The third-party liability insurance market has entered a period of heightened volatility, driven by rising nuclear verdicts, evolving juror attitudes, and increased third-party litigation funding.
As a result, insurers are reducing capacity, leading to higher premiums and more restrictive coverage terms. Businesses that fail to adjust to this shifting landscape face significant financial and operational risks.
Vince Gaffigan, executive vice president and director of risk consulting at Lockton, has observed significant shifts in the third-party liability insurance market.
What was once a relatively stable sector has become increasingly volatile, driven by rising nuclear verdicts, shifting juror attitudes, and the expansion of third-party litigation funding. As insurers reassess their exposure, market capacity is shrinking, and premium rates are escalating at an unprecedented pace.
“Historically, insurers have relied on prior loss experience to estimate reserves and set premiums. However, as social inflation drives up loss frequency and severity, historical estimates – particularly from the soft years of 2016 through 2019 – are proving insufficient,” Gaffigan said. This has led insurers to continually revise forward-looking reserves and adjust pricing models.
Despite efforts to reduce deployed limits and alter programme structures, many liability insurers struggle to keep pace with loss trends. “Many remain heavily reliant on workers’ compensation reserve releases to blunt the impact of liability reserve development,” he said.
Social inflation, increasingly referred to as "legal system abuse" by insurers, is not a new phenomenon but has intensified in recent years. “The causes of social inflation are complex, but they are generally tied to evolving juror attitudes around social justice and corporate responsibility,” Gaffigan said.
He pointed to an expanding landscape of judicial hellholes and activist judges who are receptive to expansive legal theories and class action certifications.
The litigation funding industry, now estimated at US$15 billion and growing, has kept plaintiffs’ attorneys well-financed, a factor Gaffigan highlighted as contributing to rising claim costs.
“Regardless of the cause, social inflation’s impact is real, resulting in higher costs for businesses and consumers and creating significant economic inefficiencies.”
The rise in nuclear verdicts fuels a cycle in which large awards become increasingly normalised among jurors. “As large verdicts become more commonplace, media attention amplifies their impact, encouraging larger verdicts in future cases,” Gaffigan said.
While some of these awards are reduced on appeal, businesses facing litigation must consider the reputational risks and insurance policy adequacy when preparing for potential lawsuits.
Social inflation has also contributed to leveraged trends, impacting various layers of liability programmes. “Losses under deductibles generally experience the smallest amount of change, while higher layers feel an outsized impact,” Gaffigan said.
Even small increases in claim frequency or severity can lead to disproportionately larger losses in excess or umbrella coverage. This has forced insurers to reassess reserves and increase premium rates for these higher layers.
“To manage their exposure, insurers are adopting more conservative strategies, including higher attachment points or stricter risk selection criteria, and, in some cases, are completely exiting high-risk sectors, such as trucking, certain types of healthcare, construction, or hospitality,” Gaffigan said.
Higher loss ratios directly impact insurers’ financial performance. “Persistently high loss ratios can prompt concern from investors and rating agencies, which view rising ratios as a potential sign of deteriorating financial health. This, in turn, can lead to stricter capital requirements, a higher potential for downgrades, and less flexibility for insurers to write new business.”
“If underlying claim severity trends are underestimated, reinsurance layers might be triggered more often than expected, leading to unexpected payouts and prompting reinsurers to raise rates, increase attachments, or impose stricter terms,” Gaffigan said.
As traditional insurance coverage becomes more restrictive, Gaffigan said that larger companies are increasingly turning to self-insurance through captives, insurance-linked securities, catastrophe bonds, and other alternative risk transfer strategies.
“Larger, sophisticated buyers have responded to more restrictive terms and limited capacity by self-insuring more risk through captives, insurance-linked securities, catastrophe bonds, and other alternative risk strategies.”
Consumer perceptions of large corporations have also shifted, with growing distrust leading to greater willingness to punish perceived misconduct.
“A key driver of social inflation is consumers’ growing distrust of large companies and willingness to punish what they see as bad behaviour,” Gaffigan said. The rise of social media and digital platforms has amplified this, as grievances gain visibility and mobilise collective action.
What should risk managers consider?
For insurance buyers, these market dynamics necessitate a reassessment of liability insurance programmes.
“Buyers must consider their potential exposure in excess layers and the adequacy of their traditional insurance limits, retentions, and attachment points,” Gaffigan said. Given the reduced capacity from individual insurers, many buyers must now engage multiple carriers to complete their programmes, often at increased costs.
Underwriters are also becoming more selective, particularly for businesses with heightened litigation exposure. “Buyers in industries prone to litigation or those with significant fleet, product liability, or professional exposures may face limited options, higher premiums, or increased attachment points. They may also be forced to retain more risk or rely on the surplus lines marketplace more than others,” he said.
“Additionally, companies may invest in additional measures to mitigate potential liabilities and seek to improve their risk profiles, which could raise the cost of risk management programmes.”
To manage these challenges, businesses must take a proactive approach to claims management.
“The best claim is a closed one,” Gaffigan said. “As claims tend to become more expensive as they age, identifying potentially problematic liability claims early and devising proactive strategies to quickly resolve them can yield substantial savings.” This requires businesses to work closely with insurers on settlement and defence strategies.
As social inflation continues to reshape the liability insurance market, businesses are exploring alternative risk transfer options, including captives, structured risk programmes, and buffer layers.
“By making strategic use of these alternatives, buyers can stabilise high-severity risks over multiple years, reduce dependency on the commercial insurance market, and improve control over pricing and capital allocation,” Gaffigan said.
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