Social Inflation and Nuclear Verdicts: Shaping the Future of the E&S Market

Over the past few years, the insurance landscape has been dramatically influenced by two powerful forces: social inflation and nuclear verdicts. These factors have created significant ripples in the excess and surplus (E&S) marketplace, leading to accelerated claim costs across critical liability lines. As the pressures of social inflation continue to grow, the question is: Will this fuel the E&S market's growth for the foreseeable future?

Understanding Social Inflation and Its Influence on Claims

Social inflation describes the rising costs of insurance claims due to societal factors like increased litigation, evolving interpretations of liability, and higher jury awards. It stems from shifts in public sentiment around accountability and corporate responsibility, which have often led to more sizable claims and settlements. These changes have had a pronounced impact on sectors such as commercial auto liability, where rising claim costs reflect an increasingly litigious environment.

For instance, general liability (GL) claims are escalating as juries interpret liability more broadly, making insurers more vulnerable to unforeseen risks. Sedgwick reports that the average incurred loss for all new GL claims increased by 12.7% in 2023 compared to 2022. They also stated that growth in the average loss incurred continues at a greater rate than average expenses and continues to outpace inflation. (1)

Similarly, product liability claims have been significantly affected, as consumers are more willing to seek compensation for perceived injustices. In commercial property, evolving societal standards are pushing up claim settlements, particularly in high-exposure areas like tenant liabilities and catastrophic losses. In 2022, the number of product liability cases that weren't already in multidistrict litigation reached a record high, with 5,826 filed. (2)

Nuclear Verdicts: A Game Changer for Liability Coverage

Nuclear verdicts, exceptionally high jury awards often exceeding historical norms, are another significant factor reshaping the industry. These verdicts are typically fueled by aggressive plaintiff strategies, sympathetic juries, and punitive damages aimed at perceived corporate negligence. In commercial auto liability, nuclear verdicts have become particularly notorious, with claims sometimes reaching tens or even hundreds of millions of dollars, pushing traditional insurers away from high-risk coverage.

According to the National Law Journal, between 2015 and 2019, the average top verdict soared from $64 million to an astonishing $214 million, with a 30% increase in cases surpassing the $100 million threshold. Product liability cases have also seen nuclear verdicts, as high-profile lawsuits against major manufacturers influence jury expectations, setting a precedent for even higher awards in the future.

The E&S Market’s Role Amid These Trends

As traditional insurers grow cautious, the E&S market has stepped in to address these high-stakes risks, leveraging its flexibility to underwrite policies tailored to unique exposures. The result has been rapid growth, as evidenced by a recent AM Best report noting U.S. surplus lines direct premiums written (DPW) reaching a record $115.6 billion in 2023—an impressive 17.4% increase over 2022. Key impacts on the E&S market include:

• Surging Lawsuits and Settlements: With the rise in lawsuits, the E&S market is addressing a gap left by standard carriers. E&S insurers are better equipped to handle the volatility of larger settlements in general liability and commercial property lines.

• Increasing Claim Costs: Nuclear verdicts have made coverage costs skyrocket. By specializing in high-limit and complex claims, E&S carriers provide a vital alternative for businesses facing the possibility of severe financial exposure.

• Premium Growth: As demand for tailored coverage grows, the E&S market continues to attract a wide range of industries seeking innovative solutions for high-risk exposures.

Future Trajectory of the E&S Market

The E&S market's adaptability makes it well-positioned to handle the ongoing challenges of social inflation and nuclear verdicts. While certain segments, like commercial property, may fluctuate, others are expected to see sustained growth:

• Commercial Auto Liability: Given the propensity for nuclear verdicts in this space, E&S carriers will likely remain essential in providing coverage as jury awards continue to climb.

• Product Liability: As product-related claims become more costly, E&S insurers will play an increasingly significant role, offering options where traditional insurers are unwilling or unable to cover high exposure risks.

• General Liability: As societal attitudes toward corporate accountability shift, E&S carriers will remain crucial in addressing general liability exposures that could lead to nuclear verdicts.

As social and political dynamics continue to evolve, the E&S market's role will be pivotal in delivering coverage solutions that meet the demands of an increasingly litigious environment. At QuoteWell, we are committed to supporting our agents and carrier partners in finding the right coverage options for their clients amidst these challenges.

Sources

https://www.insurance-research.org/sites/default/files/news_releases/IRCSocialInflation2020.pdf https://www.travelers.com/resources/business-topics/top-100-verdicts/whats-driving-huge-jury-awards https://www.propertycasualty360.com/2024/01/05/the-promising-market-for-professional-liability-insurance