Social Inflation Accelerates Claim Losses, IRC Study Shows

Insurers’ losses across multiple coverage lines have accelerated more swiftly than economic inflation, pointing to so-called “social inflation,” according to a new white paper by the Insurance Research Council  (IRC).

While there is no universal definition of social inflation, the term generally describes concerns of the rising liability risk and costs of insurance claims.

The IRC evaluated incurred claims costs in auto liability, medical malpractice, products liability, and general commercial liability between 2007 and 2018.

“Incurred claim losses have increased rapidly in recent years—much more rapidly than in preceding years and more rapidly than economic inflation would predict,” the IRC said in its paper.

In medical malpractice, incurred losses decreased by 3.9% annually between 2007 and 2013, only to rise 3.2% annually between 2013 and 2018.

Commercial auto liability losses rose over the study period at a rate of 5.4%, with most of the growth occurring between 2013 and 2018 at an annualized rate of 10.9%.

According to the IRC, even personal auto claim losses represent a “substantial increase,” with an annualized 5.6% increase between 2013 and 2018.

“At its heart, social inflation begins with changes in attitudes and beliefs about entitlement to compensation for injury or loss and the willingness to pursue litigation or file an insurance claim against another individual or business in order to obtain that compensation,” the IRC said in its paper.

According to the IRC, the drivers of social inflation are due to several trends and developments, including the following:

• Shifts in public sentiment about litigation
• Increasing numbers of “nuclear” jury verdicts
• Tort reform rollbacks
• Legislative actions to retroactively extend or repeal statutes of limitation
• Increased attorney advertising and involvement in liability claims
• The proliferation of class actions
• Emergence and growth of third-party litigation financing

The IRC used loss data published by the National Association of Insurance Commissioners for its loss trend analysis.

The paper’s data predates the current coronavirus pandemic. However, the IRC notes that legislative efforts to impose business interruption coverage for insurance policies that specifically exclude bacteria and virus-related losses are a present example of the forces that drive social inflation.