By Jamie Molloy is Head of ATE at Ignite Specialty Risk
As reported in Bloomberg Law, the Judgment Preservation Insurance (JPI) market has recently taken a substantial loss in the U.S. case of BMC Software, Inc. v. IBM. Corp., No. 22-20463(5th Cir. 2024) (‘IBM’), with such losses estimated to exceed 500M USD (https://news.bloomberglaw.com/business-and-practice/liberty-insurers-take-hit-on-1-6-billion-ibm-judgment-policy).
The successful appellate court decision in IBM follows fresh off the back of the U.K.’s Court of Appeal overturning the judgment in Carton-Kelly v Darty Holdings SAS [2022] EWHC 2873 (Ch) (the so-called ‘Comet’ decision), where the JPI market was also rumoured to have taken a substantial albeit much smaller loss, estimated at £35m.
The JPI market is very much in its infancy yet has already suffered what can only be said to be both catastrophic and unexpected losses, resulting in some markets pulling out of class altogether.
As head of U.K. product offering at Ignite Specialty Risk , I set out below a few thoughts on these recent developments and what is now likely to happen.
Varying jurisdictions = Varying results
We have seen demand for JPI across various jurisdictions, including the U.K., U.S., and mainland Europe.
Whilst the product offering remains common, the associated risks in each jurisdiction vary, with each jurisdiction having its own applicable Civil Procedure Rules and unique appellate system. This inevitably leads to varying results, and it is simply not possible for any insurer to look at a cross-jurisdiction portfolio of JPI collectively and suggest any degree of predictability.
Any insurer looking to write this business needs to focus on a specific jurisdiction or ensure it can build a sufficient portfolio across all jurisdictions it offers the class of business in. However, on this point, see below.
Volume and Market Awareness
The inevitable problems associated with the creation of new insurance products are both that the uniqueness of the product and lack of market awareness can result in an insurer failing to build a sufficiently large portfolio to stomach the cost of losses.
In the U.K., for instance, in excess of 90% of cases do not reach a final determination, settling confidentiality beforehand. This suggests the size of the market for JPI in the U.K. is limited, making it far more difficult to build out a sufficiently large portfolio. The net result of this is that it is unlikely that the premium collected on successful cases will be sufficient to pay for the losses incurred on those cases which fail.
Risk Reward
In order to encourage the development of the litigation insurance market, insurers need to be both profitable and adequately rewarded for the risks they take, particularly when considering the rewards made available to litigation funders.
What has become apparent with the JPI market is that the premiums on offer do not reflect the risk associated with the class of business.
The impact of these recent losses demonstrates that the premium cost of JPI needs to increase substantially to be both attractive and sustainable to insurers.
Pricing Pressures
Inevitably the pricing pressures referenced are to some degree driven by both competition in the market and brokers.
Whilst accepting brokers have a duty to their clients to obtain the best product for the best price, too much downward pressure on pricing will inevitably result in insurers exiting the market and potentially an eventual outcome of no market existing.
Let’s be clear though, it’s the duty of the Underwriter to ensure they obtain premium rates which accord with risk and in no way can brokers be said to be responsible for insurer losses. What is apparent from these losses and the market reaction is that premium pricing for JPI needs to be revisited.
Conclusion
So, what next? Inevitably losses of this nature will result in market retrenchment and a harder market, but will the future increased premiums brokered be sufficient to attract interest in a product which is not only loss making but also, very much in its infancy?
What is clear is that any market looking to write this class of business needs a strong technical team and to consider the above-mentioned points before committing to such a product offering.
Ignite Specialty Risk remains committed to offering pioneering and innovative products, but only for litigation insurance markets it deems attractive and, inevitably, for the right premium.
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