Dupont, who is COO at Fairfax subsidiary Allied World, noted in the latest Close Quarter episode that the impact of social inflation over the last decade has led to elevated insured losses, which ultimately hurts buyers through increased pricing.
“Insurance carriers have to stay ahead of those loss cost trends,” he said. “We have to price our products slightly above what our loss expenses are in order to stay in business. And those loss expenses get put into the price of insurance and it gets passed on to consumers.”
Franzetti, who is head of P&C business management for the Americas at Swiss Re, identified four factors contributing to social inflation: the plaintiffs’ bar evolving over the past decade to become more strategic and coordinated across the US; litigation funding entering the picture; a change in culture leading to increased anti-corporate sentiment; and legal advertising doubling over the past decade to more than $1bn last year.
“All of these factors come together and they can lead to increasing loss costs and increasing combined ratios. We’re particularly feeling it in the umbrella and excess space,” Franzetti said.
Franzetti, who in her role at Swiss Re leads the P&C reinsurance claims group for the US, said that social inflation is leading to increasing numbers of nuclear verdicts.
It is also being seen in increasing frequency of other verdicts that are more in the multi-million-dollar range. “But they’re bigger than they’ve been in the past, and they’re also beyond the reasonable value of the loss,” she said.
A “refreshed approach” is needed
The executives suggested the industry needs a change in mindset to combat social inflation.
“We’re requiring a refreshed approach,” said Franzetti. “We need to do things differently than we’ve done in the past.”
She elaborated that potential actions can be divided into those that can be done before a loss happens and those that can be done after a loss.
One of the actions that can be taken before losses occur is to watch what is happening with legal advertising, as this can give an idea of which states losses might occur in and who lawyers are targeting.
Franzetti said that legal advertising generally precedes filings by about six to 12 months. “If you see advertising increasing in frequency that generally means it’s working, because there are aggregator companies and firms and their job is to accumulate plaintiffs,” she said.
Once a claim is happening, Franzetti said there are trial strategies that can be utilised.
“I would start with: what’s our story?” she said. “The defence needs to tell a story. We traditionally chip away at the plaintiff’s story but don’t offer one of our own and that actually is a little bit difficult to follow for jurors and doesn’t lend itself to connection.”
Franzetti advised anchoring juries and mediators with a number, which is something carriers are often reluctant to do.
“We have often traditionally been afraid to give a number on the defence side, thinking that it implies liability,” she said. “But what happens is the plaintiffs’ attorneys are offering numbers and they’re priming the jurors, the judges and the mediators through this process to get accustomed to some big numbers.
“By the time the defence even offers the number, we’ve already lost them.”
Other pointers Franzetti provided include investing in witness preparation and finding out whether litigation funding is present in a case.
“We need to understand who all the parties are who might have an interest in the outcome,” she said.
Dupont stressed it is very important to “know who you are up against”.
“There are some very, very well-known plaintiffs’ attorneys that travel across the country. If you have the right defence counsel, they’re going to know that plaintiffs’ lawyer’s strategy and tactics. And know what jurisdictions you’re dealing with, know what court system you’re in.
“Pay attention to all the details – dot your i’s cross your t’s. Because you know the trial bar is going to do that, and they’re going to be gunning for you for the biggest number they can get.”