General liability (GL) losses continue to rise, challenging businesses across a variety of industries. For the past four years, the combined ratio for U.S. carriers writing GL has been over 100%, reaching almost 108% in 2017. There are many issues driving claims severity and losses, including legal, medical costs, and several new trends. By understanding these issues, businesses can take proactive steps to reduce the impact on their insurance programs and ensure their coverage will be adequate to handle these escalating risks.
Legal, medical, and other trends have contributed to general liability combined ratios of over 100 percent since 2014.
A Changing Legal Landscape
One of the largest expenses associated with GL claims is legal fees. Litigation trends contributing to higher claims costs include:
- Litigation funding. Also known as legal financing, litigation funding occurs when outside investors front legal fees in exchange for a percentage of potential settlements or judgments. With upfront access to funding, claimants may be more inclined to go to trial, refuse a reasonable settlement, or seek more expensive or unnecessary medical treatments. Their attorneys may also pursue more complex legal arguments, all of which can extend litigation and drive up costs.
- Traumatic brain injuries. More plaintiffs’ lawyers are alleging traumatic brain injuries at the onset of claims — even in less serious accidents — which can lead to more medical treatments and doctors’ visits, increased legal costs, and life care plans.
- Escalating verdicts. Larger trial verdicts — from breach of contract and intellectual property to product liability and wrongful death lawsuits — are becoming more common. In addition to trends like litigation funding and the rise in traumatic brain injuries, other factors contributing to this shift include growing public sympathy for injured plaintiffs and attorneys attributing fault to businesses versus individual employees. In 2016 alone, four verdict awards amounted to $1 billion or more.
Medical Trends Drive Severity
Similar to what business are experiencing with significantly higher commercial auto claims medical issues are also affecting GL costs. They include:
- Medical inflation. Medical inflation is a significant driver of loss severity, primarily because GL claims are “long-tail” and medical treatments can last several years. The inflation rates for some medical related services continue to be higher than the “all-items” consumer price index (CPI). For example, the Bureau of Labor Statistics reports the change in CPIs for prescription drugs and hospital services were 2.7% and 4.5% from April 2017 to April 2018, respectively, while the change in the all-items CPI was only 2.5%.
- Opioids. In the last five years, claims charged to insurance companies to treat opioid dependence or abuse grew from $72 million to $722 million—an increase of almost 1,000 percent. Costs associated with opioid abuse are higher when patients are dependent on the drug, resulting in expenses associated with drug abuse treatment services and lost productivity.
- Wellness. By 2035, the number of adults in the U.S. over the age of 65 is expected to reach 78.0 million—outnumbering children under the age of 18. In addition, approximately 80% of older adults have at least one chronic disease. As our population ages, resources to maintain good health and well-being will continue to affect medical costs.
- Medical management challenges. Unlike in workers compensation, insurance carriers have little control over the medical treatment choices and costs of GL claims. The inability to direct care to limit unnecessary or inappropriate procedures, tightly manage prescriptions, and closely track billing of services can all translate into higher medical and claims costs.
Emerging Trends Affecting General Liability Losses
- Violent events. More than 50 percent of active shooter incidents in the U.S in 2016 and 2017 took place in either a commerce, government, or educational environment. These and other crisis situations have prompted the insurance industry to respond to this emerging risk, and are causing organizations to re-assess their risk and readiness.
- Technology. Technology and data are disrupting nearly everything we do. From artificial intelligence and 3-D printing to autonomous vehicles and data-driven environments, these advancements can help improve efficiency and safety, but are not completely without risk.
- Sharing economy. The sharing economy is creating new opportunities for businesses to work together, streamline services, and boost interactions with customers. However, this trend has also created a lack of clarity about when coverages begin and end, driving the need for custom insurance solutions.
How to Manage General Liability Risk
The best defense is a good offense. Begin by partnering with an insurer that has longevity in writing general liability insurance and a strong risk management infrastructure. Make sure the company you select understands your industry and risk exposures, so it can create tailored solutions specific to your business operations. Other proactive steps include:
- Adding umbrella and excess liability policies to provide your business with extra protection by covering costs that surpass your primary GL policy limits.
- Being prepared for a crisis or disaster situation by developing a proactive plan to help you better identify potential vulnerabilities and dependencies before they happen.
- Actively engaging with your insurer when claims occur to help ensure the best possible outcome and to reduce your total cost of risk.
- Staying informed by tapping into your insurer’s risk control resources, tools, and training opportunities to help you learn how to better identify and mitigate potential risks.
Working closely with an insurer that understands these trends and the potential impact to your business can help you better mitigate risks and manage GL losses and costs.
 Conning Insurance Segment Report. General Liability Year-End 2017.
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