The increasingly litigious environment, driven by social inflation pressure, and concerns around litigation funding coming to Europe are likely to be topics for conversation for those at the Baden-Baden reinsurance meet this week.
As some of the biggest contributors to the current liability crisis, several critical issues are expected to take centre stage, like the persistent problem of US legal system abuse and the prevalence of nuclear verdicts driving uncertainty.
While the US is the focus, social inflation has already spread to Europe, with one source saying it has been on the radar for about four years now and is leading to an increase in liability claims and higher settlement amounts.
“There is a sentiment that it’s time to make big companies pay and that people can try their luck,” one source said.
A recent Insurance Insider virtual Monte Carlo Rendez-Vous roundtable revealed concern is growing among casualty writers over reserving, social inflation and legal-system abuse.
These factors all contribute to a complex and demanding renewal environment, where balancing competitive pricing with the need for sufficient risk management will be crucial.
Contributing factors to the risks of social inflation include the increasing gap between rich and poor, a high-inflation environment – aggravated in the UK by the Brexit – and the political changes being seen this year.
While social inflation has yet to be factored heavily in European renewals, one source said that in Latin American countries such as Mexico it is in being taken into consideration.
In addition, as this publication reported earlier this year, the general liability market could face a climb in rates and reducing limits in the wake of more frequent third-party litigation financing (TPLF) coming to Europe.
TPLF is the mechanism by which a third-party vehicle, such as a PE firm or hedge fund, can provide capital to a party in a legal dispute, in return for a percentage of the funds won.
US impact
Litigation financing has been a factor in social inflation in the US, and US insurers have seen adverse reserve developments making liability classes difficult to price.
This impact on claims could lead to rising rates and force leading carriers to respond by reducing limits, particularly for larger clients, and reassessing attachments.
Litigation costs have driven up US liability claims by 57% over the past decade, according to Swiss Re Institute’s Sigma report. Further, the institute estimated that “social inflation” contributed around 7 points of liability claims growth in the US last year.
While the US remains the “epicentre of social inflation”, the reinsurer said it is seeing similar trends emerge in Australia, the UK and Canada.
Based on Swiss Re's index analysis, social inflation contributed more than 10% of liability claims in the UK in 2023.
This was mainly due to US spillover effects, it added, which was reflected in claims that a company submits to its UK insurer after a large compensation award in a court case in the US.
Historically, with fewer class actions in the UK, TPLF has not been an issue but the Municipio de Mariana & Ors vs. BHP Group case is heading through the UK High Court later this month demonstrates the increased willingness of the English courts to handle large and complex multijurisdictional claims.
In the case of this dam collapse in the Brazil over 600,000 claimants are able to sue in the UK because the parent company BHP Group is domiciled in the UK.
Additionally, sources suggest Portugal and the Netherlands are seeing an increase in class action cases.
Sources suggest widespread education of the public of the impact of increasing legal awards and legal system abuse, which include higher insurance costs, financial strain on insurers, depletion of municipal resources, and disincentives for businesses to take risks, would be welcome.
There is hope, however, that social inflation across Europe will not be of the same magnitude as in the US.
More consumer protection, strict business regulation, different litigation systems and a more limited litigation funding environment in the UK and across Europe should help to mitigate the situation to some extent.