In The Public Eye: Market Volatility, Nuclear Verdicts and Skyrocketing Liability Claims
By Alliant Specialty
Carleen Patterson and Justin Swarbrick, Alliant Public Entity, speak to Kevin Williams, SVP & Division Manager, Genesis, about market volatility and skyrocketing liability claims.
Welcome to the Alliant In the Public Eye podcast, a show dedicated to exploring risk management topics and challenges faced by today's public sector leaders. Here are your hosts Carleen Patterson and Justin Swarbrick.
Carleen Patterson (00:19):
Hi, this is Carleen Paterson and Justin Swarbrick. Welcome everyone to today's podcast, where we are tackling one of the most challenging aspects in the insurance market.
Justin Swarbrick (00:30):
That's right. If you are a public entity and are a buyer of liability insurance, there's a really good chance that you've already felt this volatility. And if for some reason you've been able to escape it, then this is going to be a timely message because the market's changing quickly, it's changing fast and that's not likely going to change here in the near future.
Carleen Patterson (00:57):
Yeah. So, joining us today is someone that Justin and I have worked with for quite a few years. He's one of the great pillars in the industry when it comes to liability insurance for public entities. And so please welcome Kevin Williams, who is the division manager for Genesis public entity group. Welcome Kevin.
Kevin Williams (01:15):
Well, thanks, guys. It's good to be with you today.
Carleen Patterson (01:18):
Good to have you. So, this is a topic that's really hitting home for you being with an insurance carrier and for us on the front lines, working with our clients. And we're looking forward to talking to you today and sharing a little bit about Genesis, and what your role is in the organization.
Kevin Williams (01:35):
Sure. Carlene, as you mentioned earlier, I'm the division manager for Genesis. Genesis is involved primarily in the casual lines for public entities, K through 12, and higher education clients across the nation. My role as division manager is to oversee the operations for Genesis, which is part of general reinsurance, and hopefully along the way to stay out of the way of a talented group of eight underwriters on the team who do the day-to-day work and keep me on the straight and narrow.
Carleen Patterson (02:12):
So Genesis works with a couple of different segments within public entity. So, you do K through 12, municipal business. I know you work higher ed, are there other segments of the end industry that you're intimately familiar with?
Kevin Williams (02:27):
Well, in the public entity space that also includes, county special district pools, anything really with a public entity flavor. And in particular, those organizations that have formed pools or mutuals or similar organizations under state statutes. So, we've had a long and storied and historical, if you will, a presence in that space. And it is one that well, we intend to be in for, for decades to come.
Carleen Patterson (02:59):
So, for our listeners, when we are talking about the liability market, and not only in general, what's happening, but when we're talking specifically about public entities, we're touching on a lot of the different, pieces of what we consider public entity and how it's impacting, whether you have police profession or educate with legal or what have you, we'll be talking about it today.
Kevin Williams (03:25):
That sounds great.
Justin Swarbrick (03:27):
So, Kevin, as we dig deeper into this liability market, it's interesting you mentioned the pools and we know that you work a lot with those types of organizations, but it really does seem that we are in the hardest market since the eighties, when those public entity pools were created. And I think by all standards, those have been a huge success, but what do you think is the biggest factor in today's world on why we're experiencing such a hard market specifically for liability insurance?
Kevin Williams (04:06):
Well, Justin, that's actually a great question. You're right, in the eighties, when many of the public pools and mutuals formed around the nation, it was a direct response to an evaporating market. And, difficult and pricey capacity, today is a little bit different situation, but there are some similarities. We've been by all accounts, really in a soft or stable to soft market since about 2005 until just recently saw a fairly extended period of attractive pricing, favorable terms and favorable conditions. I think we noticed at least in Genesis, and I think this is likely true for the remainder of the industry. We began to notice some significant changes along the 2014-2015 timeframes. Really, if you think back on it, 2014 was when we began to see the headlines emerge, particularly coming out of things like the Michael Brown shooting in Ferguson, Missouri.
Then we began to see sort of the Penn State, Jerry Sandusky, sexual abuse scandal take hold, and shortly thereafter, the emergence of the hashtag MeToo movement. And so, all of these things sort of conspired if you will, to create and foster what's commonly referred to today as social inflation. Those factors began to concurrently put a lot of pressure on underwriting results. You know, it wasn't too many years ago that the public entity space from an underwriter's perspective was relatively stable. The underwriting results could be counted on generally some variation of course year after year, but again, 2014-2015, the last five years or so, began the change dramatically after recognizing the impact of social inflation on underwriting results. I think the industry was also confronted with the realization that some of our pricing models, over the years have not held up as well as we would've expected, you know, pricing models, particularly those based on data, actuarial pricing models are generally backward-looking and based on historical results.
