The global head of insurance for RPC, Simon Laird (pictured), has supported clients within the financial services sector through his current role for over three years, and he recently spoke with Insurance Business to discuss the development of social inflation as a phenomenon in the UK and how insurers will respond to this growing challenge.
Social inflation has proven something of a buzzword in 2020, and Laird noted that before attending a conference about two months ago where it seemed that every talk was about this concept, it was not something that was widely discussed.
Social inflation has been around for a long time, he said, it’s just being talked about a lot more at the moment. For those unfamiliar with the concept, he outlined that in its simplest form social inflation is an increase in the cost of claims and it is called this due to some of this increased cost being attributed to social trends.
Social inflation has seen claim sizes grow in the US due to a variety of factors including the prevalence of ‘claim culture’ where intensive advertising seeks to encourage people into making a claim, and the format of civil trials. In the UK, if you go to court on a civil matter, he said, you will be in front of a judge or three judges if you go to the Court of Appeal but in the US, there is a jury who get a say in the award of damages.
The jury will often side with “the man on the street” as opposed to a large corporation such as an insurance company, he noted, and they tend to award higher damages than a judge might. The risk of one-off awards which result in very high payouts is that they might become the norm, he said, and it may become acceptable to have these large awards.
“If you look at the data in the US over the last five or so years, you’ve had a steep curve upwards in legal claims which have been issued in the US which are above the $10 million mark,” he said. “And it literally spikes each year, it doesn’t even drop down a little then come back up, it just keeps going up.”
While more prevalent a challenge for insurers with US exposures, Laird said, the causes of social inflation may also start to impact the UK. A core factor which is a serious consideration for the UK market is the rise in litigation funding, he said, and big businesses with lots of capital looking to find causes of action which are driving claims activity. The UK has to contend with the growth of sophisticated claims management companies which are also advertising more aggressively, he said, and while the claims they deal with tend to be lower in value, they are bringing in multiples of these.
“I think another factor in the UK as well is the presence of the Financial Ombudsman,” he noted, “and the limits on the Financial Ombudsman recently went up substantially for financial related complaints. So people can go to the Ombudsman rather than the courts, and have a decision made, not necessarily based on the law, though the Ombudsman might have regard to the law, but on what is fair and reasonable in the eyes of the Ombudsman.”
The UK also has the regulator, Laird said, which tends to be more consumer friendly in terms of how they want big insurance companies to deal with claims and complaints. All these factors create a societal platform that may well see an increase in the cost of claims, he said. Laird highlighted, however, that in the UK while there are lots of statistics that depict the increased cost in indemnity spend by insurers and claims cost themselves, there is not the same level of data that can show year on year how the level of claims in the UK is getting higher or how the level of judgements has increased.
“It’s difficult to point to consistently gathered data across different jurisdictions to support it,” he said, “but if you look at the societal factors, they point towards the fact that social inflation would logically be a change in the UK and, by extension due to similar factors, Australia, Canada and the Netherlands in particular.”
Looking at how insurers in the UK can set about dealing with this challenge, Laird noted that many UK insurers will be handling US losses as well and so are concerned with the development of social inflation in both locations. The kind of actions that these businesses can take to manage this risk is first to make sure that they are looking at their reserve adequacies, he said, to make sure that they are properly covered for some of these losses.
“If you’re seeing claims trends increase, in terms of cost of claims increase, then you need to constantly be looking at your book to make sure that you’ve got adequate reserves in play,” he said. “One of the big challenges for UK insurers with US exposure is the big damages payouts and trying to pick out where that spike in activity is coming from as otherwise they might end up under-reserved.”
There needs to be a constant review of certain types of business, he said, particularly in the US bodily industry and D&O sectors which have the potential to spike significantly. Insurance companies must also look to their policy wording and start reviewing and tightening up these wordings and by extension their risk selection, he said.
These organisations must be constantly reviewing this to make sure that their wording is reflecting what they are trying to write, he said, and they must make sure that their risk selection is adequate. Insurance companies must question, he said, if, in the instances where a type of risk has more exposure to social inflation trends, whether they even want to write this in the first place.
The fact is that social inflation has been a long-term consideration despite its recent publicisation, Laird said, and insurers have underwritten their way through it before and will do so again. Underwriting through social inflation is perhaps the only way to manage this challenge, he said, as he does not believe it will be possible to lobby against it or get the law changed in the foreseeable future.
“It’s about just having good information and good insight,” he said, “so that they can work their way through it, and [those factors] are going to be critical for them.”
