is helping fuel large awards. According to Deloitte, “Millennials’ opinions about business continue to diminish ... After four straight years in the 70s and a drop to 61 percent in 2018, the number of respondents who said business has a positive impact on wider society fell to just 55 percent."
Another contributing factor is the passage of “reviver statutes” in nearly half the states, which expand the timeframe for victims of childhood sexual abuse to file suit. Reviver laws have led to a sharp increase in claims and lawsuits against institutions and in turn, institutions have tendered claims to insurers that wrote those policies long ago.
Long-tail lines have perennially challenged underwriters, given that the litigation landscape can undergo dramatic changes from the time a policy is written to the time a claim is filed. But so-called “nuclear verdicts,” which were once regarded as a one-off, are now the norm. Not only is excess-casualty business threatened, but public company D&O is seeing pressure at renewal. Re/insurers are addressing the issue by insisting on transparency and an objective assessment of risk portfolios:
They are requesting more data from clients and comparing portfolios to determine how to best manage their own exposure.
They are comparing each client’s risk data with information they have on other clients so they can tell clients where they are overweight compared to others, so they can reconsider how they write long-tail GL and similar lines.
If they have more than one line of business with a client, they can offer more coverage or better terms in another line to offset their liability exposure.
They should make sure each client understands precisely how much exposure it has so it understands the stress placed on the industry, including the reinsurance market.
If there’s one overriding message the reinsurance market should heed, it’s this: Full transparency between cedants and reinsurers is imperative. You can bet the plaintiffs’ bar is examining every tactic in the book, and potential defendants must be prepared.
Michael Hudzik is Head of Underwriting Casualty, U.S. & Canada, for Swiss Re
This piece originally appeared in Reactions.