Ignoring the Lede To Attack the Messenger

By Joseph L. Petrelli

In journalism, using the phrase “burying the lede” suggests that the author(s) failed to impart the most crucial information, e.g., who, what, where, when, why, how at the beginning of an article. In these instances, the most crucial information is buried, paragraphs deep into the story. Many view this as a fundamental mistake. However, the lede might also be buried intentionally when the crucial information is inconsistent with the author’s intent. I will refer to this phenomenon as “ignoring the lede to attack the messenger.”

Whenever a lede is buried, or a messenger is attacked, crucial information is withheld or obfuscated and does not get properly disseminated to those who need it. This issue of The Demotech Difference is dedicated to those who seek information and insights into the new challenges facing the insurance industry, how those challenges were unearthed, and, importantly, how to address those challenges so as to facilitate the availability and affordability of insurance countrywide.

This issue of The Demotech Difference summarizes a candid interview between Todd Kozikowski and myself. We discuss our backgrounds, how we met, and why he was my first and only choice for a research project that Demotech developed, and Kozikowski completed, by mid-2022. Our project and his findings should have been the headline in insurance articles throughout the country.

The effort began when several carriers failed precipitously, after long histories of unqualified, “clean,” independent audits and favorable determinations of reasonable provision as to gross and net loss and loss adjustment expense reserves. In our postmortem of these failed carriers, Demotech discovered “something new” that no other rating agency, opining actuary, independent auditor, advisory organization or regulatory body had actively discussed. Our postmortem detected a meteoric rise in new, annual, litigated claims filed against the carriers in the years prior to their sudden failures. The largest of the failed carriers was American Capital Assurance Corporation, dual rated by us and AM Best at our respective A levels until a few weeks prior to its liquidation.

Kozikowski was my first and only outreach in March 2022. My postmortem led me to believe that the meteoric rise in litigated claims in the years immediately prior to failure had to be driven by technology. I felt this because other factors in the marketplace had been adequately addressed by regulators, actuaries, independent auditors and analysts. As a data scientist and technologist with insurance experience, Todd was uniquely qualified to undertake our research to find the “something new” that had escalated the failed insurers market share of litigated claims to six times their market share of premium.

In less than 10 days, Kozikowski had evidence of online activity that had harnessed technology to target and attack not only insurers but also the transportation and hospitality sectors, as well as any other brand with money. The goal of the online activity was simple: convert a policyholder or claimant reported claim into a contested or litigated claim. By May of 2022, Kozikowski, through execution of Demotech’s research project, had identified the online activity that destroyed the carriers. Concurrently, he documented that the online business model had been in place for years and was positioned countrywide. While actuaries, independent auditors and advisory organizations had been content to wave hands over “social inflation” and “nuclear verdicts,” it was Kozikowski and I who discovered that “social inflation” and “nuclear verdicts” were not causes; they were the effects of an online business model targeting insurers to transition policyholder claims from claimant reported to contested or litigated status.

We coined the term “tech-enabled claim instigation” to describe the online business model utilized by the opportunists. The online business model harnesses litigation platforms, driven by artificial intelligence years prior to “AI” as a common term; and litigation marketing firms retained to secure leads on potential litigation, powered by search engine optimization and pay-per-click and other online tactics. And, yes, often fueled by third-party litigation funding.

Summarizing, our postmortem discovered meteoric increases in new, annual litigated claims in the years immediately prior to the failure of several insurers. This phenomenon was not detected by the actuaries and independent auditors that had issued, in total, 120+ statements of actuarial opinion and independent audits in the years prior to liquidation of the companies. Our research project emerged from this postmortem. Kozikowski’s execution of our research project revealed that “something new” had, in fact, underscored the meteoric increase in claims. Further, it appeared that the online business model had been covert yet in place since about 2017.

Our portmortem and Kozikowski’s findings are the lede that has been buried, ignored, or obfuscated. The attacks and hit pieces on Demotech may have been orchestrated to keep this crucial information and insights hidden from the industries under attack. Were the attacks on us formulated to impede your capability to identify and isolate the online targeting aimed at YOU?

I want the insurance industry and all targeted industries to have access to this crucial information. Like Howard Beale in the 1976 classic, “Network,” I’m mad as hell, and I’m not gonna take it anymore. This issue of The Demotech Difference puts the puzzle pieces of social inflation, nuclear verdicts, the dilemmas related to the availability and affordability of insurance, increased levels of litigation, the attraction of litigation funding, and the ongoing mutations and offshoots of tech-enabled litigation instigation in one place. Importantly, although Kozikowski’s company, 4WARN Inc., offers a solution to individual carriers, I applaud and join others proposing the universal “speed bump” of uniform federal taxation of profits emanating from third-party litigation funding to slow down the online business model — tax its profits.

Keep this issue of The Demotech Difference on hand. It provides insights on the “something new” that is attempting to redefine our industry from the outside in.