And that works as long as the environment is stable. But when you are faced with a situation where there is systemic or deep change in a market space. Those models become less predictive, less stable if you will. And I think that's what we've recognized no more true, rather than particularly in excess liability layers where it's notoriously difficult to project and predict pricing needs in higher layers anyway, but in an unstable or changing environment that particular instability is just really ramped up, really exacerbated. So, that's been a, a challenge as well. The bottom line though, I think carriers in general, as we sometimes are slow to recognize the dynamic changes, taking place in an environment and working those into underwriting and pricing models. And as a result, underwriting results begin to deteriorate. And what you get when that happens is sort of the snap back effect, the rubber band effect. When the market finally realizes that after several years, the business has not been underwritten and priced appropriately. And there's a response to that can be kind of painful.
Justin Swarbrick (07:49):
Yeah, I read a quote in one of the big publications that Steven Catlin said, the situation is quite simple. Insurers have significant underpriced casualty insurance for the last 10 years. And I think that just sums up exactly what you're saying, but quite frankly, I don't know if anybody could blame them in the actuaries and the underwriters. We've just seen such an exponential increase in the size of claim in jury verdicts and settlements, that it would've been nearly impossible to predict, even if you did start building this into your underwriting models back in 2014, 15 and 16. And when we look at these verdicts or settlements that were seeing these new nuclear verdicts, as they say, we just seem to be seeing them more and more, and there has to be something that's contributing to that. If you could speak to that a little bit, I think that would be really helpful.
Kevin Williams (08:55):
Yeah, Justin you're right. In terms of seeing the severity increase over the past few years and all we really have to do to, to verify that is read a few headlines, in the public entity's face, and know that to be true. A good example, our two hot button issues, I think for the space today, and that is police liability claims and of course, sexual abuse and molestation-related claims. Now when the police liability claims, I mentioned earlier that we sort of saw the sea change begin, if you will. And this is a little simplistic, but I think begin really 2014 with a Michael Brown shooting that particular claim was settled with the family and town of Ferguson, Missouri in 2017 for a million and a half dollars. Now that's a large number, but not in comparison to what we've seen in more recent years, following that you might recall that we saw the Freddy Gray wrongful death claim.
Kevin Williams (09:58):
That was a death in police custody involving police officers in the city of Baltimore that settled for 6.4 million. Fast forward to 2017, and we have the disturbing and unfortunate shooting of Justine Ruszczyk in, Minneapolis. That case was settled in 2019 for approximately 20 million. And of course, most recently just this past September was the settlement of the Brianna Taylor shooting, in Louisville, that was a 12 million settlement, plus some promises, by the police department to institute reforms in Louisville. The interesting thing about that case, and I think this also points to how difficult it is in this current environment is that when, from the date of the incident to the date of the civil settlement, in roughly seven months, right, which for a settlement, that size is really large.
Justin Swarbrick (10:56):
One of the things I've been thinking about recently is, are these the new bar, Kevin? I mean, you, you talk about the Michael Brown case in 2017, it settled. That wasn't even three years ago, and now we're talking, 12 times 20 times, that amount for some more recent incidents.
Kevin Williams (11:22):
Justin, I think you're actually correct in that. I don't know about the new bar, but we are certainly seeing much more community support for larger settlements and speed to settlement to get these terrible and tragic incidents resolved. And I think there are a few things that are driving that, first of all, we certainly have the presence of a social media, as well as the regular media that keep this front and center at very rapid speeds following the actual uncovering or discovery of the incident. But I think beyond that, there are some macro issues that we are recognizing today. One of those, for example, is jury makeup, or prospective jury makeup. Today, millennials are making up much more of the jury pool or prospective jury pool than they ever have in the past. It’s interesting, but last year millennials, became the large just subgroup of adults living adults in the United States, surpassing boomers for the first time.
So, what we're seeing now is our are folks born between say 1981 and 1996, being on those prospective jury pools. And with that, they bring a new set of values, a new set of expectations, some disenchantment and disenfranchisement. I think a second aspect that influences where we're seeing both verdicts and settlements go today is this entire idea of wealth or income disparity in our country. There is a growing and continually growing disparity in our nation between haves and the have-nots. And we have only to look at again, numbers coming out of the FED to establish how wide that disparity has been over the past couple of decades and its growing and wealth disparity lends itself again to juror or respected juror anger. And I think clients looking to settle cases, look at that and recognize that reality. And so, that's driving some of the value or the cost of settlements up.
Justin Swarbrick (13:48):
It seems like sometimes a jury will look at that disparity and in a sense use is it as an opportunity to shrink that and what we're finding. And I think what you'll be able to talk some more to Kevin is plaintiff's attorneys recognize this now and they're using it to their advantage. And I think there's a number of strategies that they're implementing that aren't helping, but are absolutely contributing to these nuclear verdicts that we're seeing across the country.
