A perceived retreat in social inflation amid the pandemic may prove to be transitory even as economic inflation has defied initial expectations to that effect.
U.S. property and casualty industry executives generally continue to take a cautious approach in their public commentary and business strategies to what might otherwise appear as signs of favorable frequency and severity trends related to insurance-related litigation in the casualty lines.
Dynamics related to COVID-19 rather than a broad-based drawdown by the plaintiffs' bar or a retreat in third-party litigation funding likely account for a significant portion of the retreat from alarmingly active 2018 and 2019 levels. We would expect that an eventual return to normalcy from a societal perspective will be accompanied by at least a partial reversal of the downturn in litigation volume observed during 2020 and 2021 in a scenario that would reward carriers' current conservatism.
An S&P Dow Jones Indices webinar on March 2 entitled, "What Surging Inflation Could Mean for Insurers," will delve into this topic in greater detail.
Various data points indicate a decline in the volume of new civil litigation at the same time the amount of time required to reach a resolution for existing cases has increased.
Although statistics released by the Administrative Office of the U.S. Courts show a surge in personal injury and product liability actions in 2020, the filing of federal civil actions fell by an estimated 13.9% when excluding more than 200,000 individual product liability cases linked to injuries allegedly sustained by U.S. military veterans from 3M Co.'s Dual-Ended Combat Arms Earplugs. Federal civil litigation filings, excluding an estimate of approximately 68,000 additional 3M complaints, increased by 2% in 2021, but remained 12.2% below 2019's level.
Caseload statistics for the federal district courts that traditionally see the highest volume of civil litigation also suggest a lengthening in the amount of time from filing to trial and disposition as well as increases in the percentage of civil litigation that has been pending for more than three years. Various published reports have highlighted long and growing backlogs in court systems at the individual state level as the effects of temporary COVID-19 courtroom closures and, in some instances, moratoriums on jury trials continue to resonate.
CNA Financial Corp. Chairman and CEO Dino Robusto said during a Feb. 7 conference call that the omicron variant forestalled the return of court activity to pre-pandemic levels. In the meantime, said interim CFO Lawrence Haefner, CNA is "cautious about recognizing any of that potential improvement, if it exists."
Münchener Rückversicherungs-Gesellschaft Aktiengesellschaft in München, better known as Munich Re, also signaled a similar approach in its U.S. liability business. It strengthened prior-year reserves in that business to provide "additional resilience in case of future catch-up effects" in court systems, according to a Feb. 23 presentation, even as the company acknowledged that new losses have been below internal expectations and results in previous years.
"The phenomenon of social inflation is definitely not over yet," said Munich Re CFO Christoph Jurecka during a Feb. 23 conference call.
"We do worry about an increase — kind of a pinch in the pipe — with claims ... that will come at some point in the future as court systems open back up," said Edward Rand, president and CEO of medical professional liability insurer ProAssurance Corp. during a Feb. 22 conference call.
ProAssurance recorded net favorable prior accident year reserve development of approximately $18.3 million in the fourth quarter of 2021 and $45.5 million for the full year as it observed the continuation of a decline in claims frequency that began in 2020. Rand said that "there's still a lot of unknowns" as to whether lower frequency will eventually be offset by higher severity. He also referenced a hypothesis that plaintiffs' lawyers "are being more selective on what they're bringing in," which would increase the likelihood of an indemnity payment.
In addition to being cautious with prior-year reserving, carriers also continue to push for rate increases in the lines prone to social inflation as they attempt to stay ahead of loss costs should they rise again in the near term.
Frequent and severity falls, but for how long?
Several macro-level data points offer a glimpse at just how significant the drop-off has been in categories of professional liability litigation that had bedeviled defendants and their insurers in years past.
NERA Economic Consulting's analysis of federal securities class-action litigation found that just 205 actions were filed in 2021 against NYSE- and NASDAQ-listed public companies, down from 321 in 2020, 420 in 2019, and the peak of 428 in 2018. A plunge in the number of merger-objection cases is most responsible for the overall drop in federal securities class-action litigation as NERA Economic Consulting found only 14 such filings in 2021 as compared with 103 in 2020, 162 in 2019 and 199 in 2018.
Not only has frequency dropped dramatically, so too has severity. NERA Economic Consulting put the aggregate amount of federal securities class-action settlements at $1.8 billion in 2021, with the average and median settlement amounts of $21 million and $8 million, respectively, when excluding merger-objection cases and settlements that award $0 to the underlying class. The average amount was the lowest observed by NERA Economic Consulting in at least 10 years, even before adjusting for inflation.
A somewhat similar dynamic appears to be present in the medical professional liability business, which is somewhat unique in the pandemic's depressive effect on elective procedures and routine care as well as a heightened sense of sympathy for COVID-19-weary medical professionals among the general public.
An analysis of the public use data file of the National Practitioner Data Bank, which tracks medical malpractice payments resulting from a written claim or judgment, finds a significant pullback in the number and dollar amount of adverse actions valued at $2 million or more during the past two years from heightened 2019 levels.
Between 2019 and 2021, the total number of adverse actions fell by 31.0%, and the number of $2 million-plus actions tumbled by 48.8%. Total dollar amounts paid, adjusted for inflation, tumbled during that two-year span by 42.1%, with the total value attributed to $2 million-plus actions down by 57.1%.
These statistics may not be directly applicable to individual carriers' books of business. And while they may be instructive as to the extent to which the environment has changed in a relatively short period of time, most carriers have smartly opted for a wait-and-see approach as they continue to evaluate whether they amount to an aberration or the start of a new normal.