With all these complex and interrelated risks, it’s no surprise excess and surplus lines (E&S) and specialty markets are growing. Brokers and buyers want thoughtful, bespoke solutions to the risks their companies and clients are facing.
But the market isn’t without its challenges. Over the past few years, rates have been on the rise as soaring verdicts, cyber risks, third-party litigation funding and other trends influence the market.
“The risks we underwrite to are becoming increasingly complex and more interrelated. There are a lot of headwinds in terms of macroeconomic and geopolitical factors affecting the market,” said Kristin McMahon, senior vice president, Global Risk Solutions North America specialty claims for Liberty Mutual and Ironshore.
With WSIA’s annual meeting this month in San Diego, here are some key trends to watch.
1) Increased Jury Activity
At the beginning of the pandemic, courtrooms — like every other type of business, public or private — closed their doors to do their part to stop the spread of COVID-19. Trials were delayed, court dockets got backlogged and some court proceedings even occurred over Zoom.
In 2020, during COVID, Texas trial courts processed only 200 trials down from an annual run rate of 10,000 jury trials,” McMahon said.
Now that courts are getting back to normal, there is a backlog of cases to get through.
“We’re seeing judges use a number of management tools to get these cases moving more quickly to clear the backlog,” she said, “including adoption of a ‘rocket docket’ approach where judges are pushing plaintiffs and defendants to either settle the case or to try the matter on an expedited timetable.
One side effect of this phenomenon: some plaintiff’s attorneys are more willing to settle cases during pre-trial proceedings for reasonable sums opting to only try cases with juror appeal for which they could receive large jury awards.
“It’s the older pre-COVID cases accruing prejudgment interest where you have aggressive plaintiffs attorneys who believe in their high damages cases — they’re going to hold out and try it to a jury,” McMahon said.
2) Social Inflation and Litigation Funding
Kristin McMahon, senior vice president, Global Risk Solutions North America specialty claims, Liberty Mutual and Ironshore
Some of the challenges in today’s legal landscape were alive and well long before the pandemic, however. Increased jury verdicts and third-party litigation are both phenomena that started prior to COVID-19 and are continuing to grow.
Defined as awards over $10 million, nuclear verdicts are often the result of a juries’ responses to perceived corporate misconduct and their efforts to redress with large punitive damage awards.
As an example, each of 10 largest jury verdicts so far this year amount to nearly $100 million or more, with the largest being almost $7.5 billion.
“And while juries feel that awards are warranted, the dollar values we are seeing are significantly more than what we would have seen five years ago. Much of that increase is because of social inflation,” said McMahon.
As for third-party litigation funding, where companies invest and profit from litigation, “it is thriving,” McMahon said. In fact, the U.S. litigation finance industry has been growing explosively, reaching $12.4 billion in 2021.
“Unfortunately, when third-party litigation funders are involved, it’s often more expensive to resolve a claim and it also ma takes longer to resolve,” she continued.
A SPAC (short for special purpose acquisition company) is formed when an investor-backed management team is formed with the intention of acquiring a private company and taking it public. When the SPAC merges with the private company it intends to acquire, that process is called a de-SPAC.
While SPACs have been around for decades, during 2020 and 2021 SPAC activity grew exponentially, drawing the attention of underwriters. “During 2021 we saw a whopping 613 SPAC IPO transaction filings compared to the pre-COVID highwater mark of 59. It just exploded,” McMahon said.
Since then, SPAC formation has cooled. McMahon believes the waning enthusiasm for this business maneuver is due, in part, to the poor performance of the acquisition targets following the de-SPAC transaction. She reports that approximately two thirds of SPAC acquisition targets have experienced a loss in value.
As a result, the industry has seen an influx of securities class action (SCA) litigation after the target company becomes publicly traded and its share prices plummet. There have been approximately 50 SPAC related securities class action lawsuits filed since January 2021, including 19 through 2022. And approximately 40% of the cases so far have been filed after the defendant company’s share price declined following the publication of a short seller report, according to McMahon.
Cyber woes are top of mind for companies of all sizes. As ransomware and other attacks become commonplace, insureds are embracing increased security protocols and prepping for tough renewals on their cyber policies.
“There is no immunity against a cyber-attack. It doesn’t exist,” McMahon said.
“One hundred percent of businesses, regardless of their size and their industry, can be faced with a cyber incident. So it’s all about hygiene and making sure you have the right processes in place to respond.”
Cyber risks may be pervasive across sectors and lines of business, but smaller companies were especially at risk this year.
“Historically it was the larger accounts that seemed to be in the crosshairs,” McMahon said, “But for 2022, we are seeing small- and medium-sized businesses suffer ransomware events far more frequently than larger accounts.”
Small businesses serve as easy targets as they may not have the same level of sophistication in their security systems as larger companies.
“Small businesses typically lack the dedicated IT or security staff, leaving patch management in limbo and incident response plans unfinished,” McMahon said.
Getting Ahead of These Trends
Though rates are moderating, insureds will still want to get ahead of these trends in the hopes of preventing costly claims of their own.
Given that the majority of specialty claims loss activity is driven by litigation, businesses must work with their insurers to make sure they have proactive legal and settlement strategies in place.
Savvy insurers are refining their approaches to litigation management to meet the needs of the moment. Liberty Mutual has been taking advantage of virtual mock juries to understand whether or not potential defense themes will play well in front of jurors.
“We are using more mock jury trials than ever before and we’re doing it earlier in the life of a claim to test whether the defense themes are resonating with the jury pool,” McMahon said.
Partnering with a specialty insurance partner and broker with subject matter expertise on evolving risk and post claim mitigation strategies is vital for risk managers to prepare for and get ahead of these risks. All three parties should work closely together to understand the risks faced by a particular company, so they can mitigate exposures and prepare for any potential future claims. &