The State of the Reinsurance US Liability market (updated)

We originally published our state of the Reinsurance US liability market on the 11th September 2023 and have updated it and republished on the 4th October to provide a fresh view of current trends. New information is highlighted throughout the article.

In addition, in September the Swiss Re Institute published a sigma entitled, Social inflation: litigation costs drive claims inflation.

The United States is the largest and most challenging Casualty market in the world. It has been shaped by economic, social, legal and political factors as well as specific supply and demand dynamics.

In the past decade, market syndication and social inflation led to a liability crisis triggering rate increases and limit reductions. Despite these improvements, the underlying forces remain as strong as ever.

In exploring the state of the US liability reinsurance market, we found that:

• NEW: Social inflation drivers remain very strong and are putting continuous pressure on loss costs because of claims.
• NEW: Based on data insights the industry continued to observe negative prior year development in 2023.
• NEW: In 2023 the industry booked an initial gross loss ratio of 64.2% (other liability occurrence) compared to 62.2% in 2022.
• NEW: While the casualty market has remained largely disciplined, a more proactive response is needed to effectively manage persistent social inflation.
• The US liability market is set against a backdrop of negative societal attitudes with anti-corporate sentiments, distrust in institutions and general dissatisfaction at all-time highs.
• In this environment, juries react with an inclination to punish perceived wrongdoers resulting in a continued escalation of nuclear verdicts.
• A quickly growing third-party litigation funding market is creating a highly litigious environment, enabling plaintiffs to pursue more cases and extending their duration.
• A well-funded plaintiffs' bar aggressively advertises to recruit clients, with success. Along with an increased propensity to sue, attorney involvement in claims is increasing, which further increases settlement values.
• Lastly, expanding theories of liability, for example, public nuisance as a cause of action in Casualty, have the potential to further increase nuclear verdicts.

Court closures during COVID-19 offered a temporary reprieve from the above points. State-specific court data indicates that some high value cases remain stalled as courts work to clear backlogs. We expect a continued emergence of high value cases fuelled by social inflation as these cases flow through to the courts in the coming months.

At Swiss Re, we are working with clients and partners to achieve risk appropriate solutions.

This article offers our observations on current trends in the US liability market. We hope it will be a useful resource to CFOs, reinsurance buyers, reinsurance brokers and underwriters.

The United States is the largest liability market in the world…

According to data from S&P, the primary US market size (as measured by earned premiums) for General Liability and umbrella insurance is USD 87.7 billion and USD 22.6 billion for reinsurance, as reported in 2023. It has more than doubled in size from 2014 to 2023.

…yet it is one of the most challenged historically in terms of risk landscape and profitability

The US liability market performance is notoriously hard to predict. This manifests itself in industry loss ratios above 70% from 2015 through 2019, which have developed 8-10 points worse than initially assumed.

It is clear from figure 1 that the reinsurance market has fared even worse (ceded loss ratios are on average 5% higher than direct loss ratios over the 2012 – 2019 period). Additional challenges for reinsurers are:

1. social inflation and claims latency effects are exacerbated by non-proportional reinsurance; and
2. significant cost overriding commissions (difference between ceding commission and actual primary insurance expenses) paid in proportional reinsurance contracts

This further increases the gap between net and ceded technical results.

Social inflation is the key driver of liability market underperformance

Social inflation, or the increase in compensation cost over and above basic economic trends, is not a new phenomenon. In recent decades, three distinct episodes of social inflation have shaped the market as we know it today:

1. US Liability Crisis of the mid-1980s
   In the mid-1980s, the US experienced a liability crisis because of legislative changes and case law expanding the scope of tort liability. Many asbestos and environmental claims emerged, with unexpectedly high economic inflation also contributing to rising liability losses. Here, many states adopted tort reforms to limit the surge in insurance losses and premiums as a response. 
    
2. Wave of class action lawsuits in the late 1990s
   A second episode emerged when the scope of liability was widened by easing access to mass tort claims via case law. Asbestos cases were key. And again, federal tort reform on class actions, state caps on non-economic awards and lawyer compensation were adopted to address the challenges of class actions on the industry.
    
3. Third episode currently ongoing
   At present, a third episode has been underway – one mainly driven by single claimant. We’re seeing a much higher frequency of large claims affecting casualty and reinsurance disproportionately.
   
   A rise in mass tort cases 
   Whilst single claimant cases continue to be a driver of re/insurance losses, since 2020 we've seen a dramatic increase in mass tort claims, harboring the potential to add to loss cost pressure (see new exhibit below).

In contrast to the first two episodes of social inflation, more recent developments are not predominantly caused by legislative changes but by a broader set of underlying drivers, such as increasing litigation costs, outsized jury awards and litigation funding (see section 'A deeper dive into key trends impacting the US liability market'). An insurance capacity crunch, which helped to bring tort reform in prior episodes is currently not observed. In the absence of tort reform, the current episode is likely to persist.

Improvements are present, but more industry action is needed to keep up with current trends

In response to the ongoing challenges, the market has taken some corrective measures. However, for some re/insurers the impact of measures like liability reserve strengthening is partially offset by positive developments in other lines of business.

