The global insurance industry has a new enemy: US juries.
Executives are increasingly fearful at the threat posed by juries handing out ever more generous awards to plaintiffs, covering everything from opioid overdoses to tainted talc, with insurance companies left to pick up the bill.
‘Social inflation’ as the trend of juries making bigger payouts is known, is arguably the hottest topic for an industry facing a squeeze in profits and the need to bolster the reserves companies hold to fund payouts.
Rob Francis, who runs healthcare underwriting at ProAssurance, a US property and casualty insurer, reels off a list of this year’s payouts, including $230m a Baltimore hospital was to ordered to pay in July in the largest US malpractice award to date.
Insurers have seen “a tripling of verdicts over $10m over the past three years” in professional liability cases, he says.
The mix of explanations for the trend is eclectic, including a souring in the national mood towards big corporations, the financial firepower provided by specialist litigation companies and a shift in the political disposition of judges.
“There is a growing social mood against big business,” says the chief underwriter of one global insurer. “Juries think they can hold big companies to account without consequence.”
What is not in dispute is that insurers are on the back foot.
At a conference organised by Insurance Insider this month, Stephen Catlin, an industry veteran, reckoned the trend could ultimately blow a $200bn hole in global reserves.
Third-quarter results from insurers offered evidence of the damage. Travelers, the $34bn US insurer, warned of an “increasingly challenging tort environment” as its profits fell sharply. Bermuda-based Hiscox said it, too, was taking an increasingly cautious approach to its US business.
Transport companies with US exposure are beginning to feel the fallout. FirstGroup, the UK owner of Greyhound buses, last week alarmed shareholders by revealing a £59m charge to cover the rising cost of motor insurance.
Estimating the ultimate impact on the industry’s profits with certainty is difficult, says Meyer Shields, insurance analyst at KBW.
“Court cases are different from one another and the data are slow to come in,” he says. What is certain is that “it is a huge deal”.
Big awards have a trickle-down effect, putting upwards pressure on smaller settlements, underwriters say. “The demands of the plaintiffs’ lawyers go up because the defendant has to fear [large] verdicts . . . that makes its way into day-to-day claims,” and from there into insurers’ profit margins, said Mr Francis.
Robert Reville, chief executive of Praedicat, a risk modelling agency, says that the pain for insurers has been deepened because just a decade ago there was a consensus corporate America faced little threat from juries.
“Ten years ago, the corporate community had a sense they had won the tort reform battle,” said Mr Reville. “Since then the price of insurance has declined dramatically. So you have 10 years of declining prices and 10 years of reserves being released, and insurers being deemed profitable. But over that time they have accumulated exposure.”
Bodily injury claims are proving a particularly expensive area for insurers, as plaintiffs and their lawyers go after employers as well as transport companies. This year, for example, Greyhound was told by an appeal court that it had to pay some $30m to a person injured in a 2013 crash.
According to data from Swiss Re, the median cost of the top 50 bodily injury claims in the US rose from around $28m in 2014 to just over $54m last year.
“We’re seeing claims for opioids, talc, repetitive head injuries caused by sports and even for loud noises in occupational settings,” Mr Reville says. In a report called “Nine newly known unknowns,” his firm argued that “the next opioids” are antibiotics, diesel and sugar, each of which leading to liabilities in the tens or hundreds of billions.
As those vying for the Democratic presidential nomination call for companies to broaden their purpose beyond profits, analysts say that the headache insurers face over payouts is in part a legacy of Barack Obama’s election.
Mr Shields, the KBW analyst, says that historically a rise in the share of Democratic appointees to judges on the US appeals courts leads to an increase in the reserves of held by property and casualty insurers.
The effect happens with a lag of about five years, reflecting the time it takes for insurers to recognise the change in the environment. On this theory, insurers are still adjusting to the change in the judicial environment wrought by the Obama administration.
This political dynamic, Mr Shields argues, is amplified by the emergence of an industry dedicated to financing plaintiffs’ lawsuits. “If there is a better-funded plaintiffs bar, then they can afford to be more aggressive and experimental.”
One high-profile litigation finance group, Burford Capital, is listed in London, while firms such as US-based Lexshares and the UK’s AxiaFunder court investors to back lawsuits in return for a share of any awards.
Some insurers executives remain more sanguine than others, arguing that the premiums insurers charge will eventually reflect the cost of bigger payouts.
Robert Childs, the chairman of Hiscox, speaking at a recent FT/PwC conference, was philosophical. “Like all things in insurance, there is volatility,” he said. Social inflation “has added some costs to our business, and it’s going to take some time for price increases to overcome that. I don’t see it as a catastrophe. I see it as an adjustment.”
Others believe the severity of the trend — and its durability — is still being underestimated.
“The fact that it is cyclical doesn’t mean that it mean it won’t get worse before it gets better,” Brian Duperreault, the chief executive of the insurer AIG, told the same conference. “I think social inflation will run on for a while.”