Litigation funding
Assumption by a third-party investor of the cost and risk of legal proceedings, in exchange for a share of the proceeds, which lifts the rationing limiting the passage from grievance to claim.
For two centuries the number of claims brought against a business never reflected the number of breaches committed, but the number of people who simultaneously held a grievance, knew their rights, had the means to act and tolerated the risk of failure. The conjunction of those four conditions was rare, and the gap was a free and considerable filter whose effect observed claims experience never isolated. Third-party funding does not alter substantive law, it alters the rationing function. Claims frequency then stops being a function of the number of wrongs and becomes a function of the capital seeking a return in litigation, which makes it sensitive to the cost of capital. For liability insurance the consequence is that a fall in rates mechanically raises the expected burden on exposures already written, without any error having been made about the materiality of the facts.
No liability rating model today contains a financial market variable, although a growing share of frequency now depends on one.
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