6 ways claims industry can mitigate social inflation

Below are examples of how nuclear verdicts have recently impacted businesses, with portions of these verdicts often being paid directly by the business through their self-insured retention or deductible: 

• In 2021, a large, US-based retail and pharmaceutical corporation – was ordered to pay a $43 million verdict to a man who was robbed and shot in their parking lot. This case sets a precedent that, even though the victim presented his own gun, which triggered the assailant’s reaction, the victim was found minimally liable.
• In 2022, a large, US-based multinational chain of coffeehouses and roasteries – was ordered to pay $9 million after a pedestrian was hit at a low speed in the drive-through lane.⁶
• In December 2021, a Texas jury returned a verdict of $730 million to the family of a 73-year-old who died in a truck accident where the truck driver unsuccessfully attempted to haul a 197,000-pound submarine propeller across a narrow bridge, leading to the driver leaving his lane and striking the decedent. 

3. Societal trends  

According to Gallup’s latest Confidence in Institutions⁷  survey, the percentage of Americans expressing “very little confidence” in big business grew from 22% in 2000 to 32% in 2019, while those expressing “a great deal” of confidence decreased from 29% to 23%. 

Many claims professionals believe that society’s perception may be used as a scapegoat for defense firms to use to avoid trial on defendable cases or as an attempt to justify performance associated with inflated settlements.

Carriers must refocus their operation by providing data insights into the appropriate claim-level defend vs. settle strategy, which defense firms and attorneys to hire, more accurate and thorough case evaluations and negotiation strategies, and clearer enterprise accountability for successful litigated claim outcomes. 

So, where do carriers start? Cleansing, normalizing and understanding your data for effective prioritization and decision-making will enable a more simplified litigated claims transformation. There are six strategies that every claim organization can implement to mitigate the controllable portions of social inflation: 

1. Create a culture of proactively evaluating claims with potential for attorney representation and litigation.   

Traditionally, carriers will evaluate cases at an early stage, often well before mediation or settlement negotiations. However, with all the data at their disposal, evaluations should begin as soon as the claim is reported through combinations of claim characteristics and the use of leading metrics. Carriers should use their data to thoroughly understand and proactively identify higher risk claims and prioritize them with their highest-skilled litigated claim handling employees by developing answers to the following questions: 

• What are the key decision points in the evolution of a file, and how can we measure them with leading metrics?
• Are there certain combinations of jurisdictions, plaintiff firms or plaintiff profiles that are known to drive adverse outcomes? 
• What can you learn from your quality assurance (QA) and leakage results to understand characteristics of litigated claims that lead to controllable leakage? 
• Is there a need to elevate and refresh your current QA and leakage approach to be more rigorous? 
• What factors determine adjuster skill level and case allocation? 

2. Understand who your best-performing defense firms are and provide incentives for top performers to work with you.  

• Leverage the right metrics to assess performance, focusing on a balance between expenses and outcomes. For example, if one firm typically has favorable bill rates and expenses, but often unfavorable trial success, the indemnity costs likely outweigh the expense savings.    
• Through a contracted and rigorously managed counsel list, create leverage through incentives and accountability for quality outcomes.
• Leverage targeted QA to assess defense counsel effectiveness for another powerful metric to inform quality. 

3. Identify the right claims at the right time with the right expertise. 

Discontinue the outdated mandatory supervisory file touch points at arbitrary intervals (60, 90, 120 days). These claims touch point concepts are outdated in today’s data-rich environment. Instead, flag claims throughout their lifecycle for the opportunity to proactively intervene prior to adverse development at key decision points, such as: 

• The need to engage defense counsel
• The need to engage experts
• Decisions to settle or file a motion to dismiss

4. Avoid handing defense counsel a blank check.  

Following defense counsel assignment, proper collaboration and obtaining justification from counsel at key decision points (while being cognizant of the rules of professional conduct) is critical. There are several key decision points where expenses vs. value should be considered by claims professionals:  

• The need for defense counsel – Can the claim be managed without defense counsel involvement? 
• Defend vs. settle strategy – What is the anticipated settlement figure vs. continuing to defend, and will continued activities that are driving expense create value? 
• Potential dismissal – Is there opportunity to dismiss vs. incurring additional expenses? 
• Engagement of experts – What is the value of initiating and continuing to engage experts vs. the cost?

5. Remove the noise and focus where the skill is needed. 

De-emphasize activities that don’t matter as much to create capacity for adjusters and supervisors to focus on activities where their skills are needed throughout the claims process, which includes: 

• Defend vs. settle strategy – collaborating with defense counsel as new information comes in to evaluate continued defense, moving into settlement or filing for dismissal 
• Case evaluation – a thoroughly supported and well-documented range of settlement values 
• Negotiation strategy – developing a negotiation strategy based on strengths and weaknesses of the claim and executing on that strategy 
• Expense management – implementing budgets and revisiting budgets as the file develops 

With so many organizations focused on adding more activities to their adjusters’ plate, they should consider removing unnecessary tasks to increase the adoption rates of new initiatives and best employ the use of their adjusters’ skills. If adjusters and front-line supervisors do not have capacity to focus on these four key areas, insurers should question what their staff is doing that’s more important. This encompasses not only litigated, but also nonlitigated handlers since nonlitigated claims become litigated in often avoidable situations. 

6. Establish an internal feedback loop, training, accountability and collaboration. 

• There should be clear ownership of litigated claims outcomes, which includes ongoing action plans to improve such outcomes based on performance data. Often, there are too many parties involved, and cases that go sideways become a game of finger-pointing.
• Due to the evolving litigation environment, the aforementioned action plans should include ongoing targeted training based on performance to even the most experienced staff.  
• There should be organizational buy-in to focus on the litigated claims process. Claims leaders, C-suite, actuarial (pricing and reserving) and underwriting should collaborate often to identify litigation trends, difficult jurisdictions, etc. This will enable proactive understanding of where there’s emerging risk so that carriers can price properly and make more informed decisions before entering new markets. 

Based on these social inflation trends and controllable aspects, one critical question that carriers should be asking themselves is this: Do we have the right strategy to mitigate and survive this evolving era of social inflation, and where do we stand in the evolution of these six strategies?

Summary 

Claims organizations need to assess whether they have the right strategies to survive this evolving era of social inflation.