According to AM Best Financial reports, between 2018 and 2023, litigation management costs for the combined Property & Casualty industry increased by 19%, amounting to an increase of $4-5 billion, or for context, bringing total litigation expenses to ~$24B of LAE.
In both personal and commercial lines, carriers have experienced the adverse effects of social inflation. While certain states and underwriting markets, such as California and Florida, continue to be known as problematic jurisdictions, carriers are revising their approach to managing litigated claim files across the board.
Plaintiffs have recently secured significant verdicts against carriers, with the ability to look across jurisdictions and carriers to develop tactics to secure “nuclear verdicts” that increase the overall cost of risk to businesses and consumers. According to AM Best, many of these verdicts also align with the new trend of treating litigation as an asset class. This trend is fueled by private equity and hedge funds seeking to create new sources of uncorrelated returns for investors from these substantial settlements.
The insurance industry is modernizing its approach to litigation management by embracing new legal management systems, improving the data hygiene of core claims systems, and leveraging advanced analytics and AI-driven decision support. This revolution in data utilization is enhancing the accuracy of claims settlement, enabling leading carriers to develop more effective methods for resolving litigated claims.
A crucial development in this domain is the creation of the Litigation Analytic Record (LAR) providing the capability to look across data that was previously siloed. This tool merges internal and external data about defense counsel, plaintiff counsel, claimants, policyholders, and more, offering a comprehensive view of all litigation data in one table, ripe for analytical insights and AI/ML processing at scale. It creates a much richer data set that allows for advanced segmentation and pattern recognition. These new insights have now reinvigorated the classic levers of litigation management.
Three primary focus areas where carriers are proactively settling litigated claims more effectively are:
- Litigation Strategy: Advanced Analytics and AI-Led Decision Support
- Enhanced Counsel Selection Criteria
- Performance Management of Panel and In-House Counsel
1. Litigation strategy: advanced analytics and AI-led decision support
In recent years, the insurance industry has experienced a significant shift driven by the explosion of data availability and data migration to the cloud. This transition has allowed carriers to easily access and combine data sources, including third-party information. As a result, insurance companies have set up new teams of claims experts and data professionals dedicated to uncovering insights and unlocking value from their data, leading to improvements in the way litigated claims are resolved and shifts in the claims operating model.
Notably, the use of AI has been instrumental in understanding the expected cost and complexity of each case, facilitating the creation of efficient litigation plans and budgets based on combinatorial insights from internal and external data sources. By having a clear path to resolution, carriers can optimize litigation expenses while ensuring more accurate settlements.
Other significant use cases include:
Plaintiff attorney profiles: By analyzing historical data, carriers can find patterns of behavior among plaintiffs who often bring cases against insured parties. This information can help insurance carriers better understand the motivations and strategies of these attorneys, ultimately aiding in developing more effective defence and negotiating strategies.
Strategic positioning: Carriers can use internal and external data sources to create a comprehensive view of each case, incorporating information about the parties involved, the venue, the type of case, and other relevant factors. This “single pane of glass” approach can inform decision-making and enhance collaboration between attorneys and adjusters, leading to improved outcomes.
Utilizing the aforementioned Litigation Analytic Record (LAR) to understand the relative size and scope of a panel law firm along with the ability to review historical case outcomes is essential when assigning cases. By leveraging data on attorney performance, carriers can match the complexity of a case to deliver the best total outcomes for the claim through a tailored counsel selection tool or framework. Additionally, visibility into the number of cases assigned to each firm can help carriers optimize the mix of open matters by complexity to maximize the performance of their panel firms and attorneys.
Historically, assigning counsel was often based on adjusters’ relationships with attorneys or their managers’ recommendations. However, developing counsel selection tools and frameworks that guide the influence of the claims adjuster in assigning counsel based on data and analytics can be a more strategic approach.
C-Suite Insurance executives are facing increasing pressure to understand how major expenditures support strategic imperatives, particularly for line items with significant financial impact, such as outside defense counsel costs. The top 50 carriers in 2022 spent on average $500 million on litigation expenses, with outside counsel fees typically making up 80-90% of these costs, depending on their book of business, litigation strategy, and in-house counsel capabilities.
However, Chief Claims Officers often need more clarity on the total outcomes they are achieving from these substantial expenditures by focusing on both litigation expenses and the indemnity associated with those cases.
Leading carriers use data-driven solutions to gain insights into counsel performance to optimize legal spending. By combining claim records metadata with legal management and billing systems data, carriers can identify top-performing attorneys, ensure compliance with carrier guidelines, and rationalize their legal panel to maintain high-performing resources.
Carriers typically start by creating a blended scorecard that combines these different sources of data to provide a single source of truth to illuminate the performance of firms and attorneys with the outcomes delivered.
A high-performing legal panel is critical for effectively defending insureds when a claim is filed, particularly for commercial lines businesses. Some carriers have successfully highlighted their claims operation’s strength to brokers and agents, selling confidence in their ability to deliver value beyond the policy’s price when required.
Key use cases include:
Advanced case monitoring and escalation paths
Carriers can utilize event-based triggers and expense tracking to monitor the progress of cases against historical benchmarks provided by the Litigation Analytic Record. This enables them to make proactive decisions about escalating cases and allocating resources at the claim level, promoting an activist approach to claim file management. Automated management escalations, triggered by flagged changes in claim profiles and spending variances, provide enhanced oversight of pending files, allowing front-line managers to focus their time effectively with their teams. Carriers with high-quality data hygiene have taken further steps, enabling them to predictively address individual files before they deviate from the optimal path, resulting in improved outcomes.
Adherence to litigation plans and budgets
Inaccurate budgets can lead to poor reserving practices, particularly for carriers without visibility into the quality of budgets provided by counsel. Spending and event-based triggers, derived from the Litigation Analytic Record, offer visibility into cases that deviate from their original litigation plans and budgets. These event-based triggers help front-line handlers and managers stay on track when budget changes, spending forecasts, or the number of tasks deviate from expectations. Changes in these event-based triggers can lead to proactive realignment of litigation strategies based on developments in the file. For instance, if a claim is initially categorized as “lower complexity” but exceeds 75% of the budget faster than the benchmark, the adjuster can take remedial actions or collaborate with counsel to reconsider the litigation strategy for the file.
Blended scorecard for panel scoring and tiering
Many carriers distribute cases among panels unevenly, often with 80% of cases and paid losses handled by National Firms operating across multiple lines of business and states. Leading carriers leverage blended scorecards that assess not only law firm and individual attorney performance based on claim types but also gauge adherence to their operating guidelines to enhance overall outcomes. Aligning claim cohorts with historical claim outcomes by attorney and firm enables carriers to distinguish their top performers from the remainder of the panel (or in-house counsel). Concurrently, it streamlines the allocation of the most challenging cases and best hourly rates to the highest-performing firms and attorneys, ensuring their proven expertise is leveraged where it has the most impact. This strategic shift towards evidence-based panel management optimizes resource deployment and steadily improves overall claim outcomes.
If you’d like to learn more about how advanced analytics and AI-led decision support can help people make smarter decisions about litigation strategies, amongst a host of other benefits, please read our Fuel the future of insurance through technology report. If you’d like to discuss in more detail, please reach out to Kenneth Saldanha or Jeff Mitch.