Following years of stagnant premium rates during the soft market years, most lines achieved significant price rate increases between 2019 and 2021. The peak for General Liability/Umbrella was reached in 2020/21. Since then, rate increases have moderated but remain positive.

The key question is whether these meaningful, but relatively short-lived rate gains are sufficient to compensate for the loss deterioration experienced in the pre-pandemic years. Right now, as an industry, we do not see a deceleration of loss trends and therefore continued rate increases are required to adequately price for risk. We expect that for the coming years further pricing increases will be required for the industry to cope with social inflation trends.

Lead Excess and Umbrella have been more impacted by social inflation than primary segments and have hence benefitted from stronger adjustments.

In addition to rate increases, the industry has also addressed underlying exposures with structure and limits reductions. Average limits have decreased while average attachment points have increased between 2019 and 2022.

New players and broad syndication hinder recovery as capacity is abundant

While rate increases are required to achieve market sustainability, current dynamics are being influenced by new entrants. As rates have increased, liability insurance has become more attractive, creating an influx of new players from US, Bermuda and London markets providing ample (re-)insurance capacity. Insurance towers are also more syndicated and carriers prefer to deploy capacity in multiple ventilated layers.

To conclude chapter 1, we showcase the size of the US liability insurance market and highlight some of the challenges that have plagued the market since the 1980s. Despite attempts to combat growing losses through rate increases and reduced limits, more is needed to achieve a sustainable long-term market. However, with new players entering the market achieving that equilibrium may take longer than desirable.

There are three key trends that have been particularly influential in driving the market into the super challenged position that we observe today:

#1 – A growing extremely litigious environment

US litigation is fuelled by a growing influx of third-party capital. According to Westfleet Advisors, the US litigation funding market grew by 39% between 2019 and 2023. See new exhibit below.

This additional capital enables plaintiffs to pursue more cases, staff them with more experts and lawyers, and extend their lifespan. While there are some opportunities to settle smaller cases efficiently, for larger cases there is a greater desire to gain the benefits of trial before live juries, further contributing to uncertainty of claim duration.

Additional capital also leads to increases in legal advertising by plaintiff lawyers – a trend that we’ve witnessed for some time. Indeed, the number of legal ads on TV and radio have continuously gone up, with a 94% increase since 2014, and legal advertising spend reaching USD 1.18 billion in 2023 according to X-Ante.

The effort is bearing fruit: the number of claimants in multi-district litigation (MDL) cases is at a historic high and online traffic to law firms' websites has significantly increased. Indeed, five times as many people have clicked an online ad of a personal injury law firm between January 2019 and January 2024.

The result is an increased attorney representation rate in claims. A report by Sedgwick finds an increasing number of claims being filed with an attorney representing the claimant at the time of first notice of loss. For litigated general liability claims, 51.4% were filed with an attorney involved from the outset, compared to 42.6% five years earlier.

#2 – Social inflation as the predominant driver of claims inflation

The increasingly litigious environment is further fuelled by a rise in anti-corporate sentiment. Swiss Re’s 2023 Social Inflation Behavioural Survey, which gathered insights from almost 1,000 respondents, found that corporate trust is low, with 87% of respondents either agreeing or strongly agreeing that large corporations will choose profit over public safety.

There is an observed tendency to blame corporations for accidents, even if they did not directly cause the accident. The Swiss Re survey reveals that 44% of respondents agree or strongly agree that a company should pay medical compensation even if it did not directly cause harm to the individual (e.g. in a slip and fall accident).

The plaintiffs' bar has become very efficient in exploiting such sentiments, e.g. through so called reptile theories, leading to increasingly large verdicts against corporate defendants. Traditional media and social media reinforces this and normalises outsized verdicts. It is no surprise that a substantial increase in nuclear verdicts – defined as jury awards larger than USD 10 million - has characterised the current episode of social inflation. According to Swiss Re's analysis based on Westlaw data, the share of large general liability verdicts above USD 5million has increased by 60% in the period from 2014 to 2022 but has slightly moderated in 2023 based on early indication. Further the median of top 100 verdicts has risen significantly (e.g. for product liability by 44%) since 2010 to 2019.

Despite this increase in nuclear verdicts, Swiss Re’s 2023 Social Inflation Behavioural Survey reveals that 82% of respondents believe damages awarded in lawsuits are ‘just right’ or ‘too low’, suggesting jurors feel that verdicts should be about the same or even higher—and, therefore, will continue to award nuclear verdicts.

In the latest Swiss Re sigma study, we have constructed a “Social Inflation Index” by disentangling claims growth from other claims drivers such as economic inflation, exposure growth and frequency trends. Our US social inflation index shows values greater than zero since 2014, rising to around 7% by 2023. Over the period 2017-2023, we estimate that the average social inflation was around 5.3%, with the economic inflation in claims around 3.7%. 

