Inflation and legal volatility drive changes in specialty insurance lines

Inflation, litigation, and workforce challenges are currently shaping the specialty insurance lines sector, according to a recent report from Argo.

The report highlights that labor inflation is surpassing material costs in the United States. Labor expenses have increased by 1.42 percent year over year, while material costs have risen by 0.93 percent. This increase in labor costs impacts both claims payouts and policy pricing.

“For brokers,” Argo says, “that means underpriced risks are more vulnerable than ever.”

The trend underscores the importance of precise actuarial work and disciplined underwriting. The ability to anticipate inflationary effects and adjust rates proactively has become essential for maintaining long-term profitability.

In construction insurance, tariff-related spikes in material costs are leading to higher claims expenses. While workers’ compensation remains profitable, it is increasingly affected by rising medical costs.

Legal risks are also increasing due to what Argo describes as a surge in “nuclear verdicts”—jury awards that far exceed actual damages. These unpredictable outcomes complicate risk pricing and require insurers to invest more resources in legal expertise and claims management.

Stephen Perrella, Argo’s chief claims officer and a former trial lawyer, said, “In law school, you learn that our justice system is designed to make a plaintiff whole – no more, no less. But today…in many jurisdictions, verdicts far exceed actual damages.”

Perrella referenced states such as Georgia and Florida where large jury awards and inefficiencies have led to tort reform only after insurers began leaving those markets.

“The problem is we’re implementing tort reform once those abuses have begun to overwhelm a just system,” he said.

Specialty insurers also face operational risks due to talent shortages. Many experienced professionals are retiring while fewer new underwriters, claims specialists, and actuaries enter the field. This situation creates strong competition for skilled employees.

“With large portions of the workforce retiring and a limited pipeline of experienced underwriters, claims professionals, and actuaries entering the field, competition for expertise is intense,” the report says. “That pressure is especially acute for carriers navigating complex risks and high-touch broker relationships.”

Argo notes that recruiting qualified staff is not enough; building cohesive teams capable of adapting to future challenges is equally important.