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As of today, over 3.46 million patents have been filed. Over the years, technology has transformed the way we live, work, and connect. While these innovations are often made for the greater good, for some industries like insurance, they can be a double-edged sword.

Technologies like AI and blockchain have streamlined processes and boosted efficiency, but they also come with a host of new risks that insurers can’t afford to ignore.

Let’s explore some of these emerging risks and examine recent cases that highlight just how serious they can become.

One major risk is cybersecurity, with incidents growing by the day. As insurers increasingly rely on digital platforms and store vast amounts of data, they become prime targets for hackers. Last year alone, there were 317.59 million ransomware attempts reported worldwide.

Bigger, bolder attacks

Take the MOVEit data breach, for example. This 2023 cyberattack affected over 600 organizations and resulted in the exposure of millions of personal files and records. When companies are hit with such attacks, the claims for cyber insurance skyrocket.

Insurers are now rethinking how they assess cyber risks, as the financial fallout from these breaches can run into billions.

Another growing concern is Artificial Intelligence (AI). AI is now being used to automate various tasks, from claims processing to customer service. This automation often results in greater customer satisfaction due to faster settlements, less hassle, and overall better service.

Unfortunately, AI isn’t always fair. When AI systems rely on flawed data, they can make biased decisions like offering lower payouts to certain groups or rejecting claims unjustly.

For example, a 2019 study revealed that a hospital’s algorithm designed to identify high-risk patients flagged fewer Black patients. This happened because the data reflected lower healthcare spending on Black patients, leading the algorithm to incorrectly assume they were healthier than equally ill white patients.

Liability from autonomous vehicles: Who’s to blame?

Autonomous cars sound like a dream come true, but from an insurance standpoint, they’re a nightmare. When a self-driving car crashes, who’s responsible? The driver? The car manufacturer? The software developer? These are tough questions that insurers are still grappling with.

A high-profile accident involving a Tesla Model X was settled in court earlier this year. The incident occurred in 2018 in California when Walter Huang activated the Autopilot feature before the crash. In a court filing to keep the settlement amount private, Tesla stated that it agreed to settle the case to “end years of litigation.”

When tech goes down

We’ve all experienced it—a website crashes or an app stops working. For insurers, these kinds of tech failures can lead to serious business interruptions and operational failures.

Back in July, a faulty update by CrowdStrike caused millions of Windows PCs to crash and disrupted operations. Airports, hospitals, emergency services, and many other critical sectors were affected.

Although an updated patch was sent out within a few hours, it required manual fixes for the computers, one by one. Loss estimates from the crises are believed to have reached upwards of $1.4 billion.

Wrapping it up

The tech boom brings exciting opportunities, but it also opens the door to new risks that insurers have to navigate carefully.

Whether it’s managing cybersecurity threats, ensuring AI fairness, or dealing with the uncertainties of autonomous vehicles, the industry is facing challenges that are evolving just as fast as the technology itself.

Insurers need to stay ahead of these risks by continuously updating their models, strengthening cybersecurity measures, and keeping an eye on emerging trends.

After all, staying informed is the best way to ensure that both they—and their customers—are protected in this brave new world of tech.

If you’ve ever heard of embedded insurance, you might already know it’s when insurance coverage is automatically included in products or services.

Think about buying a plane ticket and getting travel insurance bundled in. It’s simple, convenient, and saves you from having to go through the process of shopping for insurance separately.

But Insurance-as-a-Service (IaaS) takes this concept and runs with it.

Instead of just including a pre-made insurance policy with a product, IaaS allows companies to offer customized insurance solutions as a full service. Businesses don’t just tack on insurance—they can integrate the whole insurance process into their platform, from buying coverage to managing claims.

Let’s dive into how IaaS works, the different models out there, and what makes it desirable for both businesses and customers.

What is Insurance-as-a-Service (IaaS)?

So, embedded insurance is one way to think about how IaaS works.

However, Insurance-as-a-Service is much broader as it allows businesses to offer a whole range of insurance services in a flexible and cost-effective way. This allows them to launch a new insurance program or expand on an existing one.

Rather than just tacking on a policy here and there, IaaS offers companies the ability to integrate entire insurance services into their own platforms or products. It’s like turning insurance into a plug-and-play feature for any business.

