The Summit

Beacon Hill Associates A publication of Beacon Hill Associates

Social Inflation and its Effects on Insurance

Changes in litigation and the perceived value of money have caused a shift in the way underwriters assess risk

To be a stable insurance provider, companies must balance the risk assumed from their insured with the price they charge for coverage. Companies need to be at least modestly profitable to be able to service their business and provide the claims handling their clients expect while delivering a reasonable return to their shareholders. Hundreds of factors affect a carrier’s ability to achieve this, including operational issues at the insured, line of coverage offered, and many more.

Some influences exist outside the operational context of the insured, and a few have been grouped together and referred to as “Social Inflation.” These issues combine to increase the value of a loss through factors that have little to do with the insured, beyond perhaps their jurisdiction.

Social inflation has been a growing issue for several years, and one we have written about in this magazine in the past. The core components of social inflation include the erosion of tort reform laws in many states. This has allowed for the return of runaway jury verdicts, creating great uncertainty in those jurisdictions.

Another aspect of social inflation is the drop in perceived value of money. With Instagram influencers being worth hundreds of millions, professional athletes getting five hundred-million-dollar contracts, and university basketball coaches getting paid millions each season, it is common for people to think they too deserve some of that free-flowing money. Claimants generally expect more and are willing to settle for less when they are making a claim.

Yet another component of social inflation is the utilization of more litigious strategies by claimants’ attorneys. In many states, time demand filings have become common. These give the insurance carrier a very limited amount of time to either pay the demand or face a bad faith judgement from the court. This forces insurance companies to have to assess the situation in a very brief period and decide to fight or capitulate. The net result has been higher claims payments.

A final, and perhaps most egregious, piece of social inflation trend is private equity (PE) backed litigation. This is where PE firms fund litigation, giving the plaintiff an unlimited amount of money to pursue their case. This has led to a significant increase in cases going to court instead of settling, an outcome that is always more expensive for all parties involved.

Combined, social inflation influences have altered how carriers underwrite risks. From assessing a jurisdiction for runaway juries to needing rate to offset the overall impact of social inflation on the present day value of losses, carriers have had to carefully watch as the trend has evolved.

As with all things, the global pandemic has influenced this trend as well. While frequency of claims have fallen somewhat in concert with reduced overall exposures (fewer trucks on the road, etc.), the role of social inflation has changed slightly. Perhaps the biggest impact has been a result of the courts system operating differently. Courts have, on the whole, been operating at greatly reduced capacities. This has made filing motions and driving court cases much harder. The in-person challenges with jury trials have led to more out-of-court settlements. This appears to be, however briefly, reducing the scale of the impact of overall social inflation on loss values.

Carriers are not expecting this slight slow down to last though, and are consciously building in rate to offset this growing trend. As we move out of the pandemic environment over the next year, carriers fully expect these issues to play as large a role as ever in changing how claims are handled and paid. Carriers will be watching jurisdictions to determine those most challenging to operate in, and the development of larger trends over time. Unfortunately, the only defense to these issues is raising rates and limiting where coverage is offered. We fully expect to see this trend continue going forward until perhaps there is some form of national tort reform. Until then, you can expect carriers to continue needing rate across most of their business.

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