RAFAEL COSTA: And welcome both to our conversation. So let's start with the basics. Dale, how do you define legal system abuse and why has it become such a critical issue for insurers?
DALE PORFILIO: The definition that I'm going to use for today is the one that the Insurance Information Institute codified back in 2022. The definition that we're going to talk about in legal system abuse is policyholder or plaintiff attorney practices that increase costs and time to settle insurance claims to the detriment of policyholders.
The key around this definition is trying to make sure it's one that consumers can understand because the ultimate impact of legal system abuse is increasing cost of insurance products as well as goods and services. And so we want to make sure this definition that consumers could understand. There was testing done back in 2022 to test out the terms we used to use all the time of social inflation and nuclear verdicts. And the reality is those did not test well. They couldn't define them well. And if they can't define them, they certainly can't understand why they might be a problem.
So this very much is a definition that is intended to educate consumers on what it is, why it matters and what can be done. So why does legal system abuse matter? In short, because it contributes to higher costs for everyone. If you think about auto and homeowners insurance, it's a direct cost of what people are paying every day. And we've had a lot of rate increases in the last five years. And so this is one additional piece, making that more expensive.
Even on the commercial lines side, everything you buy at your favorite store, whether it's a grocery store, Target, a Home Depot, Lowe's, wherever, commercial insurance has to be embedded into that product. And so even there you are paying more when there's legal some abuse within the commercial lines space, all of it comes into play.
RAFAEL COSTA: So Joey, from the claim side, what trends or examples stand out to you that show how legal system abuse is impacting insurers and policyholders?
JOEY DARYANANI: I wondered, Rafael, how long it would take for me to go off the rails. So let me just start with a comment around social inflation, if you don't mind. I've been running around trying to figure out who coined that term. And two weeks ago at the Claims Conference in Florida, I heard it was Warren Buffett. Frankly, let's call it what it is, legal system abuse, to Dale's point, is a much clearer definition of what's going on for me.
And to your question around defining what it is, I'm wondering if it's not as much defining what legal system abuse is, but rather redefining what insurance fraud might be. And yes, I used the F word there, the word fraud. And I do think we should redefine what fraud is. And if you were to ask me, I think legal system abuse is fraud. So that's one.
Second is I think the plaintiff bar has done a very good job painting insurance companies as bad guys while letting the consumers bear the costs of overinflated insurance claims. So there's a balance there. And I'm sure that my friends in the industries have used that self-inflicted pain because some of us are less than upfront as we should be. But I am encouraged that carriers and trade groups finally are focused on this issue and wish that we see more action and consumer awareness as a result.
RAFAEL COSTA: So the insurer ends up being the bad guy because they are the ones in front of the customer. So they're the ones who are actually visible. So now that we know what legal system abuse is and why it matters, let's start talking about the ripple effects that it causes. So, Dale, as an actuary, can you tell us how legal system abuse affects pricing and reserving assumptions? And are we seeing volatility that is hard to model?
DALE PORFILIO: We certainly are. The short answer is yes. Actuaries regularly are having to look at history to try to look forward and say what's going to happen in the future? And what actuaries have seen for well over a decade is that loss trends are going up in excess of what economic inflation alone can explain. And when we start deep diving into what are the underlying drivers of that, the things, the symptoms that we categorize into legal system abuse are big drivers of that.
One of the metrics you can see in the public domain around this is adverse reserve development. If something comes out of the reserving process that when companies have to say how many dollars should I keep in the checkbook essentially to pay for all liabilities? Periodically you have to reevaluate that and you may find that that has gone up.
What we have definitely experienced in recent years, I shouldn't even say in recent years, it's been over the last decade, is that some product lines have had significant adverse development. That's when you have to say, I used to have X and it needs to be X an extra 10%, extra 20%, whatever it might be.
The product lines where that's been most poignant is general liability, especially if it's been written on an occurrence basis. At the year end 2024, the insurance industry had to increase reserves by a full 9% of premium. So 9 percentage points of adverse development, the highest it had had in a very, very long time on that product line.
