Social inflation driving losses for US commercial general liability sector, says Best

The US commercial general liability insurance segment is seeing “unfavourable claims trends” driven by social inflation and other factors such as third-party litigation financing, according to AM Best. As a result, it has assigned a negative market outlook to the segment. Other negative factors include concerns about the potential impact of difficult macroeconomic conditions in the US on general liability losses, the increasing cost of reinsurance, with tighter contract terms and conditions, and the prospect of interest rates remaining lower than expected for longer than expected, said Best. It added that the negative outlook also takes into account, albeit to a lesser extent, the possibility that the Covid-19 pandemic could pressure growth opportunities and lead to heightened claims activity for general liability insurers. Partially offsetting the negative outlook is that insurers have responded to these and other pressures by seeking significant rate increases and tighter policy terms and conditions, allowing general liability insurers to continue to grow premiums. Another factor is the strong risk-adjusted capital positions of segment carriers. Social inflation is having a profound impact on claims trends, according to Best, with an increase in litigation. “These trends have become more pronounced recently due to the growing use of third-party litigation financing that allows for more lawsuits and the increase in severity as changing jury demographics and anti-corporate sentiment has resulted in more liberal awards to defendants. These issues have resulted in unexpected increases in loss costs and have also driven up defence containment costs. These include higher jury awards and broader interpretations of policy language,” said Best. It noted that during periods of accelerating social inflation, settlement costs also typically increase, as the prospect of higher jury awards influences settlement proposals and the growing number of claims with attorney involvement also drives up defence expenses, while increasingly plaintiff-friendly jurors are also driving higher awards. “Insurers make a large number of assumptions when establishing initial reserves for long-tail casualty lines, reflecting factors that can emerge over time and drive up claim costs. Even modest changes in assumptions about economic, medical, and social inflation, as well as other issues, will affect loss reserves and have an impact on multiple accident years. Differentiating the drivers of loss cost trends to determine the specific effect of social inflation isn’t possible,” said Best. The increase in third-party litigation financing further exacerbates the impact of social inflation on general liability insurers, as carriers are incentivised to settle claims out of court to avoid exposing themselves to unpredictable jury outcomes, said the ratings agency. It explained that to date, general liability coverage has not been a major target for Covid-19 claims. “However, the risk remains that claimants frustrated by being denied under other policy forms will turn toward broader general liability forms as a catch-all for damages suffered directly or indirectly from the pandemic,” it said. According to Best, increases in loss severity, caused in part by social inflation, have led to more claims breaching attachment points in excess casualty lines and to more full limits losses on primary and excess layers. “Many casualty underwriters are raising deductibles and attachment points on umbrella and excess casualty – in some cases, for the first time in decades. They are also seeking to be paid more for higher layers on casualty programmes that were less likely to be pierced in prior years but which are now more regularly being tapped as claim costs rise,” said Best. It added: “Most insurers indicate they are achieving rate increases in excess of long-term loss cost trends, which should help widen margins. However, in many cases, including general liability, these lines of business are still generally underpriced and further pricing improvement is needed before rates will be supportive of an adequate return on capital. The greater need for poorly-performing companies to continue to raise prices to consistently achieve improved underwriting results could lead to prolonged hard market conditions.”

Social inflation driving losses for US commercial general liability sector, says Best

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