For example, instead of companies like Specialized and VanMoof just selling you a bike and offering insurance as an afterthought, with IaaS, those same companies could actually offer you insurance options, manage your claims, and keep track of your coverage—all through their own platform.

It’s insurance that’s built into the experience, rather than an add-on.

IaaS models in action

Now, how does this work in practice? There are several different Insurance-as-a-Service models, each with its own take on the concept.

 1. White-label insurance:

Here, businesses offer insurance products under their own brand name, even though the actual insurance is provided by a third-party carrier. This is popular in industries like travel and retail.

Example: Shopify offers its merchants the option to add shipping insurance to their products, but the coverage itself is provided by insurance partners.

 2. API-driven insurance:

With this model, companies use insurance providers’ APIs to connect directly to their systems. This allows them to offer custom policies to their customers in real time.

Example: Trōv, a big player in on-demand insurance, allows users to switch coverage on and off for specific items through their app.

 3. Full-stack insurance providers:

These are companies that own the entire insurance process, from offering the policies to handling the claims.

NEXT Insurance is a great example here. They don’t just sell you a policy—they also process your claims directly, cutting out the middleman.

Benefits of IaaS

There are plenty of reasons why Insurance-as-a-Service is a win-win for both businesses and customers:

• Convenience for consumers: IaaS makes insurance easy to access and less of a headache. You don’t need to jump through hoops or spend time shopping around. The insurance is already there when you need it.
• Seamless integration: For businesses, insurance can be a smooth part of their existing offerings. It adds value without feeling intrusive or overly complicated.
• Customization: With IaaS, companies can tailor insurance to fit their customers’ needs perfectly. This leads to a much better customer experience because the insurance feels relevant to the product or service.
• Increased trust: When companies offer insurance through their own platform, it builds a sense of trust and loyalty. Customers are more likely to stick around when they feel like they’re getting a complete service.

Closing thoughts

What’s also worth mentioning is the technological integration that connects these businesses and their insurance partners. This is where Insurance APIs come into play. Insurance APIs, true to their name, enable communication between the business processes and infrastructures of both insurance companies and their partners.

Insurance-as-a-Service takes the concept of embedded insurance and makes it smarter, more flexible, and ultimately more useful. With companies like Shopify, Trōv, and others leading the way, it’s clear that IaaS is here to stay, offering a win-win for businesses and consumers alike.

So, the next time you’re shopping for something big, you might find that the insurance is not just an add-on—it’s part of the whole package. Other times, it could be insurance, just masquerading as something else entirely.

Sometimes technology progresses slowly, and other times it leaps forward. Telematics, and the technologies that support it, are one of those leaps. Fueled by advancements in 5G, IoT connectivity, and more, telematics now enables accurate Usage-Based Insurance (UBI) on a scale we haven’t seen before. This pricing model allows consumers to pay for insurance based on their actual habits, be that energy consumption, driving, or other activities.

In the automotive sector, telematics devices track driving habits to reward safe driving. This data can be transmitted in real time, providing insurers with a more accurate picture of a driver’s risk profile. In the utilities sector, telematics allows accurate monitoring of energy consumption, identifies potential faults, and optimizes network performance. Smart meters, equipped with telematics capabilities, can provide real-time data on energy usage, allowing utilities to offer time-of-use pricing and demand response programs.

In other words, UBI is transforming the insurance industry. This shift from traditional risk-based pricing is reshaping the relationship between insurers and policyholders. This shift continues as more trends emerge. But what are these trends? Let’s get into it.

Surging 5G connectivity

The 5G boom in the United States has been nothing short of explosive. Just two years ago, there were nearly 162 million 5G-enabled devices in the country – almost double the amount from the year before. These devices now make up almost a third of all wireless connections. And the growth shows no signs of slowing down. By 2028, experts predict that 5G will dominate the wireless landscape, accounting for a whopping 91% of all connections.

5G is a game-changer for telematics. In the automotive sector, it’s powering real-time diagnostics, software updates, and connected car services. For consumers, this means safer, smarter driving. For insurers, it offers more accurate risk assessment and innovative products.

