Insurance experts often examine how outside trends, reforms and movements in the larger economy affect the insurance marketplace, and you should follow suit to determine what factors may impact your coverage. For 2024, there are a host of sweeping market developments to consider.
Social Inflation Concerns & the Insurance Marketplace
Social inflation refers to societal trends that influence the ever-rising costs of insurance claims and lawsuits above the general economic inflation rate. According to the National Association of Insurance Commissioners, the “social” aspect of this term represents shifting social and cultural attitudes regarding who is responsible for absorbing risk (i.e., the insurer or the plaintiff). As the insurance sector shifts, it’s essential to understand what’s currently driving social inflation.
Third Party Litigation Funding
One of the factors driving social inflation has to do with third-party litigation funding (TPLF). Such funding refers to when a third party provides financing for a lawsuit. In exchange, the third party receives a portion of the settlement. In the past, the steep cost of attorney fees would often discourage plaintiffs from taking a lawsuit to trial. But, through TPLF, most or all of the costs associated with litigation are covered by a third party, which has increased the volume of cases being pursued. Not only is TPLF becoming more common, but it also increases the cost of litigation, sometimes to seven figures. This increase is because plaintiffs can take cases further and seek larger settlements.
Tort Reform
Tort reform refers to laws that are designed to reduce litigation. In particular, tort reforms are used to prevent frivolous lawsuits and preserve laws that prevent abusive practices against businesses. Many states have enacted tort reforms over the last several decades, leading to fewer claims and caps on punitive damages; for example, 2023 saw Florida Gov. Ron DeSantis sign a tort reform bill into law in an effort to curb predatory litigation practices, limit personal injury lawsuits and minimize attorneys’ fees. However, some states have modified or challenged tort reforms as unconstitutional. Opponents believe tort reforms lower settlements to the point where attorneys are less likely to take on new cases and help victims get justice for their injuries or other damages. Further complicating matters, tort reform is subject to uncertainty, as it’s largely tied to political leanings and the interests of individual states. Should tort reform continue to erode, there could be fewer restrictions on punitive and noneconomic damages, statutes of limitations and contingency fees, all of which can drive up the cost of claims and exacerbate social inflation.
Plaintiff-friendly Legal Decisions and Large Jury Awards
The overall public sentiment toward large businesses and corporations is deteriorating, and anti-corporate culture is more prevalent than ever. A number of factors are contributing to this increasing distrust, including the highly publicized issues related to the mishandling of personal data and social campaigns. This has considerably impacted how a jury perceives businesses in court, and organizations are held to a higher standard for issues related to how they conduct their business. In fact, juries are increasingly likely to sympathize with plaintiffs, especially if a business’s reputation has been tarnished in some way in the past. As a result, plaintiff attorneys are likely to play to a jury’s emotions rather than the facts of the case.
Compounding this issue, there’s an increasing public perception that businesses—particularly large ones—can afford the cost of any damages. This means juries are likely to have fewer reservations when it comes to awarding damages. In the current environment, nuclear verdicts (jury awards of $10 million or more) have become more common.
Extreme Weather Events & the Insurance Marketplace
Extreme weather events, such as hurricanes, tornadoes, hailstorms and wildfires, continue to make headlines as they become increasingly devastating and costly. What’s worse, these events aren’t limited to one geographic area, impacting businesses across the United States.
According to data from the National Oceanic and Atmospheric Administration (NOAA), 2023 kicked off with severe cold waves and immense snowfall in several Northeastern states, producing the most frigid wind chill (-108 degrees Fahrenheit) the country has ever recorded and costing $1.8 billion in losses. Between spring and early summer, a series of hailstorms, heavy winds and hundreds of tornadoes wreaked havoc on multiple Southeastern, Central and Midwestern states, leading to almost 100 fatalities and causing over $35 billion in losses. In the summer, more than one-third (34.3%) of the country experienced prolonged droughts and heat waves, resulting in widespread crop damage, reduced river commerce and diminished national water quality; these conditions also generated $4.5 billion in losses and contributed to 138 fatalities. Throughout the year, record-high rainfall and flash flooding across states such as California, Illinois, Kentucky, Vermont and New York damaged hundreds of properties, costing more than $6 billion in losses and causing over 30 fatalities. During the 2023 Atlantic hurricane season, at least 18 named storms produced more than $30 billion in losses, leading to over a dozen fatalities.
Many weather experts believe severe storms, extreme temperatures, wildfires and flooding are the new norm. As these catastrophes become more frequent, the insurance industry will need to adopt innovative solutions to keep up with weather-related losses. Moving forward, businesses can expect to encounter additional emphasis on weather readiness from carriers.
While the insurance marketplace is beyond your control; with expertise and knowledge from your insurance advisor, you can manage the impact to your business. Contact one of our trusted advisors today.