Social Inflation, Increased Awards Driving Insurance Premium Hikes

 - July 5, 2022, 8:46 AM
Photo: Mark Wagner

"Social inflation," sharply increased jury awards and claims, and aircraft groundings are all taking a toll on aircraft insurance premiums, which jumped by 20 percent for the general aviation sector last year alone, according to participants at the recent Aviation Insurance Association conference.

Returning as an in-person event for the first time in more than two years, the conference brought together aviation insurance brokers, underwriters, and attorneys to Nashville, Tennessee, from April 29 to May 2 to discuss the effects of the pandemic, increasing claims costs, and aircraft groundings on the industry. 

Numbers Still Looking Bleak for Both Insurers and Insureds

Jeff Bruno, president and chief underwriting officer for U.S. operations at Global Aerospace, cited numbers from the McKinsey & Company Global Insurance Report 2022 indicating that during the year general aviation entities paid $2.6 billion in insurance premiums, airlines $1.7 billion, manufacturers (product liability) $1 billion, space $450 million, and war policies $250 million.

The U.S. general aviation total premium collected increased 33 percent from 2018 to 2020, reportedly “the largest increase in written premium for the USGA market since the period immediately following 9/11,” according to Milliman’s U.S. General Aviation Admitted Market Summary of 2020 Statutory Financial Results report (with data collected through July 2021). Total general aviation premiums jumped another estimated 20 percent in 2021 from $2.1 billion to $2.6 billion.

Despite the increase in premiums and the initial reduction in flying during Covid-19 shutdowns, general aviation insurers in the U.S. still lost approximately $52 million in 2020 alone. Compared with the $285 million loss in 2019, it was a “good” year; U.S. general aviation insurers lost a total of $693 million before expenses and reinsurance in the five policy years between 2016 and 2019. In the same five-year timeframe, airline insurers lost $50 million, even including a $300 million profit blip in 2020. 

“There’s definitely some headwinds for insurers,” said Bruno. “While we were all paying attention to Covid, we went to sleep on some of these issues that haven’t gone away. A $100 million claim used to be a one-in-20 kind of event, then it became a one-in-10 event. Now I think it’s less than one-in-five. We’re actually seeing a couple of these a year now.” 

Jeff Bruno presenting at the 2022 Aviation Insurance Association conference
Jeff Bruno, president and chief underwriting officer for U.S. operations at Global Aerospace, speaks during the 2022 Aviation Insurance Association conference in Nashville, Tennessee. (Photo: Kim Rosenlof)

New Term: Social Inflation

The increasing frequency and dollar amounts of high-value verdicts is one factor in the hikes in claims costs. From the dancer who was awarded $143 million in 2017 when a bus platform at O’Hare International Airport collapsed, to the family of a wing walker hit by a fuel truck at a Houston airport awarded $353.7 million in 2021, “nuclear” awards of more than $10 million are so commonplace that plaintiff lawyers are now routinely asking for—and receiving—judgments of more than $100 million.

“There’s been a paradigm shift,” said Nicole Wolfe Stout, partner at Strawinski & Stout in Atlanta. “Years ago it was the plaintiff’s lawyer that was saying, ‘I can’t afford to take this to trial.’ Or they would have to do a cost/benefit analysis. Now [defense lawyers] are saying we can’t take this to trial instead of ‘should we take this to trial?’”

The term “social inflation” has been coined, and was used throughout the conference, to denote the increased loss costs stemming from claims that are exceptionally more severe than anticipated. Sparked by a shift in societal norms where younger, educated, and more socially “aware” jurors parlay their distrust of government and dislike for corporations into sensational judgments that can then be bandied about on social media, social inflation has rapidly escalated single-plaintiff judgments to heights previously thought absurd.

“Quiet voices now recognize that they have a voice in our society,” said Marissa Beyers, CEO of Trial Behavior Consulting. “[They] use Facebook to schedule the protest, Twitter to coordinate, and YouTube to tell the world…and if they can make that voice heard by returning a verdict against big, bad corporate America, they’re thrilled to do so.”