Beyond cars, 5G is transforming smart homes. Homeowners can now monitor energy usage, automate devices, and detect issues like leaks instantly. This means improved efficiency, reduced costs, and better relationships with insurers. Specifically, consumers won’t need to argue about insurance claims based on inaccurate usage data, as they can see the real-time impact of their behaviors (like turning the air conditioner on or washing clothes in higher heat).

As 5G becomes more widespread, we’ll see even more innovative telematics applications across industries. And perhaps more interestingly, we could see UBI become the dominant form of insurance in the coming years.

Crash detection & crash diagnostics

More models of cell phones, including the latest Apple and Pixel devices now include crash detection. Similarly, most new cars now feature automatic crash detection and can alert emergency responders. These features are mandatory in all new cars sold across Europe, but they are also important to US consumers. A whopping 51% of Americans say it is extremely or very important that their next car has a system where it will car emergency services when airbags deploy.

Crash diagnostics, powered by advanced sensors and 5G connectivity, are providing unprecedented insights into accidents. These systems can accurately record the speed, direction, and even force of impact, offering a more comprehensive understanding of the incident than traditional witness accounts or police reports.

This technological advancement is significantly impacting the insurance industry. By providing objective evidence, telematics can help insurers:

• Resolve disputes more efficiently: Telematics data can clarify conflicting accounts, reducing the time and cost associated with investigations.
• Offer more accurate pricing: By analyzing driving habits and accident risk, insurers can develop more personalized and equitable pricing models.
• Develop innovative products: Telematics-enabled features like accident prevention alerts and remote assistance can enhance customer satisfaction and loyalty.

Crucially, these telematics allow for faster claims processing with less human intervention. The last thing most consumers want to worry about after a crash is filling out forms. With a more advanced UBI policy, this data can be sent automatically.

Multimodal profiling

Multimodal profiling, though still in its early stages, has the potential to revolutionize UBI models. Current programs primarily focus on driving behavior, but the future of UBI lies in providing comprehensive coverage for all modes of mobility.

Imagine a UBI program that understands when you drive, cycle, or use an e-scooter. This “pay how you move” approach would offer continuous mobility coverage tailored to your individual needs. While mobile telematics will continue to monitor driving behavior, a single poorly scored car trip shouldn’t overshadow a customer’s overall mobility patterns.

By incorporating “green rewards” for less car usage, insurers can incentivize sustainable transportation choices, benefiting both customers and the environment. This holistic approach to mobility profiling would create a more equitable and sustainable UBI landscape, where customers are rewarded for their diverse transportation habits.

A smartphone-driven revolution

Future UBI products will undoubtedly leverage the capabilities of smartphones to an even greater extent, offering an app-based experience and insights beyond the car. The vast amounts of data collected by modern connected vehicles will also be harnessed to provide even more personalized and accurate UBI solutions.

For example, smartphone apps can track driving behavior, monitor vehicle health, and even detect potential risks like distracted driving. The options are plentiful here – monitoring when drivers are making/receiving calls, sudden braking, and whether they are driving recklessly in geofenced areas like schools and hospitals. These insights can be used to reward safe drivers with lower premiums and provide personalized recommendations for improving driving habits. Additionally, data from connected cars can offer a deeper understanding of driving conditions, allowing insurers to accurately assess risk and adjust premiums accordingly.

While the increased level of oversight may raise privacy concerns for some consumers, the potential benefits of UBI are significant. By accurately measuring driving behavior and risk, insurers can offer more equitable and affordable premiums. For safe drivers, UBI can result in substantial savings.

As technology continues to advance, we can expect even more innovative UBI solutions that seamlessly integrate with our daily lives. The future of UBI is bright, promising a more personalized, efficient, and rewarding driving experience for all.

Final thoughts

UBI is rapidly evolving, driven by advancements in telematics and 5G technology. As telematics capabilities expand, UBI will become even more personalized and accurate, offering consumers the opportunity to pay for insurance based on their actual usage. From driving habits to energy consumption, UBI is transforming the insurance landscape, providing a more equitable and rewarding experience for policyholders.

