Will COVID-19 Mitigate Social Inflation?
Social inflation is a bit of a buzzword, used to describe a rising cost in insurance claims. Some say this is sour grapes from insurers who don’t want to pay out on pandemic-related policies. Others insist that social inflation is a real problem that, if left unchecked, can cause damage to the very concept of insurance. Insurance Business Magazine reveals that the delays caused by Coronavirus lockdown measures have led to an increase in early settlements. Attorney Ellen Greiper states that since May, she’s received a spike in calls from opposing counsel agreeing to offers they’d previously dismissed. She suggests that when plaintiffs realize that they may not see a trial date for a year or more, the idea of settling seems more attractive. Plaintiffs may also realize that our world has changed in a way that may not allow for huge awards. When jurors have been laid off or their company shuts down, they may not be disposed toward giving multi-million-dollar awards even when the plaintiff is in the right. Some courts are beginning to open for specific matters. Overall though, the conditions in a courtroom are not conducive to social distancing. The same is true for depositions, strategy planning, and more. When clients are in dire financial straits, less money now can mean a lot more than more money a few years down the road. Litigation funders are weighing their options with this new dynamic in mind. Is it better to settle early, cutting down on the expenses associated with trial? Or does it make more sense to wait and go for a bigger award when the courts finally reopen? Obviously, the answer will vary from one case to the next. What we do know is that things aren’t expected to return to pre-COVID conditions any time soon—if ever.
INVESTOR INSIGHTS
Overall, the industry has been positively impacted by the financial effects of Covid-19 with 64% of respondents experiencing an increase in origination activity. 
In some cases, the increase in origination activity has been dramatic, with originations in excess of 25% being experienced by approximately half of respondents. 
The largest impact in terms of the type of activity is equally split between law firm portfolio financings and single case financings. However, since portfolio financings are inherently larger, it stands to reason that a much larger dollar volume of financing will be required for these financing types. 
In terms of the source of originations, it appears to be a combination of existing relationships, mainly from law firms, and new relationships, mainly from law firms and directly from plaintiffs. It is encouraging to see new relationships continuing to be formed at this stage of the evolution of the industry. 
A natural consequence of demand for litigation finance is a demand for capital commitments by the litigation funders. Accordingly, it appears that the demand impact of Covid will have the effect of accelerating plans for new fundraisings, with about half of respondents indicating their fundraising plans have been accelerated. Accordingly, investors in search of good risk-adjusted and non-correlated returns should expect to see more opportunities in the marketplace. As always, diversification is critical to successful and prudent investing in the litigation finance marketplace. 
As it relates to the impact that the current financial crisis will have on the expected return profile, almost 50% of respondents suggested it is too early to tell. However, for those who did have some visibility or were confident in making an estimate, it appears that the expectation is that their existing portfolios may be negatively impacted, which is consistent with what I would have expected given the extent of this economic crisis. I was personally forecasting that durations would be longer, simply due to the effect that court closures would have on existing cases, where the timing of settlement discussions are ultimately impacted by the timing of the court process. In this light, I would expect to see portfolios maintain longer durations which may equate to lower internal rates of return, but this depends on the escalator clauses within their funding agreements, which may see funders obtain larger multiples of invested capital if the delay breaks through timing thresholds. I would also expect that the threat of collectability risk might put pressure on plaintiffs to accept lower settlement amounts, and defendants will use liquidity concerns to their advantage by low-balling settlement offers. However, this phenomenon could be situation-specific, and more prevalent in certain industries. 
As previously stated, one of the reasons I would have expected return expectations to be increasingly negative is due to defendant collectability risk. In this vein, it seems that most managers are focused on the impact this risk will have on their portfolios, with most managers indicating that collection risk has increased, which is expected given the impact the crisis has had on certain industries, and the impact it has had on corporate liquidity. 
Edward Truant is the founder of 
About Augusta Ventures:- Established in 2013, Augusta is the largest litigation and dispute funding institution in the UK by # cases. Augusta’s scale enables us to make decisions in market-leading timeframes and fund cases of any size.
- Augusta is organised into specialist practice groups: Arbitration, Class Action, Competition, Consumer, Intellectual Property and Litigation, and sectors: Financial Services and Construction & Energy.
- By the end of 2019, Augusta had funded 227 claims. Contact: Leor Franks, Chief Marketing Officer, 
