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Nuclear verdicts smashed records in 2023, with 27 court cases awarding over $100 million each, according to Swiss Re.
Why it matters: The massive awards are driving social inflation, which is causing litigation and insurance costs to soar, impacting consumers, companies, and insurers alike.
- Social inflation broadly refers to the increasing insurance claims costs above the rate of general economic inflation.
Social inflation has become a key driver of insurance claims. It’s surpassed economic factors, leading to insurance carrier losses, reduced insurance capacity, and higher customer premiums.
By the numbers: According to Swiss Re:
- Social inflation rose 7% in 2023, a 20-year high.
- U.S. commercial casualty insurance losses grew by 11% annually over five years, reaching $143 billion in 2023.
- Since 2014, the median limits declined by up to 46% when adjusting for inflation for stacked liability insurance programs.
What they’re saying: “Insurance rate increases have not compensated for rising loss costs, raising combined ratios for bodily injury-exposed liability lines and delivering cumulative underwriting losses of US$43 billion between 2019-2023,” said Haegeli and Lot in their presentation.
- A combined ratio above 100% means an insurer is paying out more money in claims and expenses than it is collecting in premiums.
- According to Swiss Re, the five-year average (2019–2023) direct combined ratios have been 109% for commercial auto insurance and 106% for medical malpractice insurance.
The backstory: Social inflation cycles have occurred before, notably in the 1980s. The current cycle began around 2015, fueled by litigation practices and large jury awards.
What to watch: U.S. social inflation pressures show no sign of easing despite slowing economic inflation. Insurers face the challenge of balancing risk management while maintaining market stability.
Also, with reduced capacity in the insurance market, industries like commercial trucking face increased risks and potential insolvencies due to inadequate insurance coverage.
Potential Solutions: Swiss Re cited several steps that could help resolve this growing U.S. problem, including:
- Tort reform to curb the scope of non-economic damages.
- Regulation of third-party litigation funding to create clarity and consistency. “Regulation should, for example, prohibit funders from influencing a party’s selection of counsel, choices about litigation strategy, or settlement.”
- Large, public-facing companies should emphasize socially responsible actions to mitigate the spread of negative sentiment.
- Leveraging technology for better underwriting and claims management by insurers.
Swiss Re noted that the market eventually returned to balance in the 1980s when tort reform measures slowed rapidly rising liability costs.
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