The Toll of Social Inflation on the Insurance Industry

 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 key components driving social inflation have been evident for some time, their impacts on the insurance industry have only started to come to the surface within the past couple of years. Because of this, the industry is seeing an increase in both frequency and severity of liability claims, impacting insurers as they try to cover the growing losses. Social inflation is not only driving up the cost of claims, but also contributing to rate increases across the board.

Social inflation has primarily affected commercial liability lines including commercial auto, medical malpractice, general liability, product liability, and umbrella and excess liability. Consumer-facing industries including retail, healthcare, automotive, insurance, pharmaceutical, and financial services are the most impacted by social inflation, but any industry is susceptible. This is a versatile issue and is certain to be influenced by the coronavirus pandemic and continued societal changes. Key factors influencing social inflation include:

1. Jurors Perspective: A main driver of social inflation is the anti-corporate position dating back to the 2008 financial crisis. These new outlooks mean that injured parties are more likely to bring a lawsuit against companies — and win. Jurors today are often biased toward the plaintiff in the name of social justice.
2. Litigation Funding: More and more we are seeing claimants receiving help from outside investors to bring their cases to court. These investors pay legal fees and expenses in exchange for a share in potential awards and settlements.
3. Plaintiff’s’ Bar: The bar is a well-organized and refined group willing to invest in advertising, social media, technology, and expert resources to drive damage awards.
4. Normalization of Nuclear Verdicts: Across the country, state courts are raising or eliminating caps on punitive damages and damages for pain and suffering. This breaks the ceiling on what plaintiffs can ask for and be awarded.

Social Inflation is insurers’ problem in the short term but will ultimately become a much bigger problem for policyholders. Therefore, it is good practice to understand what is driving up rates and explore risk mitigation strategies such as effective safety programs, good maintenance of property, leases that properly transfer risk to other parties, and sufficient security. These are crucial to make your business a best-in-class risk when presented to insurance companies. We may also experience a temporary pause in nuclear verdicts while the juries are out, due to COVID-19 causing a backlog in court proceedings. Many plaintiffs realize that it could be years before their case sees a trial and are taking the settlement amounts offered by the defendant. However, given how uncertain the market and economy are, it is unknown what to expect long-term. Social inflation could get worse before it gets better.

Partnering with a broker who understands your organizations unique risk profile is essential for surviving this hardening market. Hawley & Associates’ specialized brokers apply innovative and tailored solutions to each situation, along with a deep understanding of the market and long-term relationships with insurers, ensuring our clients are fully prepared for any outcome. Contact us today to protect your organization against the emerging risk of social inflation.