Is a social inflation tsunami on the horizon?
One of the notable societal changes over recent years is the development of the desire to “stick it to the man” when it comes to jury awards.
Part of this “us vs them” philosophy stems from the plethora of reality TV shows giving viewers an insight into how the haves live compared with the have-nots. It’s possible that by sticking it to big companies, juries feel they are tipping the scales of justice back towards the “little guy”.
Prior to tort reform, “runaway awards”, “judicial hell-holes” and “venue shopping” featured in your daily insurance vernacular. In the mid-2000s, tort reform in several states attempted to address this. However, over time, these reforms have lost some of their sting due to legal challenges and the trial bar crafting other ways to extract substantial punitive damages.
In our writings we have continued to draw attention to the likelihood of social inflation post-Covid, but we have been proved wrong. Until now.
In its first-quarter results, ProAssurance, a medmal and workers’ compensation specialist, reported adverse development from open claims dating back to the late 1990s and early 2000s. ProAssurance also flagged an uptick in larger verdicts across the medical malpractice industry.
These developments at ProAssurance led us to ask three questions for the wider industry:
Firstly, is there an uptick in jury awards? Anecdotal evidence suggests there is.
Secondly, how much are prior claims as a percentage of total claims, and do any lines stand out? Approximately 22% of total outstanding claims are in the “prior” bucket, which is 2012 and earlier. Meanwhile, around 10% of reserves are in that same bucket. The net takeaway here is that older claims are not just a drop in the bucket, and still have the ability to develop adversely.
Thirdly, do any lines stand out when comparing developed loss picks? Yes, and based on the results, we remain cautious around other liability and commercial auto liability.
The note below discusses these things in greater detail.
Firstly, larger verdicts are making a comeback after the Covid-driven decline.
Similar to prior quarters, this earnings season included the discussion on loss cost trends, including the changing tort climate. One of the most debatable topics is whether Covid created a backlog of claims and if there is the potential for a resurgence as we normalize. The chart below shows this impact, where overall verdicts did fall precipitously through 2020 and 2021.
Although some industry participants have taken a more cautious stance than others, the general thinking is that there are no clouds on the horizon.
We looked at some of the recent verdicts in medical malpractice and noticed an uptick in the awards. A partial list is show below. A reading of the related press articles reveals echoes of juries hoping to fix societal ills rather than playing the role of impartial judges.
So, will this growth spread to the other segments? Are we witnessing a pivotal moment? It’s tough to say, but there are signs we are easing back into the worsening trend line that had been developing pre-Covid.
Secondly, legacy outstanding claims make up a decent chunk of total outstanding claims.
When thinking about loss reserves, we typically think about case reserves plus incurred but not reported (IBNR) reserves.
Simply put, case reserves are estimates of unpaid claim liability for specific open claims, while IBNR is an estimate of everything that has not been reported, developed by the actuarial team, depending on several factors.
Over time, IBNR reserves will change depending on how the claims bucket is evolving. Typically, if claims movement is de minimis over time, the remaining IBNR could even flow into earnings through reserve releases.
With this understanding, and in the context of ProAssurance’s recent announcements, we thought it would be interesting to see what proportion of open claims are in the older buckets at the industry level. We can see that for medmal occurrence (where ProAssurance’s recent claim would fall), 10.9% is in the “prior” bucket.
However, other lines have even more significant chunks, namely other liability (occurrence) with 51%, and even commercial multi-peril with 23%.
We are not suggesting that this points to an imminent explosion in claims. But we are highlighting that a decent number of open claims are lingering in the system, and if social inflation goes south, these lines could exhibit continued pain.
Further, as seen in the table below, if we look at the percentage of total reserves in each accident year for these major commercial lines, we can see a correlation of reserves set out for prior-period claims and the tail.
For a shorter-tail line such as commercial auto, we see a lesser proportion of reserves allocated to the “prior” bucket and more in recent accident years. However, for both medmal (occurrence) and workers’ comp (long tail lines), the industry has around 28% of total reserves for each allocated to the earlier accident years. The industry has also continued to benefit from reserve releases from older years in workers’ compensation.
We would posit that a cautious view needs to be taken this year and next rather than rushing out with a “mission accomplished” banner, to ensure the industry does not get caught unawares on the reserve release front.
Thirdly, case reserves per outstanding claim is a mixed bag.
On the ProAssurance earnings conference call, the company noted that its average case reserve was going up for recent accident years compared to the industry.
The chart below computes this for the industry and we can see that, indeed, case reserves for medmal claims have declined in recent years.
But what about the other lines? You will notice mixed results here, with commercial multi-peril one of the few lines showing a consistent uptick in recent years. Other liability (occurrence) has gone up and down, and is currently double its 2013 position.
On the other hand, several lines show an optimistic view with regard to loss cost trends remaining stable. However, this view of the trend to some extent assumes stability of 2020-21 and even 2022 numbers in terms of loss activity. If there were adverse development, a future view of the numbers might not be as positive.
This again ties back to our thought process that if a social inflation tsunami does come, will current years prove deficient?
In summary, we believe that ProAssurance’s results should serve as a reminder to companies writing long-tail lines to re-examine their older claims to avoid getting caught unawares on the loss development front.