“Social Inflation,” “Nuclear Verdicts:” Definitions, Trends, Facts, and Figures

There are a couple of terms dominating the marketplace discussion in the insurance industry right now – Social Inflation and Nuclear Verdicts. These two terms represent a couple of defining phenomenon in the current hard market.

“Social Inflation” is the convergence of societal and legal trends resulting in increased litigation, broader definitions of ‘duty to care’, legal decisions trending in the plaintiffs’ favor, and resulting in larger jury awards, or “Nuclear Verdicts.”

“Nuclear Verdicts” refers to the mushrooming jury award trend resulting from states raising or eliminating caps on punitive damages (*not covered by insurance) and pain & suffering damages (which are covered by insurance). If there’s no statutory cap on damages, policy limits may be the next logical target for plaintiffs’ attorneys.

These two phenomenon are contributing to, if not leading, the current hardening of the market, specifically for general liability, commercial umbrella/excess and commercial auto. Directors & Officers premiums are also on the rise.

According to industry data, the industry’s 2019 loss ratio in general liability was 104%. That means for every $1.00 of premium carriers received, they paid out $1.04 in claims. This was the 6th straight year of underwriting losses in GL despite increasing premiums. The industry’s 2019 commercial auto loss ratio was 110%, again, despite increasing premiums for several years. The industry-average commercial auto loss ratio has been over 100% for eight consecutive years.

In the past several years, much has been written/discussed (probably including in Construction Times) on the effects of distracted driving and higher tech autos – backup cameras, sensors, etc., and those variables are unquestionably driving loss costs and subsequent premiums. But the more recent identification of Social Inflation and Nuclear Verdicts are quickly climbing the charts as the primary drivers of carrier rate decisions.

A 2014 accident involving a Texas trucking firm resulted in a 2018 $90M jury award in favor of the plaintiff against the trucking firm. Here’s the catch: in the incident, the plaintiff lost control of their vehicle, crossed over the median, and crashed into the firm’s truck. The plaintiff’s case alleged the truck was not equipped with proper safety features. You read that right – plaintiff crashed into defendant, sued the defendant, and was awarded a giant jury award. (I have a very similar first-hand experience right here in Oklahoma, thankfully at a much lower dollar amount.) But this Texas example shows how the anti-corporate sentiment that took root in the wake of the 2008 financial crisis has grown into a significant concern for businesses and carriers alike.

According the CIAB 3rd Quarter 2020 Market Index, commercial auto rates are trending like this:

• 4th Quarter 2019 – 10.5% | 1st Quarter 2020 – 9.6%
• 2nd Quarter 2020 – 9.6% | 3rd Quarter 2020 – 11.0%

But let’s focus on Commercial Umbrella and Excess. The market responses look like this:

• 4th Quarter 2019 – 13.6% | 1st Quarter 2020 – 17.3%
• 2nd Quarter 2020 – 20.0% | 3rd Quarter 2020 – 22.9%

Notice a trend?

Carriers were also surveyed regarding decreases in capacity. In other words, how likely were they to offer lower limits on umbrella or excess policies.

• 4th Quarter 2019 – 75% | 1st Quarter 2020 – 80%
• 2nd Quarter 2020 – 86% | 3rd Quarter 2020 – 90%

Again, another trend. Carriers aren’t just raising rates on each $1M of limits, they’re now simply refusing to offer limits over a certain threshold and/or avoiding the lower layers. I have a client that’s had a $15M umbrella limit for several years. Two years ago, the carrier notified us that they were only going to offer $10M so we had to go elsewhere for the other $5M. This year, they’ve notified us they’ll only “attach” at the 4th million. In other words, we have the underlying $1M in GL & auto, and we’ll have to have another policy cover the 2nd and 3rd million, and then they’ll attach after the 3rd million of coverage limits.

These are the unpleasant realities of the current marketplace, specifically for umbrella and excess coverage. What can you do about it? You can do what you’ve probably always done – make the best of a challenging situation. Educate, Navigate, Evaluate. Reach out to us and let us help you build your knowledge base in risk management tools and tactical planning. Let us be your guide to navigate the evolving marketplace with our network of resources and experience. Evaluate whatever risk management measures you utilize. Now is the time to objectively measure whether your current protocols are producing the desired results and painting you in the best possible light in the eyes of an increasingly critical marketplace. We don’t control this crazy market, but we’re here to help you make the best of it.