Managing a silent assassin in liability insurance

Managing a silent assassin in liability insurance | Insurance Business New Zealand

Managing a silent assassin in liability insurance

Social inflation is a silent assassin in the insurance world. It is blamed for driving up loss costs, especially in long-tail and casualty lines, and, as such, is deemed a major contributor to the hard market conditions that are causing challenges for (re)insurers, intermediaries, and insurance buyers worldwide.

The term social inflation is somewhat ambiguous. It means different things to different people. In fact, many insurance professionals are still in the camp of: ‘Social inflation – what’s that?’ As a phrase, it’s best known in the United States, but the factors of loss frequency and severity in liability lines are prevalent worldwide – even if insurance professionals don’t wrap those trends up in the blanket term of social inflation.

After multiple interviews on the subject, I understand social inflation as a term used by insurers to describe the rising costs of insurance claims resulting from things like increasing litigation, broader definitions of liability, more plaintiff-friendly legal decisions, and larger compensatory jury awards.

The Insurance Information Institute, which is a leading source of data-driven insights and information on insurance in the United States, says: “Social inflation is an important issue to understand, as it has a direct effect on claims-related losses and insurance costs, especially for businesses. The term refers to rising litigation costs and their impact on insurers’ claim payouts, loss ratios and, ultimately, how much policyholders pay for coverage.”

So, I wasn’t far off. Social inflation mostly revolves around rising litigation costs leading to higher loss costs. So far, it seems the lines worst impacted by social inflation are commercial auto, professional liability, directors and officers (D&O) liability, and product liability – all of which are currently experiencing hard market conditions in most (if not all) jurisdictions.

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Here’s a good example of social inflation in action. From 2010 to 2018, the average US trucking industry lawsuit verdict increased a whopping 967%, soaring from just over US$2.3 million at the start of the decade to nearly US$22.3 million eight years later, according to the American Transportation Research Institute. The same so-called ‘nuclear verdicts’ are being handed down to truckers worldwide, but with less severity than the litigation-crazy US.

So, is social inflation manageable? And can insurers mitigate some of the core components driving these trends? I believe so.

Mike Hudzik, executive vice president, head of corporate casualty, US at Munich Re told me that “one of the biggest drivers of social inflation is the general anti-corporate sentiment that exists, reaching back to the financial crisis”.

Sharing a similar opinion, Katey Walker, Americas P&C sales and practice leader, insurance consulting and technology at Willis Towers Watson, wrote a blog about social inflation in which she referred to “jaded public attitudes towards corporations” and “changes in beliefs about entitlement to awards, perhaps based on real and perceived gaps in income, and a heightened emotional undercurrent within society are taking hold.”

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Walker’s phrase “jaded public attitudes towards corporations” – does that sound familiar? It should. Insurers have always battled against “jaded attitudes” and “anti-corporate sentiment”. And yet, people always swing around to the fact that they need insurance, and therefore, insurers “aren’t so bad”.

So, there’s clearly a way to get around this anti-corporate sentiment and mitigate (at least some) of the tension causing social inflation.

One thing that will help is MORE EDUCATION. In recent years, insurers have upped their efforts around education and helping people understand what insurance is, why they need it, and how the products and the industry work. This has been necessary, in part, due to the huge surge in digital insurance shopping and the ease of access to information online. In my opinion, the more people understand a product or a service, the less they’re likely to resent paying for it.

Bringing this back to social inflation, it’ll be hard work, but insurers could teach their clients in these hard-hit sectors (commercial auto, large corporations, etc.) a thing or two about managing public sentiment through education and communication. Together, they can change the narrative so that the general public stops seeing any money-making venture as “the bad guy” and starts understanding their role in the bigger picture of daily life.