Episode 9: A Guide to Social Inflation: Part 1 - Defining the Drivers Transcript
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Wesley Todd [00:07]: This is the litigation management podcast. And I’m your host, the CEO of CaseGlide, Wesley Todd. The litigation management podcast is where I interview some of the most successful and influential people in around litigation management space. And I’m going for full court heats- not lay up. So I’m going for, and I don’t want to know the latest case law or the latest litigation guideline update. We’re looking at like, what are the huge things impacting you, the adjuster, the claims executive, the attorney, all those things around our industry that impact us. I have great guest today, there is no exception. Today on the LM pod, I have Taylor Smith. For those of you that don’t know, Taylor is the founder and CEO of Suite 200 Solutions. And I’m about to kick it to Taylor to ask him more about his background. We’re going to talk about social inflation today and answer some of the questions around it, get Taylor’s insights from just a couple of hours looking into the topic, and talking with a few of the more influential people that are having to deal with this. So I’m excited about this one. Taylor, welcome to the pod. Tell me, tell the audience about your background?
Taylor Smith [01:28]: Well, thanks. Well, I mean, first of all, it’s fantastic to be here. You’ve had such fantastic guests on this series that I’m really flattered to be here. So thank you for that. And I don’t know the latest case law. And I’m not up to date on the latest billing guidelines and litigation guidelines. So there’s probably good that you’re not focused there. I started my career as a claims professional, and I worked for CNA. I worked for NorCal mutual, I worked for MMI companies, which was an organization purchased by the travelers many years ago. And I liked everything I did in the claims world, but I was fascinated by technology. And I was sort of pulled away by some influential mentors into the technology world. I spent a number of years advancing litigation management technology among others, socializing new ideas, thinking of different ways that law firm community, can work with the claims community, and so forth, all to the benefit of the policyholder, or the interested parties and I enjoyed that very much. I started Suite 200 Solutions in 2009. And it was really an effort to do doing interesting things, have enjoyed every minute of it. Our organization is comprised now of essentially a semi-retired or retired Chief Claim Officers and Chief Litigation Officers. And so we consult to all constituencies in the marketplace, Law Firms, claims organizations, self-insurance, and especially to service and technology providers who are bringing new and innovative ideas to the marketplace. So that’s a little bit about my background. I serve as the chancellor in the CLM Litigation Management Institute. Now, I serve as a Dean in the School of Litigation Management, which is part of the CLM claims college. And as a result, I’m usually surrounded by people that are much, much smarter than I am. But it gives me a very good insight into what’s new and current in the litigation management of Reno. So is that helpful to you as a background?
Wesley Todd [03:39]: That’s perfect. You have a great group of people and Suite 200 Solutions, I know you do so much more than even what you described. But I’d heavily recommend to anybody that’s in and around this space to check that out. Check out that board and look at all the insights that you can get. I know we’ve worked with you it’s been very successful. We a case glide have been very successful with Suite 200. So I think everybody gets it. Now you’ve seen them the market emerge over the over the years and get to where we’re at and bring a lot to the table for this really key discussion. That’s real macro about the whole industry. So thank you, Taylor, for joining. I want to start it off with a real simple question, although it’s what I would call a challenging answer. And I really want to know, what is social inflation? You know, there’s a lot to talk about. There’s a lot of articles about it. But does everyone really know what it is? So I’d like you to define it for the group tell us what we should be thinking about it. You know, as its structure, what is it and whatever else you’d think is key for us to consider to get this conversation kicked off.
