Sean Kevelighan, chief executive officer of the Insurance Information Institute, discusses how so-called nuclear verdicts, litigation funding and other legal-system abuse drive up claims costs and ultimately lead to higher premiums for consumers.
Q: How does legal system abuse impact the insurance companies and their policy holders?
A: Well, back years ago, I’ll go back three decades, I think litigation and insurance was a last resort, albeit it was always at cost. But now I think as a society, we’ve tended to look towards litigation more as a first step. It’s just growing worse and worse.
We have a lot of what we call billboard lawyers out there that are really trying to exploit audiences either through advertising in different ways. We’ve now got a large asset class, literally globally, multibillions of dollars being fed into what’s called third-party litigation funding, where third parties can actually invest in lawsuits and not have any stake in the claim, but even in some cases directing the claim to settle or not.
So, we’re seeing significant increases across the board.
We have some very problematic markets where we’ve seen more of it, Florida and Louisiana being two, but we’re beginning to see other markets that we’re paying close attention to because it is weighing on the industry. The losses are undeniable as much as we want to talk about natural catastrophe and climate risk as an issue for losses. Just in some of the statistics, you can see the losses that are coming out from certain catastrophes happening in certain states are significantly more. Hurricane Ian being a great example in Florida, where now that hurricane is the second-costliest in history.
Q: Is there anything the industry can or should do to curb legal system abuse?
A: Well, I think a little bit of what you talked about in terms of us as an industry knowing that this is a problem, needs to be translated to the broader community and society and helping them understand that this is a problem, insofar as it’s costing us. It’s beginning to resonate in some of those problematic markets, especially. I think now that consumers are going to get insurance in the state of Florida and seeing that on average they’re paying three times the national average.
That’s a question that they want an answer to. When they understand that, all of those billboards and things that they’re seeing in that state and all those free roofs that they’re seeing throughout the state, that there are costs to it, hopefully they’re going to understand that cause is really what’s driving up the cost.
And so we need to look at that cause. And I think they did in the state of Florida look at the cause. They’ve addressed some of those in reform. But again, it’s going to take time because as soon as the reform came through, those lawyers heard about it, and acted fast and within a couple days dumped a couple hundred thousand cases into the system in that time.
So, it’s still a big problem in the state of Florida. It’s still a big problem in Louisiana. But I think more and more that people are informed about it, and asking questions, I think, and people are beginning to listen. We’re seeing, doing a lot of media at Triple I, we are having interviews with members of the media about this more and more and discussing it, but also not just industry media. There was an article in Bloomberg Magazine, for example, talking about this issue and how it’s impacting insurance. So, making people more aware is one thing that we’re trying to do at Triple I and hoping that people understand that this is a problem that we all can play a role in.
Q: Weather forecasters are predicting an active 2024 hurricane season. How is that going to impact insurers?
A: Well, certainly this is something that insurers pay very close attention to because this is one of those headline types of storms that can come through, and as we’re seeing more and more of the population moving in harm’s way in the likes of Florida and Texas and the Gulf regions and along the Eastern seaboard. That can have a significant impact on the insurance industry.
So, with 22 predicted name storms this year, that is a very active season and that comes from our nonresident scholar, Dr. Phil Klotzbach. What that means is we’re at Triple I making sure that people understand to prepare. Making sure that they have the right type of insurance, making sure that they’re asking the right questions about their deductibles, because as far as we’re concerned, if you live along the Eastern seaboard and Gulf sea area, it’s going to happen. So you’ve got to prepare yourself and find ways to become more resilient.