Reinsurer Says US Should Regulate $ 17 Billion Litigation Finance Industry
Litigation financing has grown into a $ 17 billion industry globally, with 52% of that money spent in the United States, Swiss Re said in a recent report.
The reinsurer said third party litigation funding (TPLF) increases the number of “oversized” court awards and contributes to rising claims ratios for excess liability, commercial automobile, medical malpractice and general civil liability. Global investment in the sector has increased 16% since last year, according to the report.
“We view the TPLF as a contributing factor to the trend of social inflation in the United States,” the report says. “General liability and auto lawsuits data in the United States show a sharp increase in the frequency of multi-million dollar claims over the past decade. “
Swiss Re said litigation funding helps increase the number of verdicts rendered by US courts. From 2010 to 2019, for cases with an award above $ 1 million, the share of verdicts over $ 5 million fell from around 29% of liability cases to 36%, according to the report. For automobile negligence claims, the percentage has increased from about 21% to 30%.
During the same period, the average claim amount, for cases with claims over $ 1 million, increased from $ 8 million to over $ 10 million for general liability and from 6 to 8 million dollars for automobile negligence.
These larger verdicts in turn lead to higher loss rates for insurers and higher premiums. Swiss Re said that in 2020 director and officer rates jumped 15.8%, general rates by 22.6%, general liability by 7.3% and professional medical liability by 8, 8%, according to the report.
Insurers are trying to recover underwriting losses. Swiss Re said that in 2020, the 2020 average combined ratio for general liability was estimated at 105.7% and for medical malpractice at 117.5%. It was the seventh consecutive year of technical losses for both lines. The 2020 combined commercial automobile liability ratio was 104.1%, the tenth year of technical losses, according to the report.
While insurers take losses, litigation finance companies enjoy an enviable return on their investment. The report says data from Morning Investments, which advises investors in litigation financing, shows the average internal rate of return for personal injury cases ranged from 25% to 35% from 2019 to 2021, 25%.
Swiss Re said these were significantly higher returns than other types of investments. Private equity and venture capital operations have recorded average returns of 13% over the past 15 years. The S&P 500 Index benefited from an average rate of return of 10%.
Additionally, the report states that 80% of venture capital cases are unprofitable. Profits are made from occasional big hits. But in litigation financing, only 10 to 15% of cases do not succeed.
“While the risks may be low, particularly in a business portfolio, the returns from the TPLF are generally high as funders are able to apply their financial expertise, data analysis and legal experience to issues. complex cases when negotiating with private and commercial borrowers, ”the report says.
While litigation funders make profits, plaintiffs in funded cases receive less. The report, citing data from the Institute for Legal Reform at the US Chamber of Commerce, states that plaintiffs received 55% of claims in cases that were not funded by third parties, but only 43%. indemnities in cases financed by third party litigation funders.
“We assume that the involvement of the TPLF will on average result in higher compensation amounts and total liability costs, as third-party funding allows plaintiffs to pursue better prepared cases and more effectively utilize litigation strategies that have contributed to social inflation, ”the report says.
Michael B. McDonald, director of Morning Investments Consulting and the source of most of the data cited in the Swiss Re report, said he disagreed that litigation funding increases the size of verdicts.
“If litigation funding makes it easier to fund meritorious lawsuits, it could increase the supply / number of lawsuits in court, but that doesn’t mean lawsuits get more expensive,” he said in a statement. -mail. “Indeed, it could be argued that with more claims submitted to judges and juries, these arbitrators would have more experience in handling similar claims and would be able to assess them more fairly and determine the appropriate financial penalty. “
McDonald, who is also a professor of finance at Fairfield University in Connecticut, said the biggest impact of litigation finance companies is that they provide access to capital for law firms that have been historically banned. to raise equity capital. The industry also offers opportunities for data collection and rational assessment of the value of legal claims, he said.
“Smart insurers, law firms and plaintiffs can therefore benefit if they use a data-driven approach to the investment space in litigation finance,” McDonald said. “Indeed, we have even seen a few insurance companies invest in litigation funds through their investment services in order to diversify their portfolios and cover their risks. So, in summary, this is a rapidly changing space, but it would be shortsighted to view litigation funding as “good” or “bad” for defendants or plaintiffs. “
Swiss Re has a different point of view. The reinsurer calls for stricter regulation of third-party litigation funders, including universal disclosure of funding agreements and caps on the amount of interest charged through funding agreements that are typically structured as loans.
The reinsurer noted that 25 of 94 US district courts have adopted rules requiring the disclosure of litigation funding agreements in civil cases. This is part of the trend to demand more disclosure that was previously noted by an article published in Claims Journal in September.
Swiss Re said lawmakers should mandate more disclosure in more jurisdictions. Lawmakers should also subject litigation lenders to anti-use regulations to protect consumers from excessive interest rates. The report says that many consumer litigation finance agreements, which provide cost-of-living assistance to plaintiffs as they go through litigation, charge compound interest monthly, dramatically increasing the amount needed to repay the loan.
“We believe that litigation financing contracts should be subject to protections comparable to those of other consumer financial products, which benefit from enhanced consumer protection,” the report said.
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