The way insurance is sold has come a long way. What started as a largely face-to-face business, where customers relied on agents for advice, has transformed into a mix of digital platforms, AI-powered tools, and seamless integrations.

Back in the day, the most common way to buy insurance was through an agent or broker. If you wanted to insure your home or car, you’d likely meet with an agent who would walk you through the process, explaining the fine print and offering recommendations. It was all about relationships—agents were trusted advisors. The value here was the personal touch, and for many people, especially older generations, that trust was everything.

But, as much as this model worked, it had its limitations. Agents could only reach so many clients, and everything was very hands-on. There were lots of forms, phone calls, and back-and-forths to finalize a policy. Things worked, but they moved slowly. Insurers also had to pay hefty commissions to the agents and brokers who sold their products, which contributed to the overall cost of insurance.

Even today, agents and brokers still have a role, especially for more complex insurance needs. Many people still prefer the guidance of an expert when navigating complicated coverage, like life or health insurance.

What if you could buy insurance while doing your banking?

That’s exactly what Bancassurance aimed to do. Starting in the late 20th century, banks partnered with insurance companies to sell insurance products right alongside checking accounts and mortgages. The idea was that if you trust your bank with your money, why not trust them with your insurance too?

This model took off, especially in Europe and Asia, but also in the U.S. with big players like American Express and City Bank offering insurance products. For consumers, it made sense—buying insurance through a bank was convenient because everything could be handled in one place. And for insurers, it was a chance to tap into a massive customer base without needing to build out their own salesforce.

However, bancassurance doesn’t always offer the personalized advice people get from an agent, so while it’s great for simple policies, it might not be the go-to for more complicated insurance needs.

The rise of tech-based solutions

Insurtech—a term that blends insurance with technology came to prominence in the early 2010s. Companies like Lemonade, Root Insurance, and Trov have shaken up the industry by offering innovative, tech-driven solutions. Lemonade, for example, uses artificial intelligence (AI) to provide renters and homeowners insurance with a super-smooth, app-based experience. Root Insurance uses telematics via the Root app tracking your driving behavior through an app, to offer personalized auto insurance rates based on how safely you drive.

The big draw here is that everything is faster and easier. You can get quotes instantly, file claims in minutes, and manage your policies all through your smartphone. It’s insurance designed for the digital age, a huge attraction for tech-savvy customers who want everything at their fingertips.

What makes insurtech particularly interesting is how it’s tapping into areas that traditional insurers might have overlooked. For instance, Trov offers on-demand insurance for individual items like electronics or sports equipment, letting you turn coverage on and off whenever you need it. This is a far cry from the traditional model of long-term policies with complicated terms.

Embedded insurance

Imagine booking a flight, and before you complete your purchase, you’re offered travel insurance at checkout—no extra effort required. That’s the beauty of embedded insurance. It’s when insurance is seamlessly included in other products or services you’re already using.

In the U.S., platforms like Expedia and Airbnb often offer travel and rental insurance right within their booking systems. Similarly, when you buy a smartphone, you might be offered extended warranty insurance at checkout—think of services like AppleCare.

This approach makes buying insurance super convenient. You don’t have to go out of your way to research policies or talk to an agent. The product is there when you need it, exactly at the point of sale.

What’s next?

So, where do we go from here? The truth is, there isn’t a single “best” distribution channel anymore. Customers today want flexibility, and that means a hybrid model where they can choose how they buy insurance, whether it’s from an agent, online, through an app, or even as an add-on to something else they’re purchasing.

Insurers are investing in omnichannel strategies, allowing customers to interact with them across multiple touchpoints. Niall Kavanagh claims that this will improve sales and retention. For example, a customer might start by researching policies on an app, talking to an agent for advice, and then finalizing the purchase online—all with the same company.

Technology will keep driving innovation, and we’ll likely see even more personalized and integrated insurance products in the future. Whether it’s AI helping to predict risks more accurately, blockchain ensuring greater transparency in policies, or more partnerships between insurers and digital platforms, the future of insurance distribution is all about convenience, personalization, and choice.

In the end, no matter how insurance is sold, one thing remains the same: people want peace of mind that they’re covered when they need it most. And with the way distribution channels are evolving, getting that peace of mind is only getting easier.

