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Insurance Companies Cite ‘Deteriorated’ Tort Law Industry for Reduced Earnings

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Throughout 2019, major insurance carriers including Travelers, AIG, and Chubb Ltd. have warned that an increase in litigiousness will continue the trend of reduced earnings for their companies. “What we’re reflecting in our numbers we would describe as a more active and more aggressive plaintiffs’ bar,” Travelers CEO, Alan Schnitzer, said on a conference call with shareholders in July. In April, Chubb CEO, Evan Greenberg, warned that excessive litigation is becoming a “tax on corporate America.” AIG has stated that the rise in class-action lawsuits is responsible for driving losses on directors-and-officers policies. 

Last month, Travelers CEO, Schnitzer, reiterated his position in another call with shareholders, this time to address third-quarter earnings that failed to meet analysts’ estimates. He stated that, specific to general liability and commercial auto insurance lines, the “heart of the issue is the higher and more aggressive level of attorney involvement in claims,” and “the bigger issue for all us is that the broken system imposes a tort tax across society.” The claim of a “tort tax” comes at a time when tort reform measures are grabbing headlines in various states across the country. 

The issue featured heavily in Louisiana’s 2019 election, according to Stephen Waguespack, head of the Louisiana Association of Business and Industry. Many Republicans who campaigned on stringent tort reform measures were elected to the state legislature in this month’s election. Waguespack told the Advocate, a Baton Rouge-based outlet, that he hopes the rise in newly elected conservatives means “both sides can sit down on issues like how to change the legal system, tort reform, in hopes that insurance companies will lower the prices of the policies required to drive a car.”

But as Louisiana seems primed to enact legislation to reduce potential tort awards for personal injury settlements resulting from car accidents, states like California are passing measures that could expand and redefine the $429 billion tort law system. Though states may differ on what type of tort reform is required, it is clearly a hot button issue. 

Insurance companies, however, seem unified in the sentiment that the current tort system is toxic and, due primarily to overly-motivated attorneys seeking major settlements for their clients, needs to be scaled back through legislation. They contend that their bottom lines are at risk, and shareholders will be negatively impacted. Schnitzer stated that the overall issue is “a tort environment that has deteriorated beyond our elevated expectation.”

PINews reached out to representatives from Travelers and Chubb Ltd. for comment regarding the recently passed legislation in California, and prospective legislation considering the newly elected conservative majority in Louisiana. A representative from Travelers responded and stated that they had no further comment beyond what CEO Schnitzer discussed on the Q3 conference call, but would provide us with a full transcript of that call. At the time of publication, a Chubb Ltd. spokesperson had not responded to our request. 

Last month, Chubb reported net income of $1.10 billion, down 11.4% compared with the same period last year. Travelers Insurance reported a third-quarter underwriting loss of $149 million, compared to a gain of $198 million in the third quarter of 2018.

Throughout the first three quarters of 2019, Travelers has recorded a net $214 million in loss reserve development. However, since the Q3 earnings report earlier this month, Travelers shares have increased 2.5%. 

The trend of increased tort damages claims, and reduced earnings by insurance companies, is being referred to by the insurance industry as social inflation. Social inflation is used to sum up increased losses attributed to financial, legal, and social changes. It’s being cited as a main factor for why insurance companies have increased their loss reserves throughout 2019. 

It’s clear that the future of tort reform is in flux, and new legislation will have a significant impact on both personal injury settlement figures, as well as profits for insurance companies. Whether there will be a consistent trend in the sort of tort legislation that is passed across the nation, or if it will vary from state-to-state, remains to be seen. It is conceivable, however, that insurance companies may be much more receptive to doing business in states with stringent tort reform measures in place.