A increasing trend of litigation expenses and their influence on insurers’ claim payments, loss ratios, and ultimately the amount of money policyholders pay for coverage are referred to as “social inflation.” Despite the fact that the methods connected with social inflation are often used against corporations believed to have “deep resources,” the problem has repercussions for people and enterprises of all sizes.

Commercial auto, professional liability, product liability, and directors and officers liability are the insurance lines that have been most adversely impacted. There is further indication that private-passenger automobile insurance is starting to be adversely impacted as well. Due to the fact that rising litigation costs are driving up insurance rates, such increases are often passed down to consumers, which may discourage investment in innovation that might otherwise generate employment and help the economy.

Much of what has been discussed and written on the subject has been based on anecdotal evidence rather than empirical evidence. It is difficult to accurately assess social inflation for the purposes of rating and reserving since it is just one of several elements that influence price. It has been our experience that the most useful approach to think about social inflation and its components is to compare their influence on claim losses over time with the increase of inflation measures such as the Consumer Price Index (CPI).

Funding for Litigation

Traditionally, it has been believed that the most effective method of eating an elephant is “one mouthful at a time.” In order to better understand the variety and complexity of social inflation’s origins and impacts, we’re beginning a series of blog postings that will cover each of them in turn. The first series of blogs will take a detailed look at litigation finance, which is the practice of third parties financing lawsuits in return for a percentage of any cash that the plaintiffs may obtain as a result of the action.

The practice of litigation financing used to be extensively forbidden, but as prohibitions have been relaxed in recent decades, the practice has developed and spread, and it has now become a significant contributor to social inflation.

As a starting point for this series, litigation funding seemed like an appropriate choice since it is a separate legal technique with a well-documented history that does not entail many of the sociological complexities that are present in other parts of social inflation. We’ll look at the history of the practice, including how it arrived to the United States from other countries, and how it has evolved in tandem with societal inflation. We’ll also talk about the present condition of litigation financing, as well as some of the ethical issues that have been made about it among members of the legal profession.

Presented by IRC Vice President David Corum, with assistance from our colleagues at The Institutes and input from our members as well as experts from outside the insurance sector, this series will be conducted by Corum. As is appropriate for any discussion on a complicated subject, we are looking forward to hearing your comments and views.