Summer 2023

Increase in Legal System Abuses Fuels Insurance Claims Inflation

Insurance claims inflation has continued to rise faster than the underlying consumer price index, far outpacing increases in premiums, according to a new study by the American Property Casualty Insurance Association (APCIA) titled “Auto Insurance: The Uncertain Road Ahead,” released in July of 2023. The study found that the combination of rapidly increasing overall economic inflation and claims inflation has driven up auto insurance losses and combined ratios.

“In addition to inflation trends, the private passenger auto insurance sector is also experiencing several other trends such as increased frequency and severity of claims cost, riskier driving behavior by the public, cost increases for medical and hospital services, and outsized growth in lawsuit verdicts and legal system abuses, that are negatively impacting and pressuring the industry with increased losses,” said Robert Passmore, department vice president for APCIA and co-author of the paper.

Significantly, the study analyzes the impacts of legal system abuse on personal injury claim settlements. The study finds that “[b]y almost any measure, litigation-involved recoveries are now increasing at previously unseen rates. This includes for example, increases in average verdicts, median verdicts for single fatalities, nuclear verdicts, which include exceptionally high jury awards, billion-dollar personal injury verdicts, and verdicts involving trucking or workplace class actions. As individual verdicts reach new heights, they establish new precedents–thus creating a positive feedback loop influencing future judgments for liability cases, fueling lawsuit inflation across all lines of business.”

For example, according to a 2020 study by the American Transportation Research Institute, the average verdict size for a lawsuit above $1 million involving a truck crash has increased nearly 970 percent from 2010 to 2018, rising from $2.3 million to $22.3 million. Routine auto accidents are similarly being impacted, which has been a major concern for insurers. According to Current Award Trends in Personal Injury data, median personal injury judgments have increased nearly 320 percent in ten years from $39,300 in 2010 to $125,366 in 2020.

The cost of auto insurance has skyrocketed 17.8% between July 2022 and July 2023, according to the according to the Bureau of Labor Statistics’ Consumer Price Index (CPI). This marks the largest annual increase since December 1976. Moreover, experts expect another 4% increase before the end of the year, putting the total surge in car insurance rates at 22% by the end of 2023.

With so much uncertainty in the auto insurance industry, what can you do to keep your auto insurance rates as low as possible? First and foremost, drive safely! Drivers that avoid traffic citations and accidents always receive lower rates than drivers with adverse driving histories. Also, shop around for the best rates and take advantage of discounts. Companies typically offer several discount opportunities to save on insurance, many of which can be combined for even more significant discounts. These include low mileage discounts for drivers who drive under a certain number of miles per year, multiple policy discounts, discounts to drivers with good credit scores, and safe driver discounts. Some car insurance companies advertise that drivers can save on their premiums for being a safe driver with a telematics program. Another way to save on car insurance is to avoid paying for coverage that you do not need. Checking your policy to see where you might have duplicate or unnecessary coverage could be one way to cut down costs. Also, consider increasing your deductible: a higher deductible is likely to result in a lower premium, but be careful that you don’t choose a deductible that would be difficult for you to pay in the event of a claim.  Another simple way to save is to pay your policy in full. Paying your insurance premium in monthly installments usually comes with a penalty.

For more information, contact Stephen J. Marshall.