Social inflation is reaching new heights and causing continued pain for the insurance industry in the form of higher litigation costs and claims inflation. A recent Swiss Re report states social inflation in the U.S. rose by 5.4% annually from 2017 to 2022, reaching 7% in 2023.
Much has been discussed and written about the causes and drivers of social inflation—societal trends, plaintiffs’ attorney tactics, and changing juror attitudes, for example. What can the industry do to battle social inflation? That is less clear than the causes. Earlier this year, however, Ernst & Young released a report, “6 Ways Claims Industry Can Mitigate Social Inflation.”
The report made the following six recommendations:
“Create a culture of proactively evaluating claims with potential for attorney representation and litigation.”
The report states that