Disabling the enablers…

Plenty has been said and written on the subject of social inflation – or legal system abuse, as is the mot du jour – and its impact on loss cost trends in US casualty.

For more than a year the topic has dominated the sector, as concerns mount over deteriorating prior-year results and the adequacy of reserves in the face of not just nuclear verdicts, but also the escalating costs of more run-of-the-mill claims.

One driver is, of course, litigation financing – a fast-growing industry in its own right, with investment funds already approaching $20bn and projected to multiply over the coming years.

At the Monte Carlo Rendez-Vous last month, Hannover Re CEO Jean-Jacques Henchoz became the latest industry executive to warn that a number of casualty risks could become uninsurable in the future if nothing is done to rein in the litigation finance industry.

In the US, the insurance industry has put the issue at the top of the agenda, with heightened lobbying efforts and signs of progress around legislative moves to regulate and require more transparency about how plaintiffs are funded.

What appears to be a unified voice has been undermined, however, by anecdotal evidence that some insurance industry participants may have hedged by investing in litigation finance funds, as well as the continued practice of offering litigation risk coverage to financers.

The latter was brought under the spotlight by Skyward Specialty CEO Andrew Robinson this year when he called out an unnamed global insurer for providing capacity to an MGA offering the coverage, describing support for those fueling social inflation “shocking and shameful”.

The situation presents some parallels with the ongoing debate about insuring the fossil fuel industry, given the potential linkage between climate change and rising loss costs from natural catastrophes – although the debate continues about how best to facilitate the transition to cleaner energy.

The relationship between funding litigation and social inflation appears to be far more direct, however, questioning the sanity of insurers and others in the insurance ecosystem that enable it.

This is an issue where the industry should be all on the same page, through actions as well as words.

One step towards that came last week from Aon, which announced that it will no longer place litigation insurance transactions that cover litigation finance firms.

“In the United States, nuclear verdicts have led to exponential growth in related insurance costs, harming US business competitiveness and consumers. Moving forward, we will not be accepting engagements to serve as a broker for litigation insurance transactions insuring litigation finance businesses,” an Aon spokesperson told this publication.

“We believe that this decision will help contribute to a more sustainable marketplace for all stakeholders,” they continued.

Will others follow suit? It should be a no-brainer, but maybe industry participants and insureds will have to start voting with their feet.

Will insurers and insureds continue working with intermediaries that are placing coverage for pools of litigation funded by litigation finance firms? Should there be a blanket ban on providing any kind of coverage to litigation finance firms?

These are all impossible to enforce, of course, as long as the practice is legal. But if the industry wants its case to be heard by a sympathetic audience, it must be able to occupy the moral high ground by disabling the enablers…