Demotech calls for granular loss cost data to combat litigation trends

Joseph L. Petrelli, president and co-founder of Demotech, traces the instability of failed carriers back to an industrial-scale surge in litigated claims. Driven by aggressive online marketing, third-party funding, and evolving legal business models, this trend creates a disconnect in current reporting methods. Since the mid-1980s, the insurance industry has relied on a formula that multiplies claim frequency by average claim cost to reach a composite loss cost. Petrelli contends this model assumes an equilibrium that no longer exists in an era of billboard-fueled litigation and alternative legal service organizations.

To restore transparency, Demotech proposes deconstructing the composite loss cost into distinct components: claims closed without payment, litigated claims, and non-litigated claims. Sharon Romano Petrelli, vice president and co-founder, notes that while this level of detail would not alter the final dollar amount, it would reveal how claim transitioning impacts the bottom line. By segregating these variables, stakeholders could better identify the specific costs associated with litigation-heavy claim environments rather than masking them within a broad average.