Taylor Smith [04:54]: Yeah. Now, that’s a good question. And it is actually a little bit of a challenging answer. I think only because it is in his become, at least in my view, it’s become a very important buzzword in the industry. And I think everyone from a senior claim officer right down to a frontline adjuster is encountering the word. It’s being used in their organizations. It’s being written in the literature. So at a very high level, it is a term that has been around for a long time. I mean, in my own experience, we first I first began seeing this get discussed with greater seriousness probably in sort of the 2015 range, maybe the last five years. And I think it’s reached sort of a feverish pitch right now, in terms of how frequently the term is used and discussed. But it’s been a term it’s been around since the 1970s. Many people know that Warren Buffett used it in a letter to his investors in to 1977, I believe, and so it’s been around for a long time. The general definition of a paraphrase down to someone with my limited IQ, is that there are really two components to it. And the first is that social inflation is used to describe pressures, societal pressures that are getting things covered under the insurance contract that weren’t intended to be covered in the first place. So these are societal pressures, juries, others, who are essentially transferring risk to insurance policies. And I’ll talk a little bit about what that means, I think is the term is more frequently used today. It’s used really to talk about runaway case values. Not just nuclear verdicts and jury awards. But the pressures of all these things driving up settlement values, compensation values, what was previously compensable at ‘x’ is in today’s world, potentially compensable and why, and that creates uncertainty for underwriters. It creates challenges for claims organizations that’s generally how it’s referred. I will say that sort of, you know, when you think about the first component of that getting things covered that weren’t intended to be covered, a very simple and often talked about, example, is the American law Institute’s restatement of the law on liability insurance and this is a restatement. It’s a guide. It’s a guide set of guiding principles for judges, lawyers, people in the legal community that was started, I think, either in 2010, or 2013. It was passed, finalized in 2018 and it does a lot of things. It provides guidance that the insurance industry feels is unfavorable to it. And to the point that two states I, Kentucky and Indiana, I think, actually passed resolutions, really rejecting this restatement. That’s the component of it, whether it’s retro actively changing statutes of limitations or enhancing coverage for things that previously weren’t defined as covered. That’s one whole component than the other is, as I mentioned, sort of this concept of increased values. There are four reports mentioned before your next question to me that I would encourage anyone listening to this to read. So it gives sort of a 0 to 60 understanding of social inflation, and they’re relatively recent, and they’re all very good. And I like them, because I think they’re a good primer for anybody that wants to understand this topic seriously. The first is the report from the insurance Research Council in 2020, on social inflation, and I think it can be Googled relatively easily and found with some ease. The second is that, Sedgwick did a very interesting report about social inflation in 2020. That was done by Alison Daly and Chris Mandel. And I think it’s very good because it serves as sort of a compilation of industry literature. The third is a 2019 milliman report on the general liability line, and it talks about deteriorating trends and increased case values and I think that’s valuable. And then in 2018, the Casualty Actuarial Society, put out a report. So those are the four that I think are particularly helpful for people that are new to the topic or want to know more about it.
Wesley Todd [09:41]: Super helpful. I mean, you definitely brought it down to something digestible, right. It’s about frequency and severity and frequency would be expanded through expanded coverage, like you said. I’m sure every adjuster and attorney has seen this in their careers. It just seems like they may have had a 50% chance of winning something, and it’s down to like a 25% chance 10 years later on issues before the court or on policy language or anything, or even civil procedure, sometimes… or summary judgments, anything I mean it’s…
Taylor Smith [10:19]: Exactly, exactly correct.
Wesley Todd [10:21]: And then severity is like you said, runaway juries, which is the one that probably makes the news a little bit more, and then the resources are fantastic, I agree. Those are the four from your resources, I’d be great if we had some real hard data around it. That from companies like ours and other companies getting together and compiling this so that we could have some real hard and fast data around it. But those are great resources, the story is pretty clear in there. So now, I think that’s perfect setup for and then everybody can go do their own homework on it with those four reports. So Taylor, the obvious question then is, well, what is causing social inflation now? Why is it now in the news? Why is it something that everybody’s bringing up in every earnings call? You know, what changed all of a sudden, these past few years we’re hearing about it all together? I mean, go ahead.