Kevin Williams (14:26):
Justin, you're absolutely right. The plaintiff's bar has honed its skillset. Finally, over the past several years, one of the techniques there routinely employing in both police cases, and we see this in particular in sexual abuse and molestation cases is this entire idea of reptile theory, which, does not involve a lizard. But it does in fact involve creating in the minds of prospective jurors, the idea that something tragic and disturbing and an immense failure has taken place to harm an individual. And this could be happening to you. You need to send message and rectify this so that it doesn't happen to you and your family in the future. And that entire sort of concept has really taken hold and frankly the plaintiff's bar has been very effective in deploying it. So, I think that there's no doubt that they've come a long ways in the past few years and honing that skillset,
Justin Swarbrick (15:36):
The, the reptile theory was created by two psychologists. And I think it was 2009 or 2010, they wrote a book on this. I went on Amazon to see if you could buy it. It's very difficult to get, and it costs over a thousand dollars. So it's absolutely working. They're absolutely using it as a technique. And I think the defense bar really needs to catch up, and if we don't soon, it's just going to continue to spiral out of control. Something else that we've been hearing about. It's not a new strategy per se, is litigation funding. It's been around for a long time. We're just seeming to hear about it more and more now in a lot smaller cases, I think traditionally had been used in the big class action lawsuits, but now we're seeing it on a much smaller scale. So, could you explain that strategy a little bit and what it is and, and why we may be seeing it more in some of the smaller cases versus where it had been traditionally used in the larger ones?
Kevin Williams (16:42):
Sure, Justin, we are seeing more of that and you're right. It's not a new phenomenon, but essentially a pursuing litigation can sometimes, and oftentimes be a lengthy and expensive process and law firms and plaintiffs sometimes do not have the financial wherewithal to pursue those. So, some years ago, we started to see the emergence of litigation funding firms. These are essentially the supplier of capital to plaintiffs and specifically plaintiff attorneys to pursue cases that look to be winnable with a good financial outcome at the end. Now, as you pointed out, traditionally, that's been on larger cases, large product liability pursuits, things like that, but more recently we've seen that drop down into the smaller and middle size cases. A great example of that by the way, is a firm called Legalist, it was started a few years back by a 23-year-old Harvard dropout, by the name of Eva Shang.
And she, and some of her folks began this, operation. And just about a year ago, a little more than that, they secured a hundred million dollar tranche of financing to actually engage on these midsize cases and pursue them. And they used a series of algorithms to decide which ones are essentially more likely to be winnable and likely to returns on those. And these are attractive investments for venture capital firms, for individuals of ultra high net worth, things like that. But the expected returns are significant. We even have a firm or two that's gone public in fact, Burford Capital, a litigation financing firm, debuted on the New York office exchange.
Justin Swarbrick (18:36):
Wow. And so that's not going away either.
Kevin Williams (18:39):
It is not.
Carleen Patterson (18:42):
Yeah. I was involved in some discussions with some claims occurring out in California and there was attempts to do some tort reform and some look at those settlements that are happening. And like you said, Kevin, around sexual abuse and molestation. And it's interesting because you have these huge nuclear verdicts and whether it's a school system or some other municipality, and it turns around that they have to pay this and then they're complaining about their taxes. And it's also kind of ironic that they're not seeing that these nuclear verdicts are being paid ultimately out of the taxes that they're paying in. So, it's very interesting what's going on.
Kevin Williams (19:29):
It is difficult. And we're always cognizant of the fact that what we're talking about here is taxpayer money, ultimately, as she said Carleen. And so, to the extent that these are also contributing to underwriting result and the cycle of a hardening markets it pays to keep that in mind that ultimately you're actually correct. The members of our own community are paying these verdicts. And so, there's a twofold issue. There it's the size of the verdict, but also finding ways that we can mitigate and limit the exposure or the practices and the behaviors that lead to some of these tremendously vertical verdicats and settlements.
Carleen Patterson (20:13):
So, I've worked with Genesis for a lot of years. And one of the things that I have found is that even in a soft market, or even in a hard market, your underwriters have been very consistent about what they're looking at and pricing your insurance policies and coverages, and even in a soft market, you tended to be very consistent at what you're looking at. So, Kevin, do you think that these large verdicts and settlements are a trend that's going to go away or do you foresee it continuing to escalate?
