Litigation finance is the key to understanding the developing litigation environment in the US, Robert Reville, chief executive officer of risk modeller Praedicat, told Monte Carlo Today.

Mass torts are rising in the US in line with investment in litigation finance—and with better funding behind them, legal teams are mounting stronger, more persuasive cases that win over the juries. Reville expects this situation to continue—so the re/insurance industry needs to get to grips with the way liability is managed.

“People talk about a lot of issues when they discuss social inflation, but we find the term social inflation not particularly informative because it doesn’t tell you what will happen in the future, or what caused it—it’s as if overnight juries started doing crazy things and overnight it may go away,” he said.

“Litigation finance provides the numbers to understand what’s driving it, what role it’s playing and what it means for the future. By thinking about litigation finance you can get a sense of where the liability risk is heading for the US.”

The impact of litigation finance in the US should not be underestimated.

“Mass torts tend to sweep up more years of policy than is typical in liability, so they create more legacy issues, which means more reserve issues,” Reville said. “On top of this, inflation affects liability insurers more than property insurers because it’s a long tail risk—so a combination of litigation finance and inflation is creating a uniquely challenging liability environment in the US.”

Health problems

With litigation finance on the rise, so is mass litigation on everything from climate change to talc and opioids. One area of particular interest to Praedicat is PFAS—the “forever chemicals” associated with a range of health issues.

“In the context of liability insurance and legacy, the litigation over PFAS is reaching an all-time high and it has the potential to sweep up many years of exposure for liability insurers,” Reville said. “At Praedicat we think it’s the prime candidate that we’ve seen for the next asbestos.

“There are all kinds of ways this litigation is playing out—there are examples of cases where people exposed industrially to PFAS are bringing claims for illness and injuries and we estimate that for just one of those chemicals, PFOA, there will be $50 billion of losses, but it could be as much as $100 billion—and that’s just bodily injury, and just one chemical.”

Another issue is PFAS water contamination. With more PFAS bodily injury litigation to date, it’s easier to estimate the losses by drawing on historical data and how the situation is expected to develop. There have been fewer large scale water contamination litigations so far—but Reville notes that with the potential for it to cost well over $100 billion to clean up the US water supply, it’s likely that the chemical companies, manufacturers of the polluting products, and their insurers will find themselves on the hook.

“We believe that working to manage the exposure, both historical and ongoing, to PFAS is a top priority for the industry,” he said.

Also high on Praedicat’s radar is addictive software design litigation—cases brought against gaming and social media companies for their role in driving the rise in teenage suicide and depression.

“There have been 32 cases so far, and our expectation of the losses is $6.2 billion, but could be as much as $150 billion,” he said.

Emerging risk is a larger part of liability business than it has been for the last 20 years, and this presents challenges for an industry that has typically evaluated risks based on past events. Reville says it now has to shift to understanding current exposure.

“The shorthand is to go from experience-based to exposure-based business,” he said. “That’s going to require investigative models and it creates a lot of opportunity not only for new ways of doing business but for new products that help insurers manage emerging risk better on a more targeted basis and in more affordable ways.

“Clients don’t have to abandon the experience-based approach but we’re helping them to adopt a more exposure-based approach to underwriting, reserving, capital, etc,” Reville said.

With all this in mind, Praedicat has launched a new version of its model, which incorporates around 250 emerging risks and is continually updated in line with science and litigation. It is working with Aon to establish partnerships with data providers to bring more data to its clients—eg, its partnership with credit reporting agency Experian.

A result is a D&O product that will help clients evaluate not just general liability and environmental liability but also D&O, all at the same time, helping to address the risk of multiple lines of insurance being impacted.

Praedicat has a partnership with Aon to develop new re/insurance products drawing on new data sources to help insurers and corporations to manage emerging risks.