Taylor Smith [11:27]: Well, I do. I mean, that looking at those four reports, and reading blogs, and putting everything together, you see some common themes that are often repeated. And those clearly I think, are in the list of drivers. If we’re going to talk about a list of drivers. I personally sort of pegged it at 10 different things, and I’ll let me just list off the 10, and then I’ll talk in greater detail about some of the underlying things that I think are relevant to claims professionals managing cases in this environment. So we’ve alluded to some things in the definition itself. So there have been changes in the appropriateness of filing lawsuits in the first place, people are more willing to do that. There have been changes in expectations about compensation. You know, we all watch TV. You know, look, plaintiff firm ads now highlight, people who stand up and say, this is the amount of money I got, and we all put ourselves in their shoes and those are big numbers. And so those numbers are being driven up. I’ve sort of referenced legislative actions to extend the repeal statutes of limitations sexual abuse. Limited statutes of limitations are a good example. Those are being extended retroactively in many areas. Increased attorney advertising, increased attorney involvement in cases those are probably the top five commonly discussed is the growth of third party funding, a plaintiff lawsuits, and we can talk a little bit more about that as well. Clearly higher jury awards coming out of the back is also a driver of the whole concept, because people hear about it and incorporate that. There are now more class action lawsuits than there were previously, and so those are the top eight. Interesting… talks about the fact that plaintiff attorneys are now better at incorporating allegations of severe injury, like traumatic brain injury and things like that. And that’s another driver and then sometimes discussed mentioned in the Sedgwick report, but in others as well, is the fact that we now have 15% more lawyers in the United States per million population than we had in 2007. So 15% doesn’t sound like a lot, but in fact, it’s hundreds of 1000s of lawyers, more lawyers now. And that’s considered a driver too. So those are the top 10. I mean, what I think interests me is that when you dig down, beneath those 10 things, you really see changes in societal attitudes, and so let me use a couple examples. Income inequality, 6 out of 10 Americans now believe that income inequality in our country is significant. You might think about this as a political issue or a societal issue, but it changes how people feel we should assign responsibility for making things better, because 6 out of 10 Americans believe social inequality, it’s pretty bad. It’s significant in our country, 6 out of 10 Americans also believe that big corporations should play a very important role and fixing that. And so those two things together, change or create a societal change. You mix that together with a few Gallup Poll findings from 2019. And you can see how this snowballs a little bit. So for example, in 2019 Gallup has measured anger levels in the United States forever. In 2019, they found that anger levels among the people they polled were the highest they’ve been in more than a decade. And so what that means is, one out of five Americans is really angry during some part of their day, like really, really angry. And there have been many studies that show when you’re really angry, you’re more likely to file a lawsuit. So that’s a relevant finding. Mix that together with a third sort of societal belief, which is, in 2019, Gallup found that big corporations have such a low area of competence. People have such low levels of competence in big corporations that were the only three institutions that rank lower than big corporations, and they were newspapers, TV news, and Congress. And so now you’ve got a thing where you’ve got angry people, there’s wealth inequality, that people sort of genuinely feel exists, and they don’t like corporations. And they feel corporations should bear some responsibility for fixing those things. There was a society done in 2009 by American jury centers that talked about a sense of entitlement, they studied that. And they found maybe not unsurprisingly, that participants in the 18 to 39 age range were significantly more in felt more entitled, than people who were older. Those people now 10 years on are now older, there seems to be some belief that that sense of entitlement has not gone away as they’ve aged. And in fact that people in general in society feel more entitled, we all have a sense of that, from how we watch the news and those kinds of things, then add in attorney advertising. I will tell you that if you do studies on attorney advertising, obviously, it’s the highest it’s ever been. As long as soon as they were allowed to advertise, we were inundated with Attorney advertisements and that’s become very sophisticated. At the same time, the use of the internet allows for a much broader reach with those ads with that advertising. If you look at the highest paid key words, in Google Search, like the highest paid, you find frequent examples of things like Los Angeles attorney, or auto accident attorney, those are paid for dearly, because they produce results to get people to reach out to their attorney. And it all adds to this mix in the other context of this. I just read a very interesting blog or article put together by travelers that talked about how attorney tactics are changing as well. And we’ll talk a little bit more about that. But some examples of that are the increased use of policy limit demands, venue shopping, and better use of social media to find and vet the right jurors for jury trials. And those three tactics, I mentioned before the increased use of sort of building medical costs and the increased allegations around severe injuries like, TBI, is that is considered to be a very important thing. And then lastly, I previously mentioned, third party funding that is considered by many to be really a watershed, because third party funding fundamentally changes incentives in the litigation management system as we knew it. As we knew it, plaintiffs were always incented to some level to some degree to reach a reasonable resolution of the file the case the dispute, in return for getting their money more quickly. Now, with third party funding there, it’s changed the economics of things, plaintiff’s counsel have more money to work with, the desire to resolve things more quickly may be diminished, because there are third parties who have looked at the probability of what this case will produce and how likely it is to produce that result. And that third party funding was described by “The New York Times” in 2018, I think, as a $10 billion industry, and that’s nothing to sneeze add. There are some, I think there are I have read articles that have said, it’s not quite that big. But there’s a lot of money in third party funding of these lawsuits. So those are seven or eight major factors that underscored the drivers. And that, in my view is what’s pushing this entire challenge forward for the insurance claims defense industry.
