Social inflation, or the rise of insurers' costs to cover claims above general economic inflation, is a growing threat to insurance affordability. The struggle to quantify social inflation’s causes is one reason policymakers have yet to reduce its impact. However, there is enough information in the public domain about social inflation to guide a mitigation plan, but success will take collective work on many fronts from all stakeholders.
While social inflation may impact any insurance line, the liability lines most under duress due in part to higher litigation costs are commercial general, commercial automobile, personal automobile, professional (e.g., errors and omissions), and excess and umbrella insurance. For these products, unforeseen rising costs threaten coverage affordability and, in the long run, availability. In diminishing coverage scenarios, a ripple of economic consequences can emerge for insurers and the policyholders who rely on them.
All parties who might face these outcomes should be welcomed to join with policymakers—legislators, courts, and regulators—in the discussion about social inflation. This tactic can foster increased awareness and education about the potential drivers of social inflation, especially those factors that put undue pressure on insurer loss and expense ratios. However, if we continue to center on insurance companies' losses and expenses in the narrative, policyholders and policymakers may be reluctant to engage with insurers on this issue.
All stakeholders should understand what drives up costs for insurance coverage and how they can take action to mitigate those factors. Regulators can aim for legislation that balances corporate accountability and unreasonable expectations of financial liability. Brokers and agents can encourage clients to implement enhanced risk assessment and management strategies, and insurers may consider rewarding these actions with lower pricing. For instance, small-to-medium businesses can invest in technology and best practices, such as artificial intelligence (AI), automation, and robust data collection, to predict and moderate exposure to legal risks faster. Insurers can also manage exposures by continuing to seek deeper insights into trends that play a role in increasing litigation risk and by prioritizing data-driven research.
Social inflation’s financial impact is significant. Indeed, a study released this year by the Insurance Information Institute and the Casualty Actuarial Society estimated commercial auto insurers cumulatively paid out $20 billion more in liability claims between 2010 and 2019 than would otherwise have been expected because of social inflation-related factors. As Big Data evolves, aspects of social inflation that do not seem quantifiable now can be measurable in the future.
Simply put, skyrocketing legal costs play a key role in social inflation. These costs accumulate from the increasing number of lawsuit filings, extended litigation, and outsized jury awards. Data indicates that attorney involvement can increase claims costs and the time needed to resolve them, even while reducing value for claimants. Research also suggests that advertising may shape attitudes about litigation and the desire for attorney involvement in claims. Insurers, policyholders, and policymakers can take actionable steps to address the legal system’s impact on the cost of insurance.
Strengthen risk management and corporate governance. Policyholders can minimize the risk of loss events with a robust plan to manage exposures. They can increase their vigilance over loss activity and risk areas. Implementing best practices that reinforce a culture of safety would be a proactive step, too. Insurers and policyholders can work together to evaluate risks carefully and explore lessons that can be learned from past losses incurred by their organizations and industry competitors.
Curb exploitative attorney advertising. Attorney advertising practices should be subject to constraints that discourage the questionable tactics of "dragnet" campaigns, such as a recent billboard posted by a Las Vegas area firm. In the attorneys' attempt to capitalize on the tragic discovery of human remains in Lake Mead, the ad reads, "Injured while searching for dead bodies at Lake Mead? Demand Compensation." Attorney advertising like this, using fear, anger, and other strong emotions to recruit lawsuit participants, seeks to create the desire for legal action out of thin air.
Advocate for greater transparency and accountability around third-party litigation funding (TPLF). Research indicates that TPLF can contribute to social inflation by enabling more lengthy litigation, making insurance coverage more expensive for all policyholders. For example, when a third party stakes a claim on the final payout, plaintiffs might hold out for a larger settlement--beyond what would have otherwise satisfied their needs. Alternatively, an attorney may attempt costlier and more labor-intensive legal maneuvers if a TPLF agreement is financing their case.
Counteract negative public sentiment via robust corporate social responsibility initiatives. Research indicates that the general public's perception of corporations in light of growing economic inequality can play a role in outsized jury awards. Anti-corporate bias, fair or not, is real and can significantly impact legal outcomes. Businesses can preempt bias by proactively cultivating an authentic strategy of charitable giving and presence, beginning in the communities in which they are located. Environmentally friendly operational practices and good labor policies can go a long way towards maintaining a positive profile. Implementing a corporate social responsibility strategy is essential for insurers before a claim arises. Once a lawsuit is filed or presented to a jury, it is too late to rein in the costs associated with social inflation.
Triple-I is committed to advancing the conversation about social inflation and raising awareness about how it impacts insurers and policyholders. We invite you to learn more about social inflation and its drivers by checking out our social inflation knowledge hub and following our blog.