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Assured Research, LLC
Our friends at Assured Research, LLC are known for their insightful “Assured Briefing” publication, which emphasizes data-driven analysis and actionability for insurers. We found the following article - that explores U.S. social inflation by linking income inequality with liability insurance results - especially resonant as it supports many of the same findings that we published in my own recent blog.
Assured Research, LLC was kind enough to allow us to reprint their article in its entirety below. We hope you find it as compelling as we did.
- Assured Research, LLC
Some election issues will slowly fade into the background. Income inequality is not one of them. In fact, for P/C insurers we suspect the topic will come to be closely identified with the first word - social - in the term social inflation.
Regular readers will know that we have, for some time now, regularly included the topics of wealth and income inequality in our efforts to "find objective signals of social inflation in the economy" as we like to describe our research. In this note we bring all of our recent comments on the topic into one note and share new data using inequality indexes by state to look for relationships between inequality and liability loss ratios.
Our observations:
Liability writers should be wary of the intersection between societal and legal trends in New York and Missouri. Charts in this report will show that hellhole states (of which New York and Missouri are regular members) have wider measures of income inequality. Peering into the mid 2020s and using projections of household (HH) net income made available through S&P Global, it appears that both states will lag the national average by more than 25% in the years ahead.
If even directionally accurate, we’d guess that it won’t be difficult for plaintiff attorneys to find disgruntled jurors in those states.
Having set the stage, we can tell much of the remaining story using graphs and sidebars. As we transition, keep this quote in mind from Boesen Litigation Consulting:
In the years that followed [the financial crisis of 2008], the market bounced back and progressed through its longest expansion in history. Meanwhile, employment rates and hourly wages remained stagnant. As the middle class shrank, we heard jurors talk more and more about the “Two Americas...One for the elite and one for the rest of us.”
Figure 3 reveals an intuitive, inverse correlation between the liability loss ratio and the national real wage index dating back to 1979. We describe the relationship as being intuitive if you buy into the idea that household frustration levels will rise as wages stagnate. In turn, that might drive more claimants and angry juries into the legal system.
The Gini index is described as a measure of income inequality ranging from 0 to 1, or perfect equality (0) to perfect inequality (1). For purposes of this work we’re taking the index at face value and offer our thanks to the U.S. Census Bureau which makes the index available by state over the past ten years. Consistent with data from the Federal Reserve, the Census Bureau’s index shows gradually rising levels of the index over that time (i.e., rising inequality).
Only 3 states and Washington, D.C. showed slightly declining levels of income inequality over the years 2010 to 2019: Colorado, Rhode Island, and South Dakota.
We first examined the relationship between the 10-year average liability loss ratio (relative to the national average and including all liability lines) and the trend in the index across all states.
When we focused our attention on the ten states with the best and worst legal environments, interesting differences emerged from the soup shown in Figure 4. Not surprisingly, judicial "hellhole" states have appreciably higher loss ratios when compared to the states with the best legal environments (each benchmarked against the national average). But more interestingly, the states with the best legal environments tended to have much lower levels of inequality than the hellhole states (observe the sloping line in Figure 5).
Coincidence? Maybe. But maybe the plaintiff friendly laws in the hellhole states are a reflection, through the political process, of a populace frustrated by gaps in income and wealth equality?
We argue (1) income inequality affects legal outcomes and awards (i.e., social inflation) and (2) it warrants attention from underwriters and other insurance professionals contemplating where and what types of liability products to offer.
While compiling this data we observed that S&P Global makes available projections for the growth in HH income, by state, from 2021 to 2026. That’s a lot of forecasting (!), but we thought it’d be interesting to see what the liability loss ratios in the ten hellhole states look like when mapped against projected HH income growth.
We flagged NY and MO earlier because their income growth is forecasted to lag the national average. NY, for example, has a 10-yr liability loss ratio that is 120% of the national average, with forecasted income growth that is only 60% of the national average. Not good!
It’s a hardening market for liability insurance, but that doesn’t mean all opportunities (products and locations) are created equal. We recommend that liability insurers consider wealth and income inequality when contemplating new liability products or geographies.
Assured Research is a research and advisory firm focused exclusively on the property/casualty insurance industry. Article and charts reprinted with permission. “Assured Briefing,” November 2020.