Wesley Todd [20:26]: Oh, it is a very helpful overview. There were a few things in there that I’ve might have left out that I’m glad that you brought up. You know, first of all, when I was practicing we represent a corporations. Yeah, it’s a big disadvantage to have an empty chair versus somebody that was injured. And now look, that’s been the same, that that’s always been the case. So it’s nothing new, but it is a huge disadvantage. Well, you talked about the jury makeup, that there’s just a different set of calculations being made by the jury than there were 10, 20 years ago. I mean, that’s huge. I believe that is a big piece. And then to kind of wrap up what you were saying. The other big piece of it is, well, actually, there’s two more big pieces. Now just throw in a couple of comments from my own experience. The certainly, the financial piece plays a big role, whether it’s litigation funding, or the changing of laws, like you mentioned a few to further incentivize litigation, like prevailing party attorney fees or the statute limitations. And then you talk about an extra, 50% of lawyers, I hadn’t heard that stat. But my theory is that in particular certain areas of litigation, the limiting factor is the amount of attorney so certain things may or may not injuries may or may not happen certain thing catastrophes may or may not happen. But if there’s more attorney, there’s gonna be more litigation. And finally, the discussion around finance, and in particular, there’s just a lot of money being printed in this country, and there’s a lot of money looking for places to go. And to your point, to put $10 billion into this litigation funding, they return 7%, which I think so far, they’ve returned more, they won’t care if they lose a few years. So this thing will explode. It’s just amazing. Because you wonder normally, like with something like this, you would expect there to be like one or two, just huge things that change everything, the way you describe it, is maybe the first time it’s kind of hit me. There’s like 10 different things going on, all important. I wonder if this is one of those rare situations where like all 10 things combined, and hey, maybe this is only incremental right now. But there’s really not anything getting in the way of this being transformational. And this means some big thing, and particularly when you lay out all 10 drivers, and the fact that I can all go in the same direction, one’s just really helpful, hopefully, everybody was taking notes, I know that I’m just going to be asking you for the notes after.
Taylor Smith [23:33]: Well, I mean, we should talk about the consequences of what these drivers like what it’s really producing. I mean, I do think that to your point big societal changes, or slow societal changes come about as a result of multiple factors, not a single factor. And I think, you know, to that degree, you could argue this as a perfect storm of things coming together, the way we feel about ourselves as a society, the way we look to others to compensate us or maybe we feel entitled or just angry, and maybe we’re ticked off at big companies, or whatever it is, I mean, the reptile theory. And for those of who don’t know, or newer participants in the industry, the reptile theory was sort of introduced in 2009. And the reptile theory is this idea that if you can get jurors or impartial viewers of a case, to focus on two things, you have a chance of getting a much larger award. And those two things are that something someone else did was a danger to the community. There’s a safety violation. The company should have better managed its truck drivers, whatever it might be. You have to get people to believe that is a danger to the community as a whole. And secondly, you’ve got to make jurors feel like they have the power to improve prove community safety. If you can do that you elevate it from being about this case to performing a societal good, you either punish the big company, or by punishing them you make society, our whole community better. And so that’s been a little bit of a factor too. Because in the background, I mean, that’s sort of, you cannot talk about societal changes I think, and social inflation without sort of, at least mentioning nuclear verdicts. I mean, they because they’re, they’re interrelated in a very important way. And to that degree, you’re right to say that there are a lot of things coming together at the same time.
Wesley Todd [25:42]: So I hear differing opinions on like, on whether that’s why I kind of brought up the incremental versus transformational. I think you have good arguments on both sides. Hey, this isn’t a big deal, this is a big deal. From your perspective, how bad is it now?
