Social Inflation, Electric Trucks, Virtual Currencies

The business environment is constantly evolving, with each new development and innovation offering a unique variety of potential risks and rewards. Broad, systemic challenges may sometimes create unexpected obstacles, while technological transitions and advancements can often create as many hurdles as they do opportunities.

The systemic implications of social inflation, in addition to the potential risks posed to businesses by the shift toward electric vehicles and virtual currencies, are three of the emerging risks we’re focused on this quarter.

A Social Dilemma

Social inflation often refers to the rising costs of insurance claims that exceed economic inflation or similar economic drivers. It often encompasses the impact of rising litigation costs as well as broader definitions of liability and more plaintiff-friendly legal decisions.

According to one report, the annual rate of social inflation rose by more than 5% every year between 2017 and 2022, outpacing standard economic inflation, which grew by 3.7% in that same stretch of time.

In 2024, Verisk collaborated on a report with the RAND Corporation exploring whether empirical trends in litigation rates, trial awards, and insurance claim payments are consistent with the expected effects of social inflation. Looking at insurance claim payments from Verisk’s ISO data, in addition to analyzing litigation rates and trial awards from court data through 2019, the report found compelling insights:

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Tort case filings per capita increased about 10% between 2012 and 2019.

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Plaintiff win rates in cases that reached verdict increased from 53% to 64% between 2010 and 2019.

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Trial awards per plaintiff in Personal Injury and Wrongful Death (PI/WD) cases grew 7.6% annually, after adjusting for inflation, between 2010 and 2019.

The use of third-party litigation funding (TPLF) is widely believed to be one of the main catalysts of social inflation. Having first gained traction in the U.S. around 2010, this practice of third parties or “funders” who are not a party to a lawsuit–often hedge funds, small investors, and foreign entities, to name a few–has grown into a more than $15 billion industry in the U.S. And though no federal rules explicitly require the disclosure of TPLF funders, some states have been more active in addressing this issue.

Our recent research found that legislation enacted at the state level generally addresses three potential concerns related to TPLF: consumer protection, disclosure, and funder restrictions. Indiana lawmakers, for example, enacted a law in 2023 requiring claimants to provide written notice that they have entered into a TPLF agreement, absent a court order.

Notably, more than half of all U.S. states institute caps on punitive damages in tort-related cases, according to the NAIC, ranging from some states implementing a 1:1 cap on payouts exceeding the compensatory damages to other states permitting awards up to three times the baseline compensation amounts.

Verisk is engaging with the National Association of Mutual Insurance Companies (NAMIC) and other industry stakeholders to develop a strategy to help address TPLF.

“Given that third-party litigation funding can serve as rocket fuel for legal system abuse that drives up costs for insurers and policyholders alike, NAMIC initiated a discussion with Verisk to address the issue,” said NAMIC President and CEO Neil Alldredge. “Verisk’s efforts in fast-tracking development of a coverage solution are poised to introduce more transparency around TPLF so it operates less in the shadows.”

Hauling Risks: The Rise of Electric Trucks

The global automotive transition to electric vehicles (EVs) has not been isolated to private passenger-type automobiles. U.S. electric truck deployment increased fivefold between 2022 and 2023, impacting commercial auto insurers.

Policymakers at the state and federal levels have taken steps in recent years to promote a more rapid electrification of commercial vehicles like trucks, buses, and vans. For instance, the National Electric Vehicle Infrastructure (NEVI) Program requires states to develop plans for charging stations every 50 miles to expand the charging infrastructure for electric vehicles, including heavy-duty vehicles like semitrailers and buses. In California, policymakers have mandated that all new medium- and heavy-duty truck sales be 100% zero emission by 2036.

These initiatives face a number of potential challenges, such as charging and range issues, increased battery weight, and lingering concerns over EV-related fires. Battery weight considerations could, for example, force shipping companies to reduce the number of goods commercial EVs can transport, possibly increasing the number of trucks necessary to transport goods and increasing operational costs.

Current federal regulations grant EVs an additional 2,000-pound weight limit allowance, which could potentially lighten the burden of added battery weight. However, one University of California study estimates that electric semitrucks could be up to 5,000 pounds heavier than diesel semitrucks.

Vehicles with higher weight ratings could also receive a potentially higher weight classification under a rule in the ISO Commercial Lines Manual, according to Verisk analysis.

Virtual Currencies, Real Concerns

Virtual currencies, also known as cryptocurrencies, appear to be basking in a post-election surge in value. But speculative manias are nothing new in the virtual currency market, where values have fluctuated wildly in the past. And with so much real money flowing through virtual currencies, commercial property insurers may want to consider some of the concerns associated with their meteoric rise.

The IRS has maintained since 2014 that virtual currencies are “property” rather than “currency” for the purposes of federal income tax collection. It’s a view that has been relied upon by some courts as well. Yet, virtual currencies are also subject to some unique risks that may not always be applicable to tangible property–or coverages designed to address them.

The extreme volatility of virtual currency values, for instance, may make them less predictable than tangible properties like commercial real estate, which has historically experienced more predictable patterns in valuation during periods of strong price growth and decline. The same cannot be said of virtual currencies. Take, for example, bitcoin: In a single year, it saw value drops of 45% and 47%. In an eight-week period in 2022, the value of bitcoin plunged by 36%.

Virtual currencies pose some potential underwriting challenges for commercial property and other lines of insurance as well. Thousands of U.S. companies already transact in bitcoin, and according to one report, businesses may hold approximately $40 billion in the currency (as of Q4 2024). These valuable assets–which may be stored on company servers or third-party servers–could be exposed to theft or tampering, potentially leading to possible commercial property claims by the impacted companies.

Virtual currencies also require physical hardware to create or “mine.” Underwriting experts note that companies in the business of mining virtual currencies may have a unique risk profile distinct from that of similar businesses–such as data center operators–including increased fire risk.

The power-hungry nature of mining additionally means that these facilities may be co-located near power plants, including idle plants in more remote areas where it may take longer for fire departments to access. Due to the nature of virtual currency mining, firms may also opt for cost savings by eschewing backup power–leaving the operations more vulnerable to possible disruption during an outage.

While there’s much excitement–and rapid growth–around EVs and virtual currencies, they present unique risks that insurers need to be aware of. Meanwhile, as social inflation challenges persist, positive action around TPLF transparency is emerging.

Shavel is president and chief executive officer of Verisk, a data analytics and technology partner to the global insurance industry. He brings nearly 30 years of experience advising and leading publicly traded companies to Verisk.

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