Social Inflation - What is it and Why use of data & analytics should be a critical element in Insurance carrier's strategy to tackle it

When Travelers CEO and Chairman Alan Schnitzer talked about 'Social Inflation' being a 'Risk Factor' in multiple lines, a lot of people in the industry paid attention.

I imagined 'Social Inflation' must have something to do with the rising impact of social media on mental health. I was wrong. It has to do with increasingly hostile legal environment that Insurance carriers are facing. This manifests in the form of much larger vedicts, liberal treatment of claims by boards, more aggresive plaintiff bars, etc. This article summarizes the trend nicely. Lets look at some industry anecdata:

• % of claims with attorneys increased by 5 points in 2018, 19 for Comm Auto, GL book of Travelers
• 94% increase in AOB lawsuits in the state of Florida in last 5 years
• Probability of 'Nuclear Verdicts' (> 10 MM) is a real trend. In 2018 alone, Top 100 verdicts ranged from 22 MM to 4.6 Bn

And so on.

It is also a pattern that we see emerging at a number of different P&C Insurance analytics engagemens. Lets try to understand what is driving these macro trends:

• Litigation Funding: Propelled by easy capital availability, a new class of plaintiff attorney funding model has emerged in last 10 years. Essentially, its providing funding for legal expenses to plaintiff attorneys in exchange for a portion of the judgment or settlement. As one can imagine, its good in a sense that it levels the playing field against large, well funded corporations but the unintended consequences (for Insurance companies) is exponential increase in attorney representation and pursuit of aggresive legal strategies. Some estimates point that approximately 9 Bn has been committed to this 'industry'
• Rising angst against big corporations: this one needs no explanation
• Large verdicts being driven by general social pessimism and jury sentiments. This is a great read on how some patterns are being observed in jury behavior, especially in personal injury and liability claims

What can Insurers do to manage this growing challenge? Old adage, being forewarned is forearmed, applies perfectly to carriers when they design the claims litigation strategies - Pre-suit and Post-suit.

Enter Data & Analytics (or Machine Learning / AI if you prefer that).

Use of Analytics from First Notification of Loss till the claims is paid off, is now a norm rather than a competitive edge. All large carriers invest heavily in usecases such as fraud detection, severity based claim assigment, automatic loss estimation, recovery optimization, etc. However, given the complex nature of how litigated claims are handled, only a few top US carriers are able to weave these capabilities effectively into the business processes. Insurance carriers who successfully adopt the mindset of using analytics to drive business process change in claims litigation space will stay ahead of this massive threat.

There are two unmistakable trends that carriers need to leverage:

1. Aggresive use of information sitting in claims & policy systems (structured attributes, adjuster notes) to develop signals around plaintiff attorney behavior. These signals then need to be deployed within claims operations to encourage early case assessment and litigation prevention
2. Use increasingly clean and comprehensive sources of external litigation information (from State courts where most Insurance litigation lies) to inform your litigation strategy. This includes past verdicts information by venues, judges, attorney firms, case types, etc. A thoughtful use of this information can help claim adjuster and defense attorneys devise the litigation strategy to avoid worst outcomes. There are multiple firms providing research tools which are based on these. Our recommendation, however, is for carriers to ingest the information, merge it with internal claims data and develop models and tools providing comprehensive view

Claims data within Insurance companies is being increasingly seen as a key asset, not a byproduct of the claims process. However, the path to utilizing internal and external sources of data to drive business outcomes is a long and ardous one. At EXL Insurance Analytics, we partner with many leading Insurers on this journey. We bring a combination of capabilities to these engagements - ability to handle big data, develop advanced analytics solutions and a third key ingredient - knowledge of 'what, why and how to deploy' in claims business processes. We are very excited to see the results of our partnerships with clients yielding great business outcomes.