Taylor Smith [25:59]: Well, I mean, I’m quick to say I think most people will acknowledge that a lot of discussion about social inflation has been anecdotal. And I think the industry is just now getting to the point that it’s beginning to look at data points. And for a bunch of reasons we can talk about the industry is challenged in talking about data points, because how what one organization calls this case type and other organization calls it something else and so aggregate information has been challenging. But on the other hand, the insurance industry is sort of the law of large numbers, and there’s no question, but that costs are rising and litigation and outcomes are worsening in litigation, just about everybody agrees with that. Not everybody, but just about everybody and the people that look at the law of large numbers all the time. The insurance Research Council’s report, I think is illustrative of this. Most articles about it talk about very specific number of big verdicts, things like that, I think more work needs to be done on non-verdict, general settlement values, but most people seem to agree. So let me give you a few factoids sort of USA style, there seems to be some general agreement that the most effective lines of business and I’ll read a few of these to you. Commercial Auto, number one, the previous trends for loss ratios and Commercial Auto, were going down in 2013, they started to go up looks like a hockey puck, at this point. I made a hockey stick at this point, it’s going it’s just up, Commercial Auto, professional liability, product liability, and DNR. And what most people seem to feel is that these, those four very specific lines of risk, that the increased values there are just contributing to increased values and other lines of business, including personal auto, for example, which is now sort of felt to be experiencing pressures to drive this up. So here are some big numbers: 2.3% of our GDP in the USA, is spent in compensation and legal costs. It’s about $429 billion a year, out less than 60% of that makes it to the injured party. Everything else is sucked off and costs, attorney’s fees and so forth. The biggest area of this spend is commercial and general liability. It’s about 58%, 37% in auto, 4% in medical malpractice. So those are three areas that you can sort of put together. Florida, as you will know, has the highest litigation costs as a percentage of GDP is 3.6%. So if the national average is 2.3, Florida is that 3.6. So a big, big, big difference there. Florida, California, New York and New Jersey all have costs per household for litigation, compensation, legal costs in excess of 4k. So those four states about 4000 per household, the national average or other states 2000, talks about double and that’s why when you’re talking with claims professional, they talk about what they’re managing in terms of litigation and those four states, Florida, California, New York, New Jersey. I’m quick to say that there are good things that can happen. I mean, Florida is no longer listed on the official list of judicial hellholes, where it was for many years, there are other states now that have superseded it and that’s because of legislative reforms in the state of Florida, which have increased certainty doesn’t mean the problem has gone away, but it’s no longer listed on the official list of judicial hellholes, and that’s in the top five anyway and that should give us all hope. If you look at, I’ll give you four other very quick, five or six other really quick little bullet points on the consequences of what this has meant. There’s more attorney involvement in cases, than there has been previously. So big Auto Claims used to be 47% of claims nationally in 2002. It’s now 52%, well in 2017, so that that is a 5% increase over, you know, 10 years or so, or 15 years. So that may not seem too big. But think about this, the whole concept of personal injury protection PIP claims was designed as a no-fault system, so that lawyers wouldn’t be required. That’s now at 39% attorney repped. Okay, that’s almost four out of 10 claims, PIP claims has an attorney involved. And in Florida, it’s 55%, more than half. And that’s as I said, all in a line of business designed to avoid attorney involvement entirely. Auto liability injury claims grew 5.5% between 2014 and 2019. That’s three times the rate of inflation. The 2008 median Jury Award for commercial vehicle fatalities was 1.5 million in 2008. And in 2018, this it increased 367% to 5.5 million. We mentioned nuclear verdicts, the common definition of a nuclear verdict is anything over $10 million people will disagree about what that is. But in 2015, the largest verdict, the United States was 844 million, a year later, it was 8 billion. That is a case that got reduced to like 6.7 million or something like that. I mean, I got reduced heavily. But the second largest verdict that year, a year later was 2 billion. So those kinds of numbers scare people, they scare claims people, they scare underwriters, they excite plaintiffs and contribute to settlement values overall. And the easiest way is if you look at the Milliman report, no matter whether you’re looking at individual settlements, or you’re looking at these big verdicts, it is loss ratio deterioration, that’s the easiest way to describe it. So anyway, those are some of the factoids and numbers that come out in terms of real numbers that claims people have to deal with.
Wesley Todd [32:56]: Yeah. I think, you know what, it sounds bad. But then you combine like the first or, the last two things we talked about some of the drivers and then how bad it is. It seems like it could be a lot worse and then those are. Well, that was great though, I’m going to tell you. Thank you, because I’ve done all the research on all the social inflation stuff. I’m a nerd, and I’ve never seen all that information in one spot. So for those you that are listening that got to this point, you’re welcome.