Change is no longer an exception for insurance companies—it’s the rule. With new competitors emerging and technology advancing at breakneck speed, staying ahead isn’t just an advantage; it’s a necessity. But while innovation is critical, insurers often face a familiar hurdle: regulatory compliance. The constant need to meet ever-evolving regulations can slow progress and make it difficult to focus on growth.

Fortunately, this is beginning to shift.

Insurers are now turning to technology, specifically RegTech—Regulatory Technology—to manage compliance in a more streamlined and cost-effective way. By automating tasks and utilizing tools like virtual agents and Robotic Process Automation (RPA), RegTech not only ensures regulatory demands are met but also enhances customer experiences and optimizes operations. It’s becoming the key to balancing compliance with innovation.

To better understand the impact this technology has had on the insurance sector, let’s explore the ABCs: What exactly is RegTech? Why do insurers need it, and what are some notable examples we’re seeing today?

What is RegTech?

RegTech refers to the use of advanced technology to help firms, big and small, comply with regulatory requirements. From finance and healthcare to education and hospitality, numerous industries benefit from technology that helps keep regulations in check.

Legal and compliance departments are often under pressure to stay updated and ensure every aspect of the business follows the rules. In the insurance industry, RegTech automates compliance processes across various business functions like reporting, monitoring, and data auditing. Compliance isn’t optional—insurers must adhere to guidelines set by regulators, but this can be overwhelming, especially when regulations change frequently.

Keeping up with regulations

The insurance industry is particularly vulnerable to regulatory changes, with rules often varying significantly across regions.

Last year, Aviva faced a hefty fine of $600,000 for failing to comply with auto insurance regulations which required insurers to provide auto insurance quotes to all eligible consumers under the company’s approved underwriting guidelines.

Manually keeping up with these evolving requirements is not only labor-intensive and time-consuming but also prone to human error. By integrating RegTech solutions into insurance systems, companies can automate critical tasks like reporting, monitoring, and compliance checks, significantly reducing the risk of non-compliance.

Beyond regulations

While RegTech’s primary focus is on compliance, its benefits extend beyond regulatory needs.

Automating processes like KYC (Know Your Customer) ensures faster onboarding, fewer errors, and quicker claims settlements, all of which improve the overall customer experience—something every business strives for.

Additionally, RegTech simplifies regulatory reporting, a typically time-consuming and error-prone task.

Start-ups like Duck Creek and Next Insurance help businesses, particularly small businesses in case of the latter, to ensure compliance by automating and integrating business processes under one digital platform that automates data collection, submission and generation of reports, among other benefits.

Overcoming legacy system challenges

One common hurdle insurers face is the reliance on outdated legacy systems, which can make adopting new technologies difficult. Fortunately, many RegTech solutions are designed to integrate seamlessly with existing infrastructure through APIs and cloud platforms.

This enables insurers to modernize their operations without needing to completely overhaul their systems, allowing them to benefit from new technologies without disruption.

Big Data vs. Smart Data

Insurers collect vast amounts of data daily, but not all of it is equally useful. While Big Data refers to large, unprocessed datasets, Smart Data is refined information that provides actionable insights.

RegTech plays a key role in transforming Big Data into Smart Data, allowing insurers to make more informed decisions about compliance, risk management and customer behavior. This refined data can improve everything from policy pricing to underwriting, ultimately helping insurers better serve their customers while maintaining regulatory compliance.

Aside from that, RegTech solutions like Zest AI excel at using advanced analytics and artificial intelligence (AI) to monitor risks and identify potential compliance issues in real time. Machine learning (ML) allows these systems to predict potential breaches and flag them before they become costly problems.

With cognitive computing, Regulatory Technology can analyze complex patterns and predict risks, improving fraud detection and optimizing underwriting. PwC’s 2022 survey found that 46% of insurance firms had been exposed to fraud or financial crime in the previous 24 months.

ML, in particular, speeds up risk assessments, making decisions faster, more accurate, and more reliable. This means insurers can take proactive steps to mitigate risks while improving operational efficiency.

The future?!

RegTech might come with some upfront costs, but in the long run, the benefits easily make it worth the investment.

