US-based litigation funding is impacting social inflation – a key concern for casualty reinsurers, says credit rating agency
The reinsurance market still needs to keep a weather eye on the “ongoing concern” of “the role of litigation funding” in the US market because of the subsequent impact on casualty reinsurance, according to Michael Lagomarsino, senior director of global reinsurance at credit rating agency AM Best.
Addressing delegates attending the firm’s briefing session at RVS 2025 on 7 September 2025, Lagomarsino commented that litigation funding – where a third party funder covers the legal costs for a claimant or class action – is increasingly being “branded” as “legal system abuse”.
This is of particular interest to the reinsurance sector because the highly litigious US environment affects claims costs, which then contributes to the rate of social inflation – a noted area of concern among the firms hosting market briefing for the 2025 RVS season.
Law firm Clyde and Co defines social inflation as “rising insurance costs due to increased litigation, claimant friendly judgments and higher awards of damages”.
For Lagomarsino, the reinsurance market is “nowhere near” being able to draw a line under litigation funding – and this poses a real risk to reinsurers.
He said: “I don’t think we’re anywhere near the end of this. There is some emphasis on tort reform, but that’s going to be really slow. More importantly, there’s still capacity backing [litigation].
“Until we get to that point where there is an inability to get coverage, will the general public feel the pain? We’re nowhere near that.”
Tort reform refers to proposed changes to the civil justice system that aim to reduce the ability for claimants to bring litigation.
An ‘unfortunate’ situation
Lagomarsino said the current situation around litigation funding was “really unfortunate”.
He continued: “There’s not clear disclosures or transparency around when it’s being used or to draw attention to how much [money] the plaintiff ultimately gets in the end.”
Mahesh Mistry, head of analytics at AM Best, added that litigation funding is now “a separate business in itself”, currently backed by “a lot of US hedge funds”.
However, he believes “there’s also third parties outside of the US [that] are interested in this and [are now] coming in”, which then creates the potential for vast litigation funding to “spill over into other markets”.
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