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Rising legal costs from more sympathetic courts bedevil underwriting models

Social inflation has been pushing up loss trends in commercial insurance and forcing companies to adjust underwriting and claims to keep pace with costs, according to a number of industry executives.

The phenomenon has been a talking point among P&C executives early in the third-quarter earnings season, with W. R. Berkley Corp.'s CEO saying the industry is now finally starting to awaken to the seriousness of the issue and Travelers Cos. Inc.'s top executive faulting the development for part of his company's year-over-year earnings decline.

The trend has been a "tax on society" from more litigation and more multimillion-dollar jury awards, forcing insurers to increase premium rates for several quarters consecutively, executives said during a panel discussion at the American Property Casualty Insurance Association's annual meeting.

"It's an extreme side of social inflation that we haven't seen before," said David Marra, chief underwriting officer at RenaissanceRe Holdings Ltd.

Social inflation's impact has fallen outside of insurers' actuarial mode because it is not as simple as mapping percentage increases in losses, according to Marra. Companies insuring commercial trucks at fault in an accident once considered $1 million a high-end legal award, but verdicts have recently been coming in as high as $10 million, Marra said.

Commercial auto is where the inflation trend hit first and hardest, but it has since spread to other liability lines, generally in excess loss insurance. The trend is behind seven years of continued adverse development in commercial lines, Marra said.

Higher costs are not always the result of bigger jury awards. Mike Mulray, chief underwriting officer at Everest Insurance, said legal actions against insurers and their clients that they previously would have expected to be thrown out of court are now finding traction in a more sympathetic legal system and advancing to more threatening stages of litigation.

Beyond noting elevating claims costs, the effects of social inflation have been difficult to quantify, but Mulray said it has compelled insurers to change their approaches when it comes to both underwriting and claims.

Some companies have been taking rate in the commercial lines space, but those increases are scarcely keeping up with loss trends, said Steve Levy, president and CEO of Munich Reinsurance America Inc.'s reinsurance division.

Loss trends for commercial liability have been particularly disturbing, Levy said. Primary general liability insurance has not yet sufficiently increased rates needed to cover losses amid what Levy called a "worsening tort environment."

Insurance companies cannot expect any relief from depressed investment returns from the once-promised dream of higher interest rates, Levy said.

"All of these factors suggest to me that we're going to see continued [commercial lines] rate increases ... for at least a couple of years, if not longer," he said.

Elevated losses could provide a silver lining for reinsurers, however, as Levy anticipates stable demand for reinsurance as cedants deal with concerns over earnings volatility.