Automating compliance processes not only reduces operational expenses but also cuts down on regulatory fines and penalties. In an industry where even the smallest fines can amount to thousands of dollars, this is a game-changer. Aside from that, it eliminates human error, making compliance more efficient and less risky.

RegTech is clearly not just a passing trend—it’s becoming the cornerstone of the insurance industry’s future.

We’ve all heard the buzz about 5G—how it’s going to make everything faster, smarter, and more connected. But what does that mean for the insurance industry?

As 5G rolls out across the globe, it brings faster speeds, lower latency, and the ability to connect an enormous number of devices. For insurance, that means real-time data collection, improvements in customer service, and the rise of personalized products.

To understand how this is happening let’s have a look at what 5G is. What does it entail? Its areas of impact in insurance, and of course, notable examples we can see today.

What exactly is 5G?

First, let’s break it down. 5G is the fifth generation of wireless technology, and it’s a big leap forward from 4G. It offers three key improvements: faster speeds (up to 100 times faster than 4G), lower latency, and higher bandwidth (meaning more devices can connect at the same time).

To put that into perspective, the potential download speed for 4G was 1 Gbps, while its latency, or “lag,” was between 60 and 98 ms. 5G promises to achieve—and is already achieving—download speeds of up to 20 Gbps and a latency of less than 2 ms.

Though telecoms began rolling out the tech in 2019, it has become mainstream in the last three years. At first, only new flagship devices supported it, but now even budget phones are released with the infrastructure to tap into 5G towers.

For consumers, this means everything from streaming Netflix to operating smart home devices becomes smoother and faster. But for industries like insurance, it opens up a whole new world of possibilities, allowing them to tap into cutting-edge tech like the Internet of Things (IoT) and Telehealth.

Applications in insurance

 1. Telematics and Usage-Based Insurance (UBI)

Telematics refers to the technology used to collect driving data, like speed, braking patterns, and miles driven. Usage-based insurance (UBI) relies on this data to offer personalized premiums.

If you’re driving a car that’s equipped with a 5G-connected telematics system, the insurer receives real-time data about your driving habits—accelerating, braking, even the way you corner. This data enables insurers to assess risk instantly and offer tailored premiums based on how you actually drive.

Take Progressive’s Snapshot program, for example. It already uses telematics to offer personalized rates, but with 5G, insurers can get more accurate data faster, meaning safer drivers can be rewarded almost in real-time.

 2. Claims processing and underwriting: Speeding things up

No one enjoys filing an insurance claim, but 5G has the potential to make the whole process faster and smoother. With instant data transmission, insurance companies can automate much of the claims process, reducing the time it takes to get a claim approved.

Picture this: You’re involved in a minor car accident. Thanks to 5G, your insurer can use real-time data from your car’s sensors to assess the damage instantly. Your claim could be processed and settled before you even leave the scene.

Lemonade, an insurtech company, is already using AI to handle claims in seconds. With 5G, this type of service will become even more common and reliable.

 3. IoT and smart insurance

5G is the backbone of the Internet of Things (IoT), which refers to the network of physical devices connected to the internet. Think smart thermostats, health trackers, or even refrigerators that can place grocery orders for you. These devices collect vast amounts of data that can be used by insurers to assess risk more accurately and offer personalized coverage.

Imagine a smart home system connected to 5G that monitors everything from water leaks to fire risks. Insurers can use this data to adjust your homeowner’s insurance in real-time. If your system detects a higher risk of water damage, your policy might automatically increase coverage.

In health insurance, wearable devices like smartwatches could provide real-time health data to your insurer. If you’ve been hitting your fitness goals, you might get a discount on your premium, all thanks to 5G’s ability to instantly transmit this data.

 4. AR, VR, and customer experience

5G also promises to improve how insurers interact with their customers. Augmented reality (AR) and virtual reality (VR) are becoming more popular in customer service, and 5G will make them even more seamless.

Imagine a customer having a virtual walkthrough of their home with an insurance agent—entirely online—thanks to 5G-powered VR. This could be used to assess risk, suggest improvements for safety, or even settle claims for damage. Some insurance companies like Sadas are already experimenting with VR for training adjusters, but with 5G, it can become a common practice.

