Social inflation: The ultimate pain point of US liability insurance

Social inflation: The ultimate pain point of US liability insurance | Insurance Business

Social inflation: The ultimate pain point of US liability insurance

Social inflation is a huge pain point in US liability insurance. It is a term used to describe the phenomenon of rising costs of insurance claims resulting from increased litigation, broader definitions of liability, more plaintiff-friendly legal decisions, and larger (sometimes nuclear) compensatory jury awards.

The impacts of social inflation have been felt more acutely in some sectors than in others. For example, the trucking industry is a major target. Over the past 20-years, the reputation of the trucking industry has been tarnished to the extent that any significant motor collision involving a large commercial vehicle can result in a nuclear jury verdict. Other industries to feel the sting include: pharmaceutical and medical device manufacturers (especially regarding their product liability), as well as large corporations (in particular, their D&O and E&O liability).

While the term social inflation only started to gain currency about five-years-ago, concerns about the increasing frequency and quantum of jury verdicts and values stem back to the 1980s, when a surge of medical malpractice lawsuits resulted in intense tightening of the insurance market. While healthcare providers remain acutely exposed to the impacts of social inflation, the risk has now permeated other realms of liability insurance.

“Social inflation is partly due to a shift in demographics and world view in the jury pools of the 50 US jurisdictions,” said Larry Crotser, head of key case management in North America for Allianz Global Corporate & Specialty (AGCS). “These changing demographics have affected the way people evaluate personal injury cases, the frequency in which they find in favor of the plaintiff, and how they set the quantum on the monetary damage awards that follow a plaintiff’s verdict.

“There’s a subsection of experts on the subject that think the millennial generation is driving these changes. It’s true that millennials (those born between 1981 and 1996) have different characteristics as jurors than Gen X and Baby Boomers. They tend to have shorter attention spans and they tend to be more cooperative or consensus-based when it comes to jury decisions. The realities of work life are also different now compared to 20-years-ago. Millennials don’t want to start working at a big corporation, work there for 40-years, get a pension, and retire. They’re moving around more and gaining different experience to past generations. All of this has an impact.”

Read next: What is social inflation, and why is it hurting insurance?

Large, publicly facing companies are particularly vulnerable to the impacts of social inflation. The more branding power a company has, the less wriggle room it has for error. For example, if a large food manufacturer is accused of causing foodborne illness via product contamination, that can lead to a nuclear jury verdict. Jurors are also more conscious about environmental issues and will go after any large corporations found to damage the environment via something like an oil spill. There has also been a more recent trend of juries taking companies to task for greenwashing – when they spin their economic role as being environmentally friendly, when that’s not, in fact, the case.

The COVID-19 pandemic has had an impact on the number of nuclear jury verdicts handed out in the past year. Through 2020, most of the court systems in almost all 50 states were either shut down or their activities were significantly curtailed because of the social distancing required to keep people safe from the coronavirus. According to Crotser, one would expect to see a list of at least 20 to 25 nuclear jury verdicts every year, but so few jury trials occurred in 2020, that he identified only two: a sum of $441 million was awarded to an injured motorcycle rider after a collision in Florida; and $125 million was awarded to a person who was injured by a falling electrical mast in New Jersey.

“Those are very large verdicts for single plaintiff cases, and they indicate to me that we’re not going to see any ebbing in the tide of these big verdicts,” Crotser told Insurance Business. “2021 and 2022 will be interesting because there’s a backup of all these cases. The US is a very litigious society. Americans file millions of civil cases in US courts per year, and I’m not sure that slowed that much because of COVID, but the processing of those cases did stop. We have all this backlog to try and get through, and that’s probably going to have an effect on the value of the cases.

“What’s driving social inflation will probably be exacerbated by the rush to get these cases through trial. It’s important to remember that 97% or so of all civil actions are not tried. That’s just the way it works out because we don’t have enough throughput, there aren’t enough judges, and there aren’t enough courtrooms to try all these cases. What usually happens is the less potentially explosive cases will settle, but the 3% that are left to be tried are those that already have a potential to get a nuclear verdict. My best guess is that we will see maybe even a little uptick in verdict values over the next year or two.”

Read more: Social inflation threatens to bounce back stronger than ever

Over the past few years, there’s been a huge push in the insurance industry to get arms around the impact of social inflation - starting at the pricing, underwriting and actuarial projections, through to case reserves and ultimately payouts of these liability claims.

“I would say that the industry is still working hard, struggling maybe, to determine the full impact of social inflation on the bottom line,” Crotser commented. “I do know that many insurers, including AGCS, are now considering elements of social inflation as part of the large claims triage process, looking at things like: 1) What is the potential impact of social inflation on the value of this case? and 2) If there is an impact, could it potentially lead to a nuclear verdict? These issues are front and center on the analysis side.

“We’re also developing tools on the defense side to manage the effect of social inflation and avoid (if possible) huge nuclear verdict awards. For instance, we’re trying to counter the strategies of the plaintiff’s bar by getting in there early and developing alternative theories of liability in the case. We’re trying to come to a ‘reasonable value’ that we can sell to the jury during the course of the case that is a real, justifiable alternative to these crazy pie in the sky numbers that the plaintiff’s bar puts on the blackboard.

“There’s also been a concerted effort to work with our clients that buy liability insurance to impress upon them how important this is. We want a corporate representative at all the depositions, we want a corporate representative at the table when the case is tried, and we want them there for the mediations. We want to personalize the corporation again to try and show folks who may have negative views of big companies that, by and large, that may be the public perception, but that’s not what the reality is.”