Ahead of this year’s WSIA conference in San Diego, here are some key trends affecting specialty lines.
Businesses are juggling a lot right now. First there was the COVID-19 pandemic, then global supply issues. An economic recession, labor market problems, rising inflation and other geopolitical headwinds soon followed.
With all of these complex and interrelated risks, it is no surprise that excess and surplus (E&S) lines and specialty markets are growing. Brokers and buyers want thoughtful, tailored solutions to the risks their businesses and clients face.
But the market is not without its challenges. Over the past few years, rates have risen as soaring verdicts, cyber risks, third-party litigation funding, and other trends influence the market.
“The risks we take on are becoming increasingly complex and 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, specializing in claims for Liberty Mutual and Ironshore.
With the WSIA annual meeting this month in San Diego, here are some key trends to watch.
1) Increased jury activity
At the start of the pandemic, courtrooms – like every other type of business, public or private – closed to do their part to stop the spread of COVID-19. Trials have been delayed, court filings have been delayed, and some court proceedings have even taken place on Zoom.
In 2020, during COVID, Texas trial courts dealt with only 200 trials down from an annual rate of 10,000 jury trial,” McMahon said.
Now that the courts are back to normal, there is a backlog of cases to resolve.
“WeI see judges using a number of management tools to move these cases forward more quickly to clear the backlog,” she said, “including the adoption of a ‘rocket folderapproach where judges push plaintiffs and defendants to settle the case or try the case on an expedited schedule.
A side effect of this phenomenon is that some plaintiffs’ attorneys are more willing to settle cases during pretrial proceedings for reasonable sums, choosing to try only jury appeal cases for which they could receive large jury rewards.
“These are the old pre-COVID cases racking up prejudgment interest where you have aggressive plaintiff attorneys who believe in their high damages cases — they’re going to hold their ground and try it in front of a jury,” McMahon said.
2) Social inflation and litigation funding
However, some of the challenges in the current legal landscape existed long before the pandemic. The increase in jury verdicts and third-party litigation are two phenomena that began before COVID-19 and continue to grow.
Defined as awards over $10 million, nuclear verdicts are often the result of a jury’s responses to a company’s perceived misconduct and their efforts to remedy it with large punitive damages.
For example, each of The 10 Biggest Jury Verdicts So Far This Year amount to nearly $100 million or more, the largest being nearly $7.5 billion.
“And while juries believe the awards are justified, the dollar values we’re seeing are significantly higher than what we would have seen five years ago. Much of this increase is due to social inflation,” McMahon said.
As for third-party litigation funding, where companies invest and profit from litigation, “it’s thriving,” McMahon said. In fact, the US litigation funding industry is experiencing explosive growth, reaching $12.4 billion in 2021.
“Unfortunately, when third-party funders are involved, it is often more expensive to resolve a claim and it can also take 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 SPAC merges with the private company it intends to acquire, this process is called de-SPAC.
While SPACs have been around for decades, in 2020 and 2021, SPAC activity has increased exponentially, attract the attention of subscribers. “In 2021 we have seen a huge 613 SPAC IPO Transaction Deposits compared to the pre-COVID high water mark of 59. It just exploded,” McMahon said.
Since then, the formation of SPAC has cooled off. McMahon believes that the waning enthusiasm for this business maneuver is due, in part, to the poor performance of acquisition targets following the de-SPAC transaction. She reports that about two-thirds of PSPC’s acquisition targets have been impaired.
As a result, the industry has seen an influx of securities class action (SCA) litigation after the target company went public and its stock price plummeted. There were approximately 50 PSPC-related securities class actions filed since January 2021, including 19 through 2022. And about 40% of the cases to date have been filed after the defendant company’s share price fell following the publication of a report on the sellers uncovered, according to McMahon.
Cyber misfortunes are at the heart of the concerns of companies of all sizes. As ransomware and other attacks become commonplace, policyholders adopt heightened security protocols and prepare for difficult renewals of their cyber policies.
“There is no immunity against a cyber attack. It doesn’t exist,” McMahon said.
“One hundred percent of businesses, regardless of size and industry, can experience a cyber incident. So it’s all about hygiene and making sure you have the right processes in place to respond.
Cyber risks can be pervasive across all sectors and industries, but small businesses were particularly at risk this year.
“Historically, these were the most important accounts that seemed to be in the crosshairs,” McMahon said, “But for 2022, we see that small and medium businesses experience ransomware events much more frequently than large accounts.
Small businesses are easy targets because they may not have the same level of sophistication in their security systems as large enterprises.
“Small businesses typically lack dedicated IT or security staff, leaving patch management in limbo and incident response plans unfinished,” McMahon said.
Get ahead of these trends
Although rates are moderating, policyholders will still want to get ahead of these trends in hopes of avoiding their own costly claims.
Since the majority of specialty claims activity is litigation-driven, companies should work with their insurers to ensure they have proactive legal and settlement strategies in place.
Savvy insurers are refining their approaches to dispute management to meet the needs of the moment. Liberty Mutual took advantage of mock virtual 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 doing them earlier in the life of a claim to test whether the themes of the defense resonate with the group of jurors,” McMahon said.
Partnering with a specialist insurance partner and broker with subject matter expertise on evolving risks and post-loss mitigation strategies is essential for risk managers to prepare for and anticipate these risks. All three parties must work closely together to understand the risks facing a particular business, so that they can mitigate exposures and prepare for any potential future claims. &