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Social inflation is cause for concern for insurers, according to a recent Geneva Association report, as insurance premiums may no longer cover the liability risk insurers take on.
Broadly, social inflation describes all ways in which insurers’ claims costs rise above general economic inflation.
It is seen in the rise of ‘nuclear verdicts,’ like a Zoom jury awarding an injured motorcyclist $411 million in damages.
According to the Geneva Association report, “an unexpected change of claims inflation has a leveraged effect on required reserves – a change of 2% could increase liabilities by around 16% on a portfolio that takes eight years to settle.”
What’s Driving Social Inflation?
A more narrow definition of social inflation refers only to legislative and to litigation developments impacting claim costs. And a jump in the use of litigation funding is just one factor driving it.
Litigation funding is the practice of third parties financing lawsuits in exchange for a share of any funds the plaintiffs might receive. The method was once widely prohibited, but as bans have eroded in recent years, the practice has grown.
According to recent surveys, almost 70% of lawyers were ‘very familiar’ with litigation finance in 2019, and its use has reportedly risen by 105% since 2017.
The study also found judge and jury attitudes are shifting in ways more favorable to plaintiffs; there’s a growing anti-corporate bias; and lawyers have strengthened their litigation activities, from client acquisition to courtroom tactics.
Insurers Must Be Proactive
While social inflation is not a new phenomenon, insurers must adapt to the current environment, according to the report.
One area insurers need to engage in is public policy. According to the report, insurers need to promote legislative changes that help level the playing fields between plaintiffs and defendants.
That could include tort reform and the push for specialized courts to oversee complex financial or professional liability cases.
The report suggests three additional areas of focus:
- Get better at defending cases. Use court and social media to develop predictive tools that help decide whether to litigate or settle claims.
- Upgrade underwriting to pre-empt new risks and claim surprises. “Insurers need better early-warning systems that identify shifts in social inflation,” the report says.
- Develop products with social inflation in mind. Insurers should go beyond adapting policy wordings and exclusions, such as risk-sharing arrangements and parametric solutions, which pay if certain agreed-upon conditions occur.
Insurers need to prevent the rise of social inflation, to protect their role in safeguarding individuals and organizations against liability risk.
Read the full Geneva Association on Social Inflation here.