Likewise, in commercial auto, there was 5% adverse development for the industry in both 2023 and 2024. And when we go back and look at a deep dive on that, the symptoms of legal system abuse and underlying drivers that we'll talk about more during this conversation are key drivers to that. Well, a smaller extent, it also is incurring in personal auto liability. So multiple product lines, all that long tail liabilities, it's showing up. And it's hard to predict, which is why actuaries keep missing it in spite of a long-term pattern of legal system abuse.
RAFAEL COSTA: And Joey, what about claims operations? How does legal system abuse change the way you handle attorney involvement, litigation and settlement strategies?
JOEY DARYANANI: We think of it as a two-pronged strategy. Let's just call it micro and macro. I define macro as how do we influence the broader industry, which will take time. Unfortunately, the insurance industry isn't quick to move and execute. And I define micro as what is within our control. So let's just think of it in those two buckets.
From a micro perspective at the onset of a potential abuse case, we have now instituted process by the individual case itself, where the claims specialist or the claims handler, our special investigations team, defense counsel, and our extra contractual folks jointly discuss that particular case. So there's no second guessing involved after litigation, which has occurred frequently in the past. And that allows us to execute on a per file strategy. So that's one.
Number 2 in the micro space is partnering with vendor partners out there to leverage both data and emerging technologies such as AI. So I've talked about this in very simple terms. Every time a vendor reaches out to me, everybody does AI today or I'm not even sure what it means anymore. We have gotten very clear around our initiative using, let's call it emerging technology and AI, to three initial use cases that's very clear around ROI.
The first one is demand package synthesis. It allows AI to evaluate that 20-page demand or the 200-page demand or the 700-page demand to one, pull out that one document that's in there where it might talk about, it's a surgical case, not that anybody would do this, that others might hope that the insurance adjuster misses and eventually pops the lid on the policy. So that's the first use case.
The second one is we are so focused on quality assurance during the first notice of loss process that our employees are more focused on documenting the file than creating that initial relationship with a policyholder. So AI will allow all that documenting process, the evaluating process, what are the next steps, all of those things that adjusters do today that allows the adjusters to just focus on building that relationship at the onset.
And the third, which I really love, is claims like this. AI allows us at our fingertips in the future to look at who are we dealing with as far as players in the file, take a look at historical data that we already have in our 100-year-old database over here at CSAA, and really be able to identify the pattern before this particular claim we're looking at goes any further?
RAFAEL COSTA: And are there certain lines of business or geographies that are more exposed to legal system abuse than others? And why do you think that is? I'll ask you both this question. How about we start with Dale?
DALE PORFILIO: Sounds good. I already teed up in my prior comments of the product lines where it's coming, well, most dramatically, but it is in the liability coverages. It's where you do have more uncertainty of what is that ultimate liability that is owed for whatever may have gone wrong, whatever injury may have occurred.
So the product lines where we talk about it the most is personal auto as well as commercial auto liability, and then the longer commercial lines tales of other liability in particular with occurrence limit. But I'll quote some numbers from a couple of different nonprofits that the industry supports and can bring forth some interesting research. The first is the Insurance Research Council. They have a personal auto database that they have built that goes through and takes a look at granular detail around liability claims.
And one of the things that it shows very clearly is that the insurance industry has had a year over year increase in attorney involvement and litigation across every personal auto liability coverage. So it definitely shows that it's a complex piece. Some of the points that Joey just walked through of how CSAA is responding, they are not unique. Every company is having to struggle with this. That's on the personal auto side.
To go to another study that was done by the Insurance Information Institute and the Casualty Actuarial Society, this was released in October of this year using data through year end 2024. It goes through and attempts to quantify how much has legal system abuse impacted across the prior decade? And some of the numbers are absolutely staggering.
Again, this is industry level to talk about, but the biggest one is your other liability occurrence on an occurrence basis. And the study estimated that the overall impact was 83 to 103 billion. And that's 27% to 34% higher losses. I mentioned earlier that adverse development number, this is a key driver to it when losses are that much higher because of what's happening on these volatile trends.
Commercial auto liability is another big stunning number. The range there was 52 to 71 billion. Again, this is across a decade of years, but that's 22% to 30% higher losses. Materially higher when this product line has had a challenge for a good number of years of making an underwriting profit, it's been well above 100 combined ratio multiple years in a row.