 5. Embedded insurance and real-time offers

Last but not least, embedded insurance—where insurance is seamlessly integrated into other purchases—is another area 5G will impact.

If, for example, you’re about to rent a car. As soon as you’re in the vehicle, 5G allows the rental company’s system to instantly communicate with your insurer. Within seconds, you could receive a personalized offer for temporary car insurance, specifically tailored to the risk factors of that trip.

This “insurance on the fly” model is already in its infancy with companies like Cover Genius, but 5G will make it much faster, more efficient, and more customizable.

Bottom line

The future of insurance looks promising, and 5G will be a big part of that change. With personalized premiums based on real-time data, faster claims processing, and more accurate underwriting, 5G will make insurance smarter, quicker, and more customized for each person.

As this revolution continues to unfold, the relationship between 5G and insurance will become an everyday part of how we protect ourselves and our assets in a hyper-connected world.

The insurance sector can no longer defend itself against these risks using the same old tactics.

Legal misuse in the insurance business is a long-standing problem that has been slowly spreading throughout the sector for many years. It is neither new nor particularly recent. Currently known as social inflation, the consequences are worse and the concept of “tort reform” appears illusive.

As per a study carried out by Munich Reinsurance America, Inc. (Munich Re U.S.) and the American Property Casualty Insurance Association (APCIA), approximately 86% of Americans concur that state and federal lawmakers ought to tackle the malpractices in the legislation. The insurance sector can no longer afford to ignore this issue and pass on the accompanying costs to policyholders, nor can it continue to rely on present methods and solutions.

A look back at the evolution of ‘social inflation’

In a 1977 letter to Berkshire Hathaway stockholders, Warren Buffett utilized the term “social inflation” for the first time, defining it as “a broad definition by society and juries of what is covered by insurance policies.” In a 2010 whitepaper, reinsurer PartnerRe clarified the definition, explaining that social inflation is the rise in insurance losses brought on by:

The following factors have been observed: higher jury awards; wider mistrust of large corporations; more liberal treatment of workers’ compensation boards; increased use of social media; growing attorney involvement in claims; social developments that impact jury members and result in very high jury awards; and widening income disparities.

Today’s operating climate has gotten much tougher for carriers, on top of the abuses that have all continued to get worse. Consumers and regulators are starting to fight back after record rate rises in 2022 and 2023. To reduce costs and boost growth, an increasing number of insurers have stopped renewing property and vehicle policies in unprofitable states and, in certain situations, have pulled out of the market altogether until rates drop.

The longer tail of liability claims hangs over multi-line carriers like a dark cloud as they brave the anticipated more active hurricane season of 2024 and step out from under the shadow of general cost inflation. Considering the long-tail effect casts doubt on reserve accuracy.

One of the many effects of social inflation is pressure on settlements to increase, such as fear of unfavorable trial verdicts. Higher plaintiff awards generally and jury verdicts of $10 million or more, dubbed “nuclear verdicts,” can force insurers to settle disputes more frequently and for larger sums than they have historically, which can alter both reserving and loss payment trends.

According to AM Best, the insurance industries most impacted by social inflation include commercial auto, directors’ and officers’ liability, professional liability, and product liability.

Challenges posed by litigation funding

Around 2015, lawsuit funding emerged, adding to the financial difficulties already posed by the aforementioned. By using a third-party funding organization, litigants can pay their litigation or other legal fees in exchange for a sizable share of any award or settlement. This technique is sometimes referred to as litigation funding or legal financing.

Funding for litigation has the impact of promoting cases and higher settlements that might not have been possible otherwise. A recent RAND Research Report lists the following as some outcomes of this trend:

• A rise of 10% in 19 states’ yearly new court filings per capita between 2012 and 2019.

• In 2019, a significant proportion of cases (64%) resulted in a verdict in the plaintiff’s favor, an increase from 53% in 2010.

The funding for lawsuits has grown dramatically in the last few years. There have been an estimated $15.2 billion invested in commercial litigation in the United States alone, making it a multibillion-dollar sector globally.