Kevin Williams (20:46):
Carlene, I think everyone is anxious to see what the environment will look like post-COVID. Once we get on the other side of the crisis and our businesses and personalized return to some sense of normalcy, but I don't see anything on the horizon that suggests at this point that we're going to see any lessening or mitigation of these the factors that we've talked about over the last few minutes. The jury pools themselves, have both disparity and perpetuation of litigation funding support, all of those things I think are going to still be with us and still driving the results we see here, And I also think that frankly in this sort of era of difficult conversations and difficult dialogues between, family members, friends, business partners and the like. The sort of level of, of anger and disruption has ramped up quite a bit. And I think that makes it very difficult to, to foresee in the near future, much change in the litigation environment and the value of these sort of vertical or nuclear settlements and verdicts.
Carleen Patterson (22:04):
Genesis has always been very consistent in your underwriting tactics and what you're looking at. So, do you think, looking ahead and looking at what Justin and I can do as brokers and what our clients and public entity risk managers can do to try and have some sort of a positive impact. And when there's so many things that are out of their control what do you think there is that can be done to try and put a little bit more control within what they're dealing with?
Kevin Williams (22:34):
Sure. Carleen, that’s a great question in a dynamic and changing environment. And we know that looking ahead in 21 and 22, our muni county and other public clients are likely to be under significant budget pressures as some of the revenue streams that they've had in the past continue to erode as our economy tries to recover. So, I think a couple of things from a buyer's standpoint that will mitigate, lessen, or at least smooth out some of the bumps and the disruptions that we're experiencing. Now, first of all, let me say that we tend to measure outcomes in dollars and cents, and we call that the currency of our business, but that's really just sort of how we measure outcomes. It's the scorecard, if you will, I would argue that data and information are king in this marketplace.
If you want to get an underwriter's attention and have he or she provide the best terms and conditions that can possibly be put on the table, having well structured data to tell your story is key. So, I would say at this time, if you are a client and you have some time and capacity to shape up your data, to tell your story now is a great time to do that. It's just absolutely critical. The second thing I would say is that that frequent and early communication to avoid really unnecessary surprises is a great idea. Most underwriters, while they may not give you a quote on something six, eight or 12 months in advance, they can at least share with you some crystal balling. So, what expectations are for the future and at least a broad sense, so that expectations are set and surprises don't creep up two weeks before renewable.
I know that I don't like surprises late in the game, and I'm pretty sure that our clients don't either. And then finally, I would say because it is a and changing environment with lots of things, moving capacity commitments and pricing, terms, conditions, availability, all of that, I would advise that clients really give deep consideration to any changes. They might be able to both implement and afford in their program to mitigate costs overall, the total cost of risk, if you will. And that may mean changes in retentions that may mean changes in purchase of a limit that may mean a whole different array of structural considerations that are implemented either on a permanent basis or for a period in order to mitigate if some of the costs increases associated with what we're saying today. So I think those three things in general serve clients well. And of course at the end of this always work with somebody like Alliant, who actually has expertise and knowledge in the space and can have those conversations, both with the client and with the underwriting community to get the best outcomes.
Carleen Patterson (25:48):
Absolutely. I completely agree.
Justin Swarbrick (25:51):
I would echo everything Kevin said, and I totally agree that this trend doesn't seem to be going away anytime soon, and data is going to be king going forward. It not just Kevin at Genesis that we hear this from it's from all the underwriters across the industry. It really is the right time to get your data right. And we talked about it in our last episode. Underwriters are overwhelmed with submissions. The more we can set a submission apart from the others, the better opportunity it's going to have to get a really good look from that underwriter. So, I think again, if this market hasn't affected you yet as a buyer of liability, it definitely is going to, and Kevin, I just want to thank you for coming today and talking through this because it helps us, and it helps our clients and other public sector risk managers tell the story behind the story. It's not easy taking a rate increase to the key stakeholders at your organization. But if you have the story behind it, absolutely softens it a little bit and it makes it appear to make more sense. So we appreciate it.
Kevin Williams (27:14):
Well, Justin, I appreciate the opportunity and, no one enjoys, I know I certainly don't paying higher prices for anything, but I have a great deal of confidence in both the brokerage and underwriting community that we can collectively through really good and frequent communication, manage our way through some relatively difficult challenges for our public adding clients.
Carleen Patterson (27:40):
Absolutely. Well, thank you so much, Kevin, for joining today, we really appreciate it. And as always thanks to our listeners for tuning into, In the Public Eye.
Alliant note and disclaimer: This document is designed to provide general information and guidance. Please note that prior to implementation your legal counsel should review all details or policy information. Alliant Insurance Services does not provide legal advice or legal opinions. If a legal opinion is needed, please seek the services of your own legal advisor or ask Alliant Insurance Services for a referral. This document is provided on an “as is” basis without any warranty of any kind. Alliant Insurance Services disclaims any liability for any loss or damage from reliance on this document.
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