Get Ready to Rumble...

As an early pioneer of Web assisted dispute resolution, I am very disappointed to inform that relationships between insurance companies and claimants have recently taken a turn for the worse and plaintiff's and defense lawyers may already be seeing the impacts of this shift toward an increasingly adversarial environment. Of course, the economic downturn is once again the main culprit.

So, what exactly is going on? The property and casualty insurance industry depends on premium investment earnings for a considerable portion of profits. There are many profitable carriers that do not have a combined ratio (losses plus expenses divided by earned premiums) of under 100. Translated in English, a carrier may spend $1.02 and earn $1.00. However, in good times, that $1.00 can generate an extra $.16 because it is floated, or held on to for a lengthy period of time.

As you can guess, insurance carriers are not very eager to part with their capital, while their investments earnings are at all time lows. Under normal conditions, insurance companies are driven by both the compelling need to satisfy policy holders and the financial reality that legitimate claims do not get cheaper as they age. However, given the market dowturn, carriers have started digging in and cash flow has become the new profit and loss.

Here's a link to an interesting Business Insurance article, where David Siesko of Siesko Partners elaborates on the carrier perspective and its current impact on relationships with policy holders.

What does this mean for litigation professionals and the vendors that support them?
This phenomenon is having a profound impact on the industry and the impact varies according to the perspective.

Let's start with plaintiff's lawyers and claimants. If you are a trial lawyer that handles a large volume of carrier settlements, get ready for protracted negotiations, and an increase in litigation due to less flexibility by insurers. An increasing number of commercial carriers will be following in the footsteps of auto carriers and taking an increasingly rigid approach to settlement. A year ago you may have negotiated a specific injury to a $45,000 settlement. Today, a carrier may offer you $35,000 and tell you to take it or sue.

"Mill" type firms, which are dependent on high volume, low severity claims, will see an increase in receivable cycles and likely a reduction in the amounts they are able to negotiate. This will ultimately cause many firms to rethink their existing business strategies. Plaintiff's firms will become increasingly dependent on litigation financing companies to help them navigate the peaks and troughs that will be created by this new environment.

Insurance companies will become increasingly dependent on defense firms, which is certainly a positive if you fall within this category. However, it is not all sugar and spice, as insurers have begun to scrutinize every dollar spent, in an uprecedented fashion. A number of carriers are hiring additional legal bill review experts to help them turn the heat on their defense firms.

Legal vendors will be impacted differently, depending on the type of business they are in. Litigation financing is a great place to be today - just have to make sure your investment is secured by viable cases, or that the firm you are lending to is very healthy financially. It is a different ballgame today.

Some vendors, particularly ones working with plaintiff's firms, may expect a delay in receivables. Firms will not be seeing settlements as fast as they once were and this is going to affect everyone doing business with them. It is a good time to be in the cost-savings business, but you will need to demonstrate an immediate and certain financial return, to win business consistently.

So a few tips to overcome this change in carrier practices: ensure adequate cash flow by learning about and leveraging the legal financial services available on the market, keep your own operations trim and tight to remain competitive and make sure to stay on top of the aging of your receivables.

What is going on in the insurance world?

During my time as head of Marketing for Cybersettle, I spent a lot of time analyzing data on the insurance industry, and more specifically, data on insurance bodily injury claims. I used many sources for my market analysis, including a book published by AM Best called Best's Aggregates and Averages. I believe this to be an indispensible source of information for any advanced marketer looking to keep a finger on the pulse of the insurance industry), and sometimes I also reviewed statistics on the Insurance Information Institute's (III) Web site.

The III, arguably a pro insurer Web site, offers data that shows a decline in litigation costs in 2006. This is considerable given inflation, the general trend for increasing settlement values and the III's natural tendency to position litigation data in a light most favorable to carriers. Further, the site explains that they project increases in litigation costs in 2007 & 2008 due to the subprime mortgage debacle. See the following link then come right back...

http://www.iii.org/media/facts/statsbyissue/litigiousness


This is great if your firm handles these types of disputes, but the one trend that is not touched on, is the continual drop in total annual bodily injury claims - the bread and butter for many of you, or the law firm clients you work with. In fact, based on my reviews of AM Best data, overall injury claim volume is currently decreasing by roughly 4%-5% anually. This is considerable and while not everyone will feel this immediately, it is inevitable that this will impact many firms.

Next, this trend is even more dramatic for plaintiff's counsel handling high volume, low severity cases. There are an increasing number of claimants using the Internet to get educated and handling small cases independently. Today, there is no consistent method by which a claimant can accurately evaluate his or her $20,000 or smaller claim, taking into account medicals, lost wages and pain and suffering in a given venue. With systems like Colossus and Claims Outcome Advisor offering evaluation mechanisms for carriers, you can be certain it is only a matter of time before technology will facilitate a claimants' ability to handle their own smaller claims start to finish.

Case in point: when Cybersettle started doing business back in 1998, there were only a handful of non-represened claimant setlements. In 2007, more than 10% of the cases submitted by insurance adjusters were against non-represented claimants. Assuming this trend is representative of the broader industry, as a plaintiff's lawyer handling large volumes of small cases, you are going up against a 5% annual industry claim volume decrease and an unrepresented claimant rate of over 10%+ and it is very difficult to predict how high this figure will get and how fast.

Defense counsel may not be as drastically impacted by the trend in non-represented small claims, but the overall shrinking pool, which includes larger injuries is certainly a major consideration.

Some vendors will be directly impacted, other more indirectly. Companies like Cybersettle handling large volumes of small claims will be affected by the industry reduction trend. Financial services companies marketing services to claimants through their attorneys may see a reduced opportunity for this. Overall competition will increase and profit margins for firms will shrink, and unless firms can adapt and find ways to reduce costs and become more competitive, discretionary firm spending will be impacted and many vendors will be affected by this.

In my next post, I will discuss in greater detail what I know about claim evaluation systems like Colossus and Claims Outcome Advisor, and the newer Precedent ID and how these have impacted the way personal and commercial carriers do business. This is very interesting stuff - be sure not to miss it.

Today's marketing tip: Marketing is so much more than communicating your offering to clients and prospects - marketing touches all facets of your business. A sound marketing strategy must incorporate understanding the big picture in your industry, through the accumulation of comprehensive business intelligence that gives you greater foresight and keeps you a step ahead of the competition.