Numerous finance companies, some supported by private equity investors, are active worldwide. They can be classified as public or private. At a compound annual growth rate (CAGR) of 13.2% through 2028, the global litigation funding market is projected to reach a valuation of $18.2 billion in 2022. By 2032, the market is expected to have grown to $24.7 million from $13.7 million in 2023, according to some estimates.

Wisconsin, West Virginia, Indiana, and Montana are the only four states with legislation pertaining to litigation financing.

According to survey results released in March 2024 by Munich Reinsurance America, Inc. (Munich Re US) and the American Property Casualty Insurance Association (APCIA), most Americans are unaware of the detrimental effects plaintiff lawyers’ strategies—such as deceptive advertising and the use of third-party litigation funding—have on their household expenses through the “tort tax,” regardless of whether the household is involved in civil litigation. Over 2,000 American individuals were interviewed for the poll, which was carried out by The Harris Poll.

Many Americans are also unaware, according to this research, that the plaintiff lawyer keeps a sizable portion of settlement or judgment awards, with a substantial portion going to investors who have no connection to the claimant and are only looking to benefit from their misery. After realizing this, most Americans (86%) concur that state and federal legislators ought to address the injustices inside the American judicial system.

Role of attorneys

Due to their large advertising budgets, plaintiff law firms that focus on personal injury lawsuits are growing across the country and bringing on new customers. With over a thousand attorneys and locations throughout all states, Morgan & Morgan is the biggest law practice of its kind in the nation.

Trial lawyers in the United States invested almost $2.4 billion on regional print, radio, billboard, and television advertisements last year. Not long after even a small accident, claimants are deluged with lawyer cold calls. Since they often receive between 30% and 50% of settlement funds, plaintiff attorneys have strong financial incentives.

One important indicator of changes in the average claim settlement value is the percentage of claims filed with an attorney. Increased legal fees contribute to higher claim costs in several ways, such as longer claim cycles, larger defense expenditures, and eventually higher settlement sums. These instances tend to inflame the situation by drawing attention to the benefits that consumers may receive from suing insurers in this way.

According to a research study conducted in 2023 by LexisNexis Risk Solution, of those who employed an attorney in connection with motor insurance claims, 57% decided to do so before filing the claim, and 71% stated the attorney pushed them to pursue further care.

According to a Sedgwick survey, 55% of commercial auto claims that are litigated had an attorney involved either prior to or on the same day as the report to carrier date. Just four years ago, this measure was 43%. In the meantime, lawyers become involved in 67% of disputed cases within the first 14 days of filing.

How the insurance industry is responding

When all these issues come together, carriers can no longer afford to watch helplessly as their profitability declines and the company becomes unviable. Increasing numbers of lawsuits, jury verdicts, and the intensity of claims all drive up liability expenses. Premiums are how consumers and businesses are made aware of all of this.

To distinguish social inflation from other contributing components, further research is necessary due to a complex interplay of forces. Any coordinated sector reaction against litigation misuse is still lopsided by a large margin, even though the insurance business has led the charge on tort reform laws in multiple states.

However, different business executives have different opinions about the best ways to counteract it. The chair and CEO of Chubb, Evan Greenberg, has stated that one of the main causes of the skyrocketing expenses of jury verdicts is societal attitudes that pit small businesses against large American enterprises.

At the S&P Global Ratings 40th Annual Insurance Conference, Greenberg told insurers, “We are not the sympathetic face to show” to change those sentiments. He noted that there will not be a federal solution to social inflation and stated that corporations are now driven to spearhead wars that will be fought state by state and county by county.

What’s next: A call for action

The insurance business can’t continue to absorb and pass on the associated costs to policyholders, nor can it rely just on present tactics and solutions to this challenge. Tort reform is a laborious, sluggish process that does not address the trends of today.

More carriers are anticipated to step up and start implementing fresh, all-encompassing short-term tactics to actively tackle societal inflation. These initiatives will probably involve taking steps to hinder the plaintiff bar in troublesome areas, preventing litigation from the start, strengthening legal defenses in their entirety, and possibly assuming greater risk via trials.

The APCIA and other insurance industry associations will be crucial in enabling carriers seeking to implement best practices to share information with one another and in broadly endorsing legal tort reform as a means of securing the industry’s long-term health and sustainability.

Now is the best time of all to get started.