The result is that in cases normally worth $2 million, plaintiff attorneys are setting opening demands for $100 million, especially if the defendant is any type of government or corporate entity, including the insurance companies.

“You can find yourself in the situation with a $100 million demand on a $2 million case,” said Ted Green, global head of aerospace claims for AIG. “I’m aware of more than a handful of cases where some very serious money was offered by the defendants; plaintiffs still went to trial and we wound up with verdicts way beyond the $100 million pre-trial demand.”

Plaintiff attorneys routinely use a “reptile” theory made popular by the book, “Reptile: The 2009 Manual of the Plaintiff’s Revolution” written by attorneys David Ball and Don Keenan. The book, now selling used on Amazon for nearly $1,200, teaches plaintiff attorneys how to subtly get jurors to decide the case emotionally; the International Risk Management Institute (IRMI) defines the reptile theory as “focusing the jury’s reaction to instinctively favor safety and survival of their families and community (versus plaintiff’s actual injuries) by demonstrating the defendant’s conduct endangers their families and community as a whole.” Rather than focusing on the plaintiff’s injuries or how the accident occurred, “reptile” lawyers typically present safety rules at the outset of litigation—perhaps from state or federal statutes, industry standards, or employee handbooks—and then box the defendant into admitting a violation of these rules, whether that violation directly contributed to the injury or not.

“Frankly, I think the defense bar is behind in this challenge,” said Stout. “We’re seeing an immense amount of coordination in the plaintiff’s bar to capitalize on fear, uncertainty, and anxiety, particularly in the last two years with Covid-19. So our traditional defense tactics with picking juries have not caught up. Typically, we would rely on more conservative people on the jury to side with corporations and believe in personal responsibility, and that’s fallen by the wayside. Instead, we’re seeing just general anger toward corporations.”

Thanks to social media and internet-based news feeds, social inflation is not limited to the U.S. “Foreign claimants are well aware of what’s going on in the U.S. in terms of jury verdicts,” said Armando Carlo, director of insurance litigation and claims at Boeing. “A recent example came up in negotiations where the plaintiffs argued, ‘We know George Floyd’s family got $27 million so we want at least $27 million because your company killed our family members.’ I don’t know if it’s coming from the claimants themselves or the plaintiff’s lawyers…but it definitely impacts the negotiations.”

Litigation Funding as a Capital Venture

Some plaintiff law teams are asking for high-dollar verdicts not because the damages warrant the judgment, but because their litigation financing contract requires a certain payout. Bruno cited a November 2021 Bloomberg article that indicated investment by hedge funds, private equity firms, and sovereign wealth funds in “high stakes court cases” reached more than $39 billion worldwide as of 2019.

“Venture capital firms are actively seeking out plaintiffs, bringing the best resources to bear, and pushing for trial verdicts with a real reluctance to settle in order to get a proper return on their investment,” Bruno said. “We think it’s unethical, and we insurers who are defending your clients feel like we’re fighting with one hand tied behind our back. It’s a real problem.”

One leader in litigation financing is Burford Capital, which claims to be the “largest and most experienced provider of commercial legal finance in the world.” Founded in 2009, the company funds the costs and expenses of litigation or arbitration, with more than 1,000 “matters” in its current $5.1 billion investment portfolio and a 96 percent return rate on concluded matters. Burford’s website says it allows law firms to “manage budgets and costs,” citing an example of a law firm that “bridged the gap between its hourly fees and a client’s budget—and won a $110 million award.”

“We need to educate the general population about these funding agreements because we can’t get it into evidence unless the [testifying experts] are in on it,” said Stout. “In some jurisdictions, we can cross-examine on the fee protection agreement to show bias, but the challenge here is how to we get an evidentiary benefit to acknowledge the reality of the situation.”

