As we dive into the complex world of insurance and risk management, I’m thrilled to be joined by Simon Glairy, a renowned expert in insurance and Insurtech, with a deep focus on risk management and AI-driven risk assessment. With litigation costs soaring and terms like “social inflation” and “nuclear verdicts” becoming more common, Simon is here to unpack these pressing issues. Our conversation explores the rising tide of litigation expenses, the staggering impact of massive jury awards, and the strategies businesses and insurers are adopting to navigate this challenging landscape.
Can you break down what social inflation means in the context of litigation and why it’s becoming such a significant challenge for businesses and insurers?
Social inflation refers to the rising costs of litigation and jury awards that go beyond what you’d expect from regular economic inflation. It’s driven by societal shifts, like changing attitudes toward corporations and a growing willingness to sue, often fueled by emotional appeals in court. For businesses and insurers, this is a big deal because it leads to unpredictable, skyrocketing costs that are hard to plan for. Premiums go up, and companies face financial strain not just from payouts but also from the uncertainty of these massive verdicts.
How does social inflation differ from the kind of inflation we typically hear about in the economy?
Unlike economic inflation, which is tied to the rising cost of goods and services due to market factors, social inflation is more about behavioral and cultural changes. It reflects how juries and the public perceive fault and compensation. For instance, there’s a growing skepticism of big businesses, and juries are more likely to award huge sums as a form of punishment or social justice, which doesn’t necessarily track with the Consumer Price Index or other economic metrics.
What are nuclear verdicts, and why do they carry such a dramatic name?
Nuclear verdicts are jury awards of $10 million or more, and they’re called ‘nuclear’ because of the devastating financial impact they can have on a company or insurer. These aren’t just big payouts; they can wipe out balance sheets, force businesses into bankruptcy, or drastically alter how insurers operate. The term captures the explosive, game-changing nature of these verdicts in the legal and business world.
Can you share an example of a nuclear verdict and how it impacted the company involved?
While I won’t name specifics to avoid legal sensitivities, there was a notable case in the product liability space where a company faced a verdict exceeding $100 million due to perceived defects in a widely used product. The fallout was immense—beyond the payout, the company’s stock plummeted, they had to overhaul their product safety protocols, and their insurance premiums soared. It also damaged their reputation, which took years to rebuild.
Data shows tort expenses in the U.S. grew at 7.1% annually from 2016 to 2022, far outpacing inflation or GDP growth. What’s fueling this rapid rise?
Several factors are at play here. First, there’s the increased use of third-party litigation funding, which bankrolls lawsuits and often prolongs cases, driving up costs. Second, public attitudes have shifted—there’s less sympathy for corporations and a desensitization to large monetary figures due to media exposure. Finally, plaintiff attorneys are using sophisticated psychological tactics to sway juries with emotional narratives, leading to higher awards.
Why are nuclear verdicts in product liability cases growing faster than in other areas?
Product liability cases often hit a nerve with juries because they involve personal harm or perceived negligence by companies that people rely on. There’s a sense of betrayal when a product fails, and juries want to send a message. Plus, these cases often involve complex technical evidence, which can be spun emotionally to amplify damages. The median size of these verdicts grew by 50% from 2013 to 2022, showing how intense this focus has become.
How are these massive verdicts, some exceeding $100 million, affecting insurers and their business models?
Insurers are getting hammered by these verdicts. When half of nuclear verdicts between 2013 and 2022 fall between $10 million and $20 million, and a chunk go over $50 million, it creates huge volatility. Claims costs are spiking across lines like auto and commercial liability, outpacing revenue growth. This squeezes underwriting profitability and forces insurers to rethink pricing, coverage limits, and even who they’re willing to insure in high-risk sectors.
Four states—Florida, California, Texas, and New York—account for half of all nuclear verdicts in the U.S. What’s behind this concentration in these areas?
These states have unique legal environments that make big awards more likely. They often have plaintiff-friendly courts, less restrictive laws on damages, and large populations, which means more cases and bigger jury pools. Additionally, urban areas in these states tend to have juries that are more skeptical of corporations and more open to large punitive damages as a form of accountability.
What strategies are businesses and insurers adopting to combat the risks posed by social inflation and nuclear verdicts?
Businesses are focusing on early claims resolution to avoid drawn-out litigation and working with defense attorneys to craft strong, fact-based trial narratives that counter emotional appeals. Insurers, on the other hand, are tightening underwriting, raising premiums, and sometimes limiting exposure in high-risk areas. There’s also a push for better risk assessment tools—some even using AI, which I’ve worked on—to predict and mitigate potential litigation hotspots before they blow up.
What is your forecast for the future of social inflation and nuclear verdicts in the coming years?
I think we’ll see continued growth in both, especially as third-party litigation funding expands and public sentiment remains critical of corporate behavior. However, there’s also potential for pushback—some states might enact tort reform to cap damages, and businesses could get savvier about managing public perception. The wildcard is technology; if AI and data analytics can better predict risks and outcomes, it might help insurers and companies stay ahead of the curve. But without systemic change, the pressure will keep building.