Expanding liability theories pose another threat in the US Liability risk landscape. For example, expansion of public nuisance theory from a property cause of action to a casualty cause of action is of particular concern. Among other advantages, allowing public nuisance claims in a casualty context tends to provide plaintiffs an easier path to proof of liability and causation. Some judges have agreed that public nuisance was not intended to be applied in casualty contexts. Since gaining significant traction with the onset of Opioid litigation, public nuisance has been alleged in a multitude of new and emergent loss complexes ranging from vaping, social media addiction and climate change litigation. Notably, it is plead as a cause of action in PFAS or 'forever chemicals' litigation.

#3 – Outsized jury verdicts and higher economic inflation post-pandemic

COVID-19 further distorted the current exposure landscape. While the pandemic period offered some reprieve in terms of frequency loss reduction and fewer nuclear verdicts, this was only temporary.

According to Marathon Strategies, the total sum of US nuclear verdicts nearly tripled to USD 14.5 billion in 2023 from a low of USD 4.9 billion in 2020, when cases slowed amid court closures and public health measures associated with the Covid-19 pandemic. Moreover, Marathon Strategies identified that 89 lawsuits against a corporate defendant resulted in a 'nuclear verdict' award, which is a 15-year high and a 27% increase compared to 2022. 

At present, court data suggests that a large proportion of injury cases remain unresolved in the court system and will work their way through over time. Estimates based on prior backlogs, filings and clearance rates suggest that it may take 12 to 18 months (or more) for court dockets to return to pre-pandemic levels.

Losses from these cases will still develop. They’ve simply been delayed, and therefore we expect claims costs to remain elevated for some time.

Economic inflation adds pressure

In addition to social inflation, increased economic inflation adds further uncertainty. As an example, the CMS (Center for Medicare & Medicaid Services) projects total national health expenditure to increase by 5.5% per year from 2023 to 2030 compared to 4.2% from 2010 to 2019. Hospital expenditure is expected to rise to 6.5% compared to 4.5% pre-COVID-19 – a full 2% higher.

We don’t see this reflected in the economic indices yet, but we do expect medical inflation to continue significantly above its pre-COVID-19 trend. Claims and reserves for long-tail liability will certainly be impacted by this shift in the inflationary environment.

Acknowledging adverse outcomes

These drivers have combined to create 'a perfect storm' in the current liability marketplace driving undesirable outcomes such as adverse reserving development and elevated combined ratios accumulating across several underwriting years. US liability takes time to show its true colours.

Leveraging key mechanisms to achieve a sustainable market equilibrium – rate increases alone will not be enough

Social inflation has put immense pressure on industry results. According to the Swiss Re Institute in 2021, social inflation has contributed significantly to general liability, commercial motor and umbrella and medical malpractice claims costs.

There is recognition that the liability insurance industry is facing stresses, and some actions are being taken to address the challenges we face. There are movements to advocate for litigation funding disclosure and transparency and we’re also seeing some favourable regulatory changes emerging in the commercial auto market, for example.

However, spikes in litigation funding, social inflation, and nuclear verdicts, coupled with uncertainty surrounding court backlogs and emerging areas of liability, dictate that momentum in market corrections must increase.

Ensuring that the entire value chain is sustainable is vital. Consumers need reliable and secure insurance options and insurers need stable and consistent reinsurance markets. How do we identify actions that will produce sustainable market equilibrium?

We need:

• Adequate risk sharing
  Rate increases are not currently keeping up with loss trends and relying on interest rates to offset rising claims losses driven by social inflation is unsustainable. Continued primary rate gains are needed for future profitability. For the reinsurance market, while ceding commissions have declined marginally, overriding commissions need to reduce further and be recalibrated to ensure they cover acquisition costs only. Establishing sustainable risk sharing dynamics and mechanisms between insurers and reinsurers will provide a means to address imbalances.
   
• Data transparency
  Greater data transparency and partnerships will be key to understanding risk selection and capacity deployments. Insights that can drive logical, disciplined decision making are imperative. Partnerships across the insurance industry will enhance understandings of underlying exposures associated with emerging risks.
   
• Regulatory change
  Advocacy for pro-insurance regulatory changes will be important. Greater transparency of litigation funding seems to be gaining traction in some federal courts and state judiciaries. This is a good start, but more will be required.
   
• Disciplined underwriting
  We’ve seen recent actions to reduce large, multi-million-dollar limits. Controlled capacity gives some reprieve, and it will be critically important that the market does not revert to prematurely expanding limits.

Conclusion

For the US Liability market, all signs suggest that the evolving risk landscape, uncertainty and social inflation pressures will remain adverse moving forward.

Today's market is challenging. However, our industry has a long-track record of dealing with crises and, like in the 1980s, forging a better market with long-lasting reforms when faced with adversity and uncertainty.

As an industry, we are uniquely positioned to effect positive change and manage uncertainty. The relief lies in how insurers and reinsurers can find ways to collaborate beyond capacity requirements.

At Swiss Re, we continue to operate in US liability, with the intention of focusing on contributing to more sustainable market conditions.

Progress in risk sharing through rate increases and commission reductions, the ability to navigate emerging risks through data transparency, and consistent discipline through limit reductions, are all contributing levers that need to be considered.

With underlying forces remaining as strong as ever we need to lay the foundations for market sustainability moving forward.