Aircraft Groundings Affecting Insurance Rates

Another hot topic in the aviation insurance industry is the increased level of losses due to the grounding of aircraft fleets. While the insurance industry has offered full and partial grounding liability coverage to aircraft OEMs and first-party aircraft grounding coverage to operators since the worldwide grounding of de Havilland Comets in 1954, there were almost no claims for decades. The coverage, which for OEMs is generally underwritten as part of an aviation general liability policy with no additional premium collected, only comes into effect if a regulatory authority grounds a certified aircraft from all operations due to an “existing, alleged or suspected condition affecting the safe operation of such aircraft,” according to verbiage by the International Union of Aerospace Insurers.  

Although the parking of airline fleets during the pandemic did not trigger this specific grounding liability coverage in most aviation insurance policies, the industry has still taken big hits from the increased willingness of government regulators worldwide to ground entire aircraft fleets in recent years. According to Bill Kingsley, account executive at AssuredPartners Aerospace in Plano, Texas, the frequency and severity of aircraft groundings have increased since 1999 when the Australian Civil Aviation Safety Authority grounded thousands of piston-powered aircraft after discovering a fuel contamination issue. Other recent notable fleet groundings have included Airbus EC225 Super Pumas following the in-flight separation of the main rotor system in a 2016 crash, Boeing 777s powered by Pratt & Whitney PW4000 engines after one engine shed fan blades shortly after takeoff in 2021, and the Boeing 737 Max, which alone incurred a $500 million grounding policy sublimit.

Kingsley cited several reasons for the increase in fleet groundings over the past few years, including an increase in both supplemental type certificates and modifications (i.e., more products increasing overall liability exposure) and airworthiness directives issued, increasing technology and complexity of aircraft and systems, and even society’s increased reluctance to accept risk.

“In today’s world, as a society, as a population, we are not willing to accept the level of risk that perhaps we were willing to accept 25 or 50 years ago,” Kingsley said.

While the overall effect of grounding losses on the aviation industry may have contributed to rates increasing as insurers try to mitigate years of losses, the effect on specific manufacturers can be devastating. Tamarack Aerospace president Jacob Klinginsmith discussed the 2019 grounding of 91 Cessna Citations that had the company’s STC’d active winglet modification installed after a few aircraft experienced uncommanded rolls due literally to a loose screw in the system. Despite the company’s proactive issuance of service bulletins and no injuries or damage to aircraft experiencing the rolls, the FAA grounded the U.S. fleet for more than 60 days while EASA grounded the European fleet for nearly four months. The grounding resulted in seven claims totaling approximately $2.7 million.

“Part of the stress of [the event] was getting the letter that there was no coverage for the grounding claims,” said Klinginsmith. “We worked through that, and after some of the exclusions, we had coverage for about 50 percent of the grounding claims. Then we were up for renewal on our product [liability] coverage, and of course, we got a notice of nonrenewal for that. So we got a new broker, and new underwriting and incurred a 700 percent increase in premiums. That was a tough discussion with the board.” 

Vnukovo Russian FBO
An FBO at Vnukovo International Airport, southwest of Moscow, Russia.

Russian Seizure of Western Aircraft Could Cost Insurers Billions

In March, the Russian government had confiscated, nationalized, or seized more than 500 Western-owned or financed aircraft previously leased to Russian entities. The aircraft, grounded in Russia due to sanctions against the country after its invasion of Ukraine, are reportedly worth about $13 billion. According to Jeff Bruno, president and chief underwriting officer for U.S. operations at Global Aerospace, claims are already starting to come in and could ultimately cost aircraft insurers more than $4 billion. Other sources estimate the losses up to $10 billion.

“It’s a good reminder of the volatile nature of aviation risk,” said Bruno. “And there’s certainly reinsurance implications. This loss is multiples of the 9/11 loss, and I think it’s going to go into the retro market where reinsurers purchase their reinsurance. Their management and their capital are going to demand that they put direct insurers under pressure, and you’re going to see all of that permeate down to the base in some way.”

Bruno predicts that the massive loss will shake up the aviation insurance industry the way 9/11 did.

“Certainly regions are going to be excluded, and you’re going to see reduced policy aggregates for war,” Bruno said. “Some market participants, wholesale and retail, might exit the business and it’s even possible that some might not survive.”