There has been a notable rise in incurred losses in the U.S. that has exceeded inflation rates since about 2015. While this rise is not entirely due to an increase in claims litigation, there is some empirical evidence that claims litigation is the cause or a contributing factor to at least some of it, McKinsey & Company experts told chief claims officers at a recent CLM CCO Discussions webinar, titled "The Next Horizon for Litigation Management."
Claims litigation, the McKinsey experts say, is becoming a top-of-mind topic within insurance companies, rising to the CEO level. “In 2016, only about 5% of the top-25 carriers mentioned social inflation in their earnings calls, compared to nearly 90% in 2020,” noted Jacqueline Montgomery, associate partner, McKinsey.
That said, Montgomery noted that, when looking at allocated loss adjustment expenses (ALAE), they seem to track more closely with inflation rather than incurred losses, which she added was contrary to McKinsey’s incoming hypothesis.
Speaking to the claims litigation drivers today, Montgomery mentioned the growth in third-party litigation funding (TPLF), increasingly sophisticated plaintiffs’ bar tactics to impact value and volume, declining public trust in businesses, and extraordinary verdicts—often referred to as Nuclear Verdicts.
As carriers grapple with the rise in claims litigation, they are responding in a number of ways. For one, Montgomery said carriers are strengthening the claims feedback loop—“How does claims interact with pricing and underwriting to ensure some trends seen in claims get flowed back into pricing and risk modeling” to adapt to the changing environment?
She also said there is a resurgence in focus on claims quality programs, or “a bit of the return to getting the basics right within individual carriers as they try to navigate this landscape.”
Refocusing on—and Defining—Litigation Management
Carriers are also thinking about their litigation management strategies, but they must consider exactly how to execute such a strategy or even what it entails. Deniz Cultu, partner, McKinsey, outlined five key considerations for carriers when developing their litigation management strategies, noting that, while these considerations are universal across the industry, how carriers answer and address them will differ depending on a number of factors.
Ultimately, though, it all starts with having a full understanding of where you are right now before figuring out where you need to go. Cultu said, “Do you have good ways of measuring and understanding what’s happening in your litigation management?”
From there, Cultu discussed the following five dimensions of litigation management, which primarily focus on how claims organizations work with legal:
A clear collaborative model between claims and legal. “How do you make sure you have the right overarching principles?” Cultu said. He emphasized the need for a clear strategy around which cases are handled by claims, and when legal gets involved. When legal does get involved, Cultu said, “When do you use an internal legal organization? When do you use external counsel? And how do you make sure there’s clarity on that from a strategic perspective, as well as clarity on roles and responsibilities so everyone knows what they’re expected to do [to] work most effectively, collaboratively, to provide an accurate and prompt resolution to a claim while upholding all of the policy commitments and policy language?”
Understanding what to assign to internal staff counsel, and where within staff counsel. “How do you segment work based on jurisdiction, line of business, complexity, etc.?” said Cultu. “How do you make sure you have the right skills and capabilities in an internal counsel organization to support the needs of the claims department?”
Understanding how you engage with your external panel. “How do you make sure your external panel complements what you have from an internal staff counsel?” Cultu said. “How do you think about a panel size that covers the needs that you need to have to go external? How do you make sure you have the right expertise? How do you [ensure that you] have the right jurisdictional coverage in designing your panel? How are you…optimizing that panel to make sure you’re able to effectively and efficiently meet the needs of the claims organization while providing the expertise you don’t have internally within your staff counsel?”
Considering the big picture from a strategic or design perspective. “How do you make [the above three considerations] work on a daily basis?" asked Cultu. “How do you make sure you have your claims organization working effectively with counsel, internal or external, to be efficient and accurate in handling each individual claim based on its merits? How do you make sure you’re executing the right roles and responsibilities?” He emphasized the importance of making sure there is clarity on who is accountable for what.
Meeting the principles and goals outlined in the strategy. “How do you make sure you are building the right performance management jointly across legal and claims organizations to be able to track success?” Cultu said. He added, “How do you make sure you have clear accountability working hand-in-hand so you know if you’re delivering, or [so] leaders can see where there are opportunities to improve?"
Cultu made clear that these are just considerations for carriers to think about. How they are applied will vary based on line of business, types of claims, and the organization's overall strategy; and he added that carriers are indeed making varied decisions on how they are designing litigation management systems. He outlined two models he is seeing: one that relies more heavily on external counsel, and one that relies more on internal counsel.
In the first model, Cultu said a carrier may determine, “We’ll have internal counsel, but it’ll be a smaller group of resources” handling a minority of litigated claims, such as very specific, high-volume jurisdictions where the carrier is able to get the right talent. Then, the carrier will rely more heavily on external counsel to bring legal expertise that works in conjunction with the claims department, investing heavily to make sure it has the right panels, and the proper relationships with external counsel.
In the second model, the majority of litigated claims are handled by internal staff counsel. “In this case, you’re investing more heavily in building out a more significant internal staff legal department that is trying to handle most cases,” Cultu explained. This involves hiring a bigger legal department, but also investments in technology and enabling capabilities to develop specialized legal skills to handle a wider range of cases internally. Then, external counsel will be used for claims the carrier cannot handle internally, perhaps because the carrier does not have enough geographic coverage, or if a claim involves very specific expertise the carrier does not have internally.
Cultu said CCOs must think about how they are going to manage litigation requirements when considering the five dimensions mentioned above. “But within that,” Cultu added, “we’re seeing a wide variety [of approaches] within carriers, based on line of business, business mix, geographical mix, and their own strategy. Within different models, what’s important to being successful is, how do you make sure you have the right ongoing management and execution? [Do] you have the right performance measurements so you know where you are and how to improve?”
CLM's next CCO Discussions webinar, "Navigating the AI Landscape: Identifying Use Cases and Integrating Solutions," will tackle AI and how it will impact claims organizations. Grant Little, founder of Claims Tech and CEO/co-founder of Precedent, will break the topic down July 11. See the full CCO Discussions schedule and register here.