And then finally, personal auto liability was approximately $100 billion of higher losses, which is about 9%. So a smaller percentage, but a very big number once again. And it's just further complicating what insurance companies are having to deal with.
But another place even beyond the auto liability that I wouldn't want to ignore is homeowners. Even though homeowners is almost all property coverage, it can then come in there as well. It started in the fine state of Florida, when people came around after hurricanes started knocking on doors and saying, I see roof damage on your home. And if you let me go up there, I can file a claim for you with your insurance company. And an awful lot of those were fraudulent. Some were justified, but many, many were fraudulent.
And unfortunately, the behavior worked. A lot of people started getting roofs replaced by insurance carriers. And the behavior spread, and now it's across the entire country. Insurance companies have had to totally redesign how they deal with homeowners insurance claims. All of that is another example of legal system abuse, just of a very different type than the long-tailed auto liability.
So realistically, it's multiple product lines and it can be occurring anywhere in the country now. Sometimes it started worse in one state versus another, like the Florida example I gave, but it's a rare city you go to now that you do not see the significant attorney advertising. It's now 2.5 billion country wide. So it's an awful lot of billboards and radio spots and TV spots and online across the country.
RAFAEL COSTA: So it started in a handful of states and it became widespread. And it started in liability lines, but it can be also expanding to other lines. Joey, what are your thoughts on this?
JOEY DARYANANI: I completely agree with Dale, and we're seeing exactly the same thing on the personal lines side. But I think where I would go with this question is around litigation financing. So while we're seeing less litigation financing on the personal lines side of the business, we're seeing it more often now than we ever have before.
Here's where I think legislation should happen, is from a collateral source perspective, why is there a need to go with litigation financing companies, whether that be corporations or private individuals, sometimes foreign nationals that are involved in this space? Clearly there is a profit to be made, and that's why it's happening.
To me, there's a significant opportunity in this space. And while, again, the plaintiff bar has done a good job saying they represent innocent victims, I want to take it further. The only thing I agree with is the word victims. And I think these folks are being victimized twice.
RAFAEL COSTA: That makes a lot of sense. So now we know what legal system abuse is. We know the impact is significant. Let's think about what we can do about it in terms of what we are as an insurance industry. So, Joey, starting with you, what are the strategies that carriers are using on the claim side to mitigate the impact of legal system abuse? And are these mostly legal tactics, they're operational changes, or something else?
JOEY DARYANANI: I think the answer to that is yes in general, but I'm sure you want me to explain a little more. So evaluating injury cases is something I've loved to do over my 40-year career. And in the past we would look at a case, we would put a valuation to it, and all eyes would be whether or not we, quote, "win" or, quote, "lose" that case in trial. So it is verdict based on evaluation is how we would rate it.
And we've changed tactics a little bit where we are now selecting the right case to jointly, I talked about the trifecta, where we look at each case, having all the players on the defense side involved, including defense attorneys and SIU and so forth, where we pick the right case, we make a decision to put that case in litigation, thus allowing for discovery and depositions and all of the players involved, and potentially making that a, quote-unquote, "investment" to use that information in any future case.
So no longer are we just looking at it from a win-loss on that particular case as much as we've got to make the right decision to pick the right case to litigate because we cannot simply cave every single time it shows our hand and we're starting to see some real bad outcomes as a result.
RAFAEL COSTA: And Dale, Joey mentioned AI before, but from the more technical actuarial side, how can advanced analytics in AI help identify and manage legal system abuse risk? And have you seen any practical applications of it yet?
DALE PORFILIO: We certainly have. The insurance industry for many, many years has applied whatever the latest analytical techniques are to pricing. And that's what actuaries have been asked to do for many, many years. But claims has regularly not been given that same priority of saying, how can analytics come and help and drive some of the things that Joey was talking about earlier as great examples?
So what we are definitely seeing company by company is that while every company is on their own place on this journey is that companies are recognizing the value of bringing advanced analytics, with AI being one example of that to come to bear within the claims space. And when approximately 70% of every premium dollar is being used to pay for claims, there's tons of data there that you can learn from and think about, how can you change the claims adjuster's job?
