Social inflation is the primary explanation offered for the need to increase general liability and excess casualty premiums in the last two years. With social inflation, injured parties are more likely to blame corporate defendants for their injuries, juries are more likely to find corporations liable and to award “nuclear verdicts,” and the result is dramatically higher losses for casualty insurers and therefore a need for higher premiums.
Executive SummaryIf losses go up 50 percent, then premiums should go up 50 percent. This math is wrong, according to executives from Praedicat who warn about the missing D&O-GL clash piece in the formula coming from a securities litigation caboose tacked onto runaway mass tort trains. They also argue, however, that the social inflation environment is ripe with opportunity for insurance product innovators willing to offer high-limits products on a named-peril basis covering both D&O and general liability.
The solution to social inflation seems simple: If losses are higher by 50 percent, we need to increase premiums by at least 50 percent.
Meanwhile, over in the directors and officers liability insurance department, securities class actions have also been on the rise in recent years. Securities class actions are where investors sue corporate management and boards for failing to disclose material information that, if publicly known, would likely result in lower stock values. Securities class action filings in each of the years 2017-2019 were nearly double the 2015 tally and are at their highest level since 2001.
Several observers of the D&O landscape, such as Kevin LaCroix of RT ProExec (and author of the D&O Diary blog) and Columbia Law School professor John Coffee, have noted that the increased filings are largely due to the rise of a new kind of securities litigation that they call “event-driven securities litigation.” Historically, most securities litigation stemmed from accounting and related disclosure issues that led to earnings restatements resulting in stock price drops. In contrast, event-driven securities class actions involve operational risks that are initially not properly disclosed to investors, such as potential contamination of a product with a carcinogen. A later event, frequently a mass tort litigation, then reveals the issue and causes stock value to drop.