US nuclear verdicts hit records and drive inflation to 7% in 2023, report says

US nuclear verdicts break records, with 27 lawsuits each awarding more than $100 million in damages in 2023, according to Swiss Re executives.

US welfare inflation rises to 7% in 2023 – a 20-year high – a situation that is driven by the costs of litigating mega-jury awards, Dr Jérôme Jean Haegeli, the group’s chief economist, told Swiss Re , who spoke during a conference. press briefing at this week’s reinsurance Rendez-Vous de Septembre in Monaco.

Joining Haegeli at the briefing to discuss a Swiss Re report on social inflation and litigation trends was Gianfranco Lot, director of underwriting, property and casualty reinsurance.

“Social inflation is also super expensive for consumers, corporations and insurance companies,” Haegeli said, noting that social inflation now overtakes economic inflation as the main driver of claims, leading to underwriting losses, higher premiums and underwriting capacity reduced. (Swiss Re defines welfare inflation as an increase in the severity of liability claims beyond that explained by economic factors.)

Related: RAND Study Eyes Impact of Legal System Abuse and Social Inflation

“U.S. commercial casualty insurance losses have grown at an average annual rate of 11% over the past five years, reaching $143 billion in 2023,” said sigma’s report, titled “Litigation Costs Drive Claims Inflation: indexing debt loss trends”.

To put that number in context, total U.S. claims were 33 percent higher than last year’s global insured losses from natural catastrophes of $108 billion in 2023, the report said, noting that the current cycle of social inflation exists in the US since about 2015. (Other cycles of welfare inflation occurred in the mid-1980s and late 1990s. See chart below).

When insurers and reinsurers started making losses and saw these negative trends during the current cycle, they started to rewrite their books and reduce limits, which had an impact on the supply of insurance and reinsurance, Lot explained in the the press briefing.

The report noted that average limits purchased for liability towers (or stacked liability insurance programs) fell on average by nearly 25% in nominal terms and 46% in inflation-adjusted terms between 2014 and 2023, which was a period of increasing loss costs.

Lot pointed to industry sectors that have seen a sharp drop in injury limits over the past decade, such as the construction industry, which has seen limits drop by about 60 percent, manufacturing by 39 percent, and the chemical industry by 50 percent.

At the same time, insurers responded by raising premiums. “In the first half of 2024, US liability premium rate increases reaccelerated to 7% year-on-year, from 3-5% over the past six quarters, defying a broader deceleration in commercial insurance rates.” Swiss Re said in the report.

“Insurance rate increases have not offset rising loss costs, increasing combined rates for personal injury liability lines and producing cumulative underwriting losses of $43 billion between 2019 and 2023,” Haegeli and Lot said in their presentation. A Swiss Re representative explained by email that these personal injury claims include other liability, commercial auto liability and medical malpractice.

Related: Fixing welfare inflation: Insurers can’t be ahead, says Chubb’s Greenberg

Haegeli noted that the 7% increase in US welfare inflation in 2023 is “double what we’ve seen in the last 10 years, but it’s not reflected if you look at insurance rates.”

The report warned that welfare inflation could eventually lead to insolvency for insurers, reinsurers and their customers. “Persistent and priceless social inflation may ultimately impair the insurance industry’s ability to provide risk transfer, the lack of which causes significant disruption at local and national levels,” the authors said. “For example, one of the main causes of the collapse of the Australian insurer HIH in 2001 was the persistent underbooking of long queues, particularly due to an underestimation of the effects of social inflation.”

Haegeli said the trucking industry is one of the sectors most affected by mega verdicts and as a result could be at risk of insolvency if it cannot buy adequate insurance.

“If you don’t have the ability to ensure the right price for the insured, then the real economy will always be more exposed to bankruptcy,” he said during the press conference. “So it’s not just the cost of insurance that matters here. If (insurance is) less available because the price is not right, then you expose companies to more insolvencies. So corporate America is also exposed.”

The report noted that some trucking companies are reducing excess coverage to manage costs as those coverages see rate increases of more than 75 percent.

“According to a 2023 report by the U.S. Chamber of Commerce Institute for Legal Reform, there are fewer insurers in the truck market today, and many of those that remain now offer reduced coverage,” the report added. “This means trucking companies are finding it increasingly difficult to secure adequate insurance and are forced to take on more risk than they have in the past.”

Factors of social inflation

The Swiss Re report attributed the extraordinary jury awards in the US mainly to personal injury cases, which can generate huge awards. “Determinants include the trial bar’s use of psychology-based strategies and litigation funding, as well as jurors’ attitudes toward issues such as social injustice and negative corporate sentiment.”

While the US is the epicenter of social inflation and is a predominantly American phenomenon, other countries such as Australia, Britain and Canada show signs of social inflation and share some of the driving forces, such as the expansion of mass tort, but these countries are “not equally exposed to runaway prizes,” the report said.

“Tort law in continental Europe differs significantly from the US, primarily because of the absence of juries and the influence of civil law traditions. In most European countries, tort cases are tried by professional judges rather than juries,” the report said, acknowledging, however, that class actions and litigation funding are growing rapidly in Europe.

The report went on to discuss the impact of third-party litigation funding (TPLF) – a process whereby commercial or consumer litigants and law firms fund their case and other legal costs with the help of third-party investors.

Related: Insurers, policyholders must work together to beat welfare inflation

“Litigation funders support claims in many areas relevant to insurers, such as trucking accidents, product liability, personal injury and medical liability claims. TPLF is correlated with higher awards, longer cases and higher legal expenses. Litigation funding is also inefficient, as more than half of awards remain in the professional litigation industry,” the report said.

“We expect US welfare inflation to continue for the foreseeable future and to remain largely an American phenomenon,” Swiss Re said in a commentary accompanying the report. “While economic inflation is falling, there are no signs of slowing social inflationary pressures. And in our view, the current rate of growth is unsustainable: we estimate that the impact on the US casualty business will outweigh the earnings benefit of higher interest rates within one to two years.”

Based on current trends, Swiss Re estimates that the impact of social inflation will outweigh the benefit of higher interest rates on casualty lines within one to two years.

It cited several steps that could help address the growing problem, such as “tort reform, regulating the use of third-party funding for litigation, particularly around disclosure rules, reducing risks at the corporate level and, in the industry insurance, using new technology and data analytics to improve underwriting discipline and claims management and more proactive insurance preparation of defense cases.”

The first significant wave (cycle) of runaway social inflation occurred during the US liability crisis of the 1980s, when changes in legislation and case law significantly expanded the scope of tort liability, the report explained. “Corporations and their insurers have been held retroactively liable for environmental damage and huge asbestos claims.”

Eventually, the market returned to equilibrium when tort reform measures slowed the rapid rise in liability costs as insurers and reinsurers moved to reinsure their asbestos and environmental risks. “Further focus on insurance and alternative risk transfer re-balanced the market.”