And Joey talked about some specific examples for his company where they're trying to have analytics take care of a lot of the simpler tasks that can be done so that the claims adjusters can be focusing more on the decision-making and providing the empathy that our claimants deserve as we're financial first responders when things go wrong.
So we're definitely seeing that company by company. Again, companies are different places on that journey. Some people don't really have claims models built yet. Other companies have them, and they're trying to connect the dots of having them in the hands of their claims adjusters to do things differently. Some people are well along in that journey to already be seeing benefits coming from advanced analytics and claims.
When it comes to legal system abuse, some of those key pieces are, are you looking at those key points in a claim lifecycle where first of all, plaintiff attorneys may become involved? How do you manage to claim before and after that point in time? And how do you specifically manage the claim very carefully, from the point that an attorney has become involved to the litigation risk? And whether this case may go to litigation or not, and how you should manage it from that point forth.
So having good analytics around those are just two of the examples, but as much as you can automate in the claims process and freeing up our claims adjusters that are so important to the process to be about the business and making decisions and being empathetic to the claimants that have been hurt in some way, shape and form.
RAFAEL COSTA: So before we wrap up, let's look ahead. So, Dale, if we do not address legal system abuse effectively, what does the future look like for the insurance market and consumers?
DALE PORFILIO: Unfortunately, the main symptom will be less affordable personal auto and homeowners insurance. Legal system abuse is just one driver amongst many, but it all has to follow through to the price to the consumer. And again, I mentioned this earlier in our discussion, but even on the commercial lines side, every time there's an increased size of a commercial claim, that has to be embedded in the ultimate price of whatever that commercial business is delivering.
And so it is the cost of goods and services that consumers are paying every day. It just makes things less affordable. So that at the end of the day, is the cost to consumers and we may not realize it. You may blame it on other things, but legal system abuse is one of those things that is adding to the price that we pay when homeowner finances are already strapped in many places.
RAFAEL COSTA: And Joey, what should industry leaders prioritize in the next 12 to 24 months to make meaningful progress?
JOEY DARYANANI: Rafael, I want to make this super simple. One is I wish insurance companies would focus less on talking and more on doing. While I understand that reminding us of antitrust when we all get together is important, let's just pick one action item that we can really rally around and execute on. Pretty simple.
RAFAEL COSTA: Now to wrap us up, I have a question for both of you. And we'll start with Dale. For listeners who are in the insurance industry and want to be part of the solution to this issue, what could they do?
DALE PORFILIO: The simple thing I would point to is consumer education and awareness. Insurance is complex. And many people have to buy insurance and don't understand it. So the more that we can all do and we all can play a role in this, is to help consumers understand what legal system abuse is, why it's adding to the cost of things, and making them aware that every time somebody responds to that billboard or that TV advertisement, to call 1-800 lawyer and get them involved in a claim, that may be the right thing to do, but it can also be contributing to legal system abuse and the cost of everything they're paying for.
RAFAEL COSTA: Joey, what are your thoughts?
JOEY DARYANANI: Three things. Don't be afraid to pick the right case to perform discovery on. Number 2, be an advocate of sharing data between carriers. And number 3 to Dale's point, continue to educate our policyholders on the overall costs and adverse impacts of legal system abuse.
RAFAEL COSTA: Thank you both so much for your time today. We appreciate your thoughts on this industry problem. Thank you, Dale.
DALE PORFILIO: My pleasure to be here. Thank you for the invitation.
RAFAEL COSTA: And thank you, Joey.
JOEY DARYANANI: Of course, happy to help with this very, very important issue in the insurance world today. Thanks very much.
RAFAEL COSTA: And thank you to our listeners. Thank you for tuning into the (Re)thinking Insurance Podcast.
NARRATOR: Thank you for joining us for this WTW Podcast featuring the latest perspectives on the intersection of people, capital, and risk. For more information, visit the insights section of wtwco.com. This podcast is for general discussion and/or information only, is not intended to be relied upon. And action based on or in connection with anything contained herein should not be taken without first obtaining specific advice from a suitably qualified professional.
