The phenomenon known as “social inflation” accounted for $20 billion in commercial auto liability claims between 2010 and 2019, a new study by Triple-I and the Casualty Actuarial Society (CAS) finds.

Social inflation isn’t a new term. Warren Buffett used it in the 1970s to describe “a broadening definition by society and juries of what is covered by insurance policies.” It has since become common parlance among insurers and risk managers for a range of factors causing losses in certain lines to rise faster than general inflation would predict. These include:

• Class-action lawsuits;
• Growing awards from sympathetic juries;
• Third-party litigation funding, in which investors finance lawsuits against large companies in return for a share in the settlement; and
• Rollbacks of tort reforms that were intended to control costs in the wake of the 1980s “liability crisis”.

Hard to measure, important to understand

Reliably quantifying social inflation for rating and reserving purposes is hard because it’s just one of many factors pressuring pricing. The paper, authored by actuaries James Lynch and David Moore, uses “standard actuarial metrics and visualizations to demonstrate how actuarial insights can be presented to an interested lay audience, such as lawmakers, regulators, the news media, and the public.”

This is an important contribution to the public policy discussion because actuaries are well positioned to spot shifts in loss severity.

Separately, Triple-I has published an “Issues Brief” that succinctly describes the drivers of social inflation, as well as its potential impact on insurers, policyholders, and the economy and society.

“More frequent suits and bigger awards can lead to increased insurance costs as rates are adjusted to reflect the changing risk profile – or even to insurers ceasing to write particular forms of coverage,” the brief says. “Higher premiums tend to be passed along to consumers in the form of higher prices and, in extreme cases, can ripple through the entire economy, creating conditions analogous to the 1980s liability crisis.”

In the 1980s, liability claims were pushing the U.S. insurance industry to the brink of collapse. Tort reforms – ranging from capping non-economic damages and limiting contingency fees to specifying statutes of limitations and eliminating “joint and several” liability – were enacted, and losses declined. It has been argued that legislative efforts to roll back these reforms in many states have contributed to social inflation, but the research is not conclusive.