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An Insight into Tech-Enabled Litigation by Demotech, Inc.

In a recent overview, Demotech, Inc. unveiled the critical challenges facing the insurance industry as a result of the rise of tech-enabled litigation instigation. This term refers to a modern business practice that has come to light through the company's rigorous research. These emerging trends in legal services have made it increasingly necessary to present loss costs with greater detail and transparency.

Joseph L. Petrelli, the president and co-founder of Demotech, highlighted key findings from their analysis, revealing that new litigation models—often amplified by technology and online marketing—are fundamentally changing the nature of claims. For instance, the company's examination of destabilized carriers in 2022 noted that litigation was often the primary culprit behind their demise.

The role of technology in this context cannot be overstated. As detailed by Todd Kozikowski, who led the research project, there is a noticeable surge in litigated claims attributed to an array of digital platforms, as well as third-party funding that assists in covering the legal fees associated with these claims. Moreover, changing structures within the legal industry—such as alternative business models and managed services—further complicate the landscape.

In light of these changes, Demotech posits that regulators and other stakeholders must adopt a more granular approach to loss costs. Traditionally, loss costs have been presented as aggregate figures, masking intricate dynamics at play. The historical method of presenting loss costs simply combines percentage rates representing claims filed against average claim costs, leading to oversimplified assumptions about risk.

Petrelli argues that this traditional approach was viable when claims were settled without excessive influence from modern marketing tactics or legal funding networks. However, as he notes, the legal world has evolved drastically, with shifting paradigms requiring a reevaluation of how loss costs are calculated. "An equilibrium in claims frequency can no longer be assumed," he states, advocating for a breakdown that considers distinct categories of claims,

Demotech suggests a new formula that involves breaking down claims into several categories: claims closed without payment, litigated claims, and non-litigated claims. Each component would be calculated separately, resulting in a comprehensive assessment of loss costs. By normalizing this new transparency, industry stakeholders can better understand the implications of both good and bad claims management.

For regulators, this means enhancing their ability to scrutinize the minutiae of claims developments and claims transitioning, thus equipping them with the necessary tools to amend oversight and policy frameworks. The need for clarity is further underscored by Petrelli's comparison of component-based vs. composite loss costs; the latter often lacks the detailed insights essential for informed decision-making.

Sharon Romano Petrelli, also a co-founder of Demotech, elaborated on how the traditional methods of assessing loss costs have left significant gaps in transparency. "Delineating the factors contributing to loss costs can highlight industry trends over time," she remarks, emphasizing the need to move beyond composite numbers to granular analytics. This detailed view would not only assist in regulatory compliance but also guide insurers in refining their underwriting strategies.

In conclusion, while the pathway to enhanced transparency in loss cost calculation may be complex, Demotech, Inc. is dedicated to advancing discussions that could reshape the future of how insurance entities approach emerging litigation trends. As noted by Petrelli, recognizing the power of technology in legal proceedings and adjusting methodologies accordingly is crucial for navigating the evolving risks in the industry.

About Demotech, Inc.

Founded in 1985, Demotech, Inc. serves the insurance sector by providing independent Financial Stability Ratings (FSRs) for various types of insurers. Their commitment has helped create a balanced and competitive market for financial stability ratings and has positioned them among key players recognized by major financial entities. For more information, visit Demotech's website.