Social inflation is one of the latest buzzwords in insurance. It is 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. While the core components driving social inflation have been evident for some time, their impacts on the insurance industry have only really started to come to a head in the past couple of years.
“Probably one of the biggest drivers of social inflation is the general anti-corporate sentiment that exists, reaching back to the financial crisis,” said Mike Hudzik (pictured), managing director, head of casualty underwriting, US & Canada, Swiss Re. “It seems like it’s a long time ago in our rear-view mirror, but it really created an environment that continues to gain momentum today. Since that time, there’s been a greater division or separation of wealth, and there’s just generally a feeling that someone needs to pay when there’s some kind of damage or injury sustained, regardless of negligence.
“Social inflation comes from a number of things, including how juries are composed these days. The jury composition impacts the outcomes of verdicts in a big way. The biproduct of this is something that’s always existed, but seems magnified now, which is the targeting of large corporate risks. They’ve always been in the crosshairs of the plaintiff’s bar, but they’re an even bigger target these days. That comes from the investment in advertising and other actions by the plaintiff’s bar, and it also includes things like litigation funding. There’s just a more pronounced movement towards this type of targeting as a result.”
There are a few areas, in particular, where social inflation has impacted the insurance industry. So far, it has been quite concentrated in commercial auto, medical malpractice, in certain professional lines like directors’ & officers’, and in the umbrella and excess liability arena – especially when those policies are for large corporate risks because that’s where the largest limits tend to be offered.
The commercial auto market has been in a hard spot for some time. Over the past five or six years, there have been many instances of trucking firms involved in some type of accident where most reasonable people would view the trucking firm as having no negligence whatsoever – they just happened to be in the wrong place at the wrong time – but because of injuries sustained by the other parties involved, trucking firms have seen verdicts of $30 million, $50 million and sometimes up to the $100 million range. That immediately burns through the primary liability coverage, which typically has relatively short limits ($1 million to $10 million) and bleeds into the umbrella and excess liability towers as well.
“In the excess liability towers, pretty much anything is fair game,” Hudzik told Insurance Business. “Any kind of product liability, or even a slip and fall nowadays can result in claim payments that are astronomical compared to what they used to be worth. D&O is another area where we’re seeing movement. There are all sorts of shareholder actions that are exacerbated by social inflation factors.”
Casualty business has a relatively long tail to it. For casualty underwriters, keeping on top of social inflation is challenging because not only do they have claims occurring in the present, but they also have to factor in issues that have been lingering or developing for a long time. Claims resulting from the opioid crisis are a good example of this. Claimants have successfully brought suits against major drug companies for the ‘harmful’ role they played in the North American opioid crisis over the past 10-15 years. The opioid crisis remains a “big question mark” for the industry, according to Hudzik, and could be the cause of further astronomical liability claims moving forwards.
“In casualty business, which has a long tail to it, the acknowledgement that trends are changing sometimes takes longer than we otherwise would like,” he added. “The good news is that there’s pretty much broad acknowledgement now that all these components of social inflation are having an impact. As a result, we’ve seen increases in rates in impacted lines. Another important thing we’ve seen is the constriction of limit that’s being offered now by insurance carriers […] and there are also changes in terms and conditions.
“There’s lots of action taking place, but in casualty it takes a long time before you see those changes bear out in the results. We’re in this inflection point now where things are definitely gaining positive momentum, but it will be a while before we see the improvement in the numbers. In the meantime, we still see some overhang from other issues like what we consider to be under-reserving for maybe the last four or five years or so for excess liability.”