Defending lawsuits and managing trials is a major focus area and expense category for insurers—whether they are defending insureds against liability claims or defending themselves in coverage and bad-faith actions. There are many reasons why an involved party may file a lawsuit: impasse during negotiations, lawsuit at first notice of claim, inefficient claim handling, allegations of bad faith, etc. Based on our experience and industry financial data, we find that anywhere from 3-8 percent of direct written premiums are spent on managing litigation. The complexity of issues involved with litigation varies across lines of business. As the underlying risk becomes more complex, we find that the claims in suit percentage increases exponentially.
Executive Summary
Following up an earlier article advising carriers about how to use analytics as a tool to prevent claims from moving into litigation, two veteran analytics officers affiliated with EXL Services move on to the application of analytics when litigation can't be avoided. Here, they argue that the combination of internal structured and unstructured insurance company data, external legal data and advanced analytics can help carriers make decisions about when to use in-house or outside counsel, the best law firms to engage for specific types of claims, and even help them make predictions about whether cases argued by a specific plaintiffs' attorney or brought before a certain judge are likely to settle. The prior article in this series is "How to Avoid Litigation With Pre-Suit Claims Analytics."In the private passenger auto line, the Insurance Research Council reported in 2019 that the average bodily injury claim cost rose by 31 percent from 2008 through 2017. Litigation cost is a big driver of this, with 52 percent of bodily injury claimants hiring attorneys in 2017, according to a 2018 IRC report. Unsettled claims lead to lawsuits, forcing insurers to hire defense counsel, which can quickly escalate the claim cost upward of $50,000.
Apart from increases in claim cost and expense, lawsuits also have an adverse impact on claim resolution time, also known as cycle time. According to the 2019 CLM Litigation Management Study, 80 percent of the insurers confirmed that the majority of litigated claims are settled far deeper into the litigation process than necessary.
Analytics Framework
Senior management at three out of four property carriers is reported to be paying closer attention to the effectiveness of their litigation management practices, according to a study by the Claims and Litigation Management Alliance. In our article, “How to Avoid Litigation With Pre-Suit Claims Analytics,” we described an analytics-driven approach to reduce the percentage of claims in suit. Here, we lay out a framework, which is a combination of descriptive, prescriptive and predictive analytics techniques that can provide actionable insights to claim adjusters and help in driving favorable litigation outcomes and efficient claim handling. The tools developed as part of this framework can have a direct impact on key metrics like average total cost per case, legal expense per case, cycle time (days to resolution), the allocated loss adjustment expense portion of a loss ratio, allocated legal loss adjustment expense portion of a loss ratio, as well as average or median bill rates by claim type.
