Demotech, Inc.: Tech-enabled Litigation Instigation Necessitates Granularity of Loss Costs

COLUMBUS, Ohio, Aug. 24, 2026 /PRNewswire/ -- Tech-enabled litigation instigation, the once covert online business model unearthed by Demotech's research project coupled with mutations in the legal profession necessitate a more granular presentation of loss costs. 

Joseph L. Petrelli, ACAS, ASA, MAAA, MBA, president and co-founder, Demotech, Inc. notes "In 2022, our postmortem of failed carriers identified new, annual litigation as the proximate cause of what destroyed them. Our subsequent research project, undertaken by Todd Kozikowski, determined that the industrial scale increases in litigated claims were accomplished through technology, online marketing, and advertising, sometimes financed through third-party litigation funding. Subsequent research by Demotech identified changes within the legal profession. The changes in the legal profession include alternative business structures, managed services organizations, and other mutations that may circumvent the disclosure of third-party litigation funding. In this environment, regulators, legislators, and stakeholders need additional granularity in the presentation of loss costs. We need to focus on the components, not the composite."

As to the need for additional granularity, Petrelli notes "Until the mid-1980s, advisory organizations published rates and premiums for insurers to utilize, either as is or with a deviation. In the mid-1980s, this changed to advisory loss costs, i.e., the average loss per policyholder without a corporate expense and pre-tax profit provision included."

"Although advisory loss costs are trended for inflation to reflect anticipated claim costs as well as anticipated changes in claim frequency. Since the mid-1980s, the formula underlying loss cost has been (Claim Frequency) times (Claim Cost) equals Loss Cost. Essentially, a loss cost is (percentage of policyholders with a claim) times (the average cost of a claim)," says Sharon Romano Petrelli, CPCU, AIAF, CCP, ARC, vice president, and co-founder.

Joe Petrelli believes that this format was reasonable when claims were not unduly influenced by billboards, TV, radio ads, third-party litigation funding, online tech-enabled litigation instigation, alternative business structures, or managed services organizations. He says, "an implicit assumption underlying the original loss cost format was that an equilibrium existed in the relative claim frequency between claims reported and settled with policyholders, and claims litigated and negotiated with plaintiff firms. However, with claim status transitioning between claims closed without payment, closed with an indemnity payment, outstanding, or litigated; loss costs need to be viewed as the sum of these components. Composite loss costs are not sufficiently transparent."

An example of the granularity that would assist regulators, legislators, insurers, and stakeholders would be the sum of the components:

(Claim Frequency of Claims Closed without Payment) x (Cost of Closing without Payment)
plus

(Claim Frequency of Litigated Claims) x (Claim Cost of Litigated Claims)
plus

(Claim Frequency of Non-Litigated Claims) x (Claim Cost of Non-Litigated Claims)
equals the Composite Loss Cost.

The additional granularity would not change the dollar amount of the composite loss cost; however, this granularity would identify the impact of claim transitioning by components. In fact, there are advantages to isolating annual trend in cost by component, as well. 

By adding granularity, rather than blurring the impact of each component of a loss cost by ignoring its contribution, stakeholders would gain the ability to segregate and investigate the components of a loss cost.

About Demotech, Inc. 
Incorporated on September 9, 1985, Demotech, Inc. is a financial analysis firm located in Columbus, Ohio. Demotech serves the insurance industry by providing objective and independent Financial Stability Ratings^® (FSRs) for Property & Casualty insurance companies, Life & Health insurance companies, and Title underwriters, among others. FSRs assist independent, regional and specialty insurers by leveling the insurer ratings playing field. Over thirty-five years ago, Demotech was the first to have its rating process reviewed and accepted by Fannie Mae, Freddie Mac, and HUD. Since that time, Demotech's FSRs have been leveling the playing field for financially stable insurers of all sizes. Since July 11, 2022, Demotech is registered with the U.S. Securities and Exchange Commission (SEC) as a nationally recognized statistical rating organization (NRSRO) in the class of ratings for Insurance Companies. Visit www.demotech.com for additional information, sign up or view The Demotech Difference.

SOURCE Demotech, Inc.