Social inflation threatens to bounce back stronger than ever

As courts reopen, a new wave of jury verdicts could be coming down the pike

Social inflation threatens to bounce back stronger than ever

Professional Risks

By Alicja Grzadkowska

Social inflation continues to impact insurance, particularly in professional lines, and the trend shows no signs of abating in 2021, especially as many experts predict that the coronavirus pandemic will only make substantial liability claims more common.

According to Fitch Ratings, “the social and economic responses to the pandemic have led to liability claims activity diminishing over the past few months,” but this effect is only a temporary one and will end as soon as legal proceedings pick up again and increase “alongside the resumption of standard general economic activity.” Notably, directors and officers insurance, and cyber liability are at the top of the list of liability segments that will be most affected by the pandemic, according to Fitch.

The past year has been an interesting one in terms of the impact of social inflation on these lines of insurance.

“The rising costs that are associated with social inflation seem to get larger and larger as each year goes by, and, going into 2020, it was top of mind for not only underwriters, but also risk managers,” said Rani Christie, head of distribution for Allianz Global Corporate & Specialty (AGCS).

In response, both insurance companies and big businesses implemented risk controls to help mitigate against the rising costs associated with social inflation. From an underwriting standpoint, many carriers took precautions with the amount of capacity they would deploy, particularly in excess liability and umbrella, according to Christie. Meanwhile, due to the spike in claims associated with social inflation, there was also a subsequent increase in premiums over the course of 2019 and going into 2020.

Then, as with many organizations, courts went into periods of lockdown starting in March 2020 and continuing throughout the year, which means that there hasn’t been as many large jury verdicts that have come to fruition. How this plays out in 2021 “is actually debatable,” noted Christie, and there are two sides to this debate.

“One side of experts think that this pause in the judicial process will cause cooler heads to prevail, so to speak,” he explained. However, on the other side of the table are experts who argue that the factors that fuel social inflation could be strengthened by the pandemic, like consumer sentiment towards big business, and inequity, which has been exacerbated during the pandemic.

Inequity in the US in particular “could fuel the demand for justice and compensation when it comes to these trials against big businesses needing to be punished for whatever wrongdoing is being considered,” said Christie.

He added that either way, underwriters and risk managers need to keep an eye on how social inflation impacts claims moving forward, as it’s a significant issue from a risk mitigation standpoint.

As for brokers and agents, Christie suggests a multi-faceted approach. First of all, insurance advisors need to ensure that they’re marrying their clients with insurance partners that have the right expertise to help mitigate against social inflation risks.

Additionally, he continued, “The market is moving, whether that’s capacity or pricing, so getting with their insurance partners and understanding what that movement looks like … and having early conversations with clients on what they can expect as new terms and conditions come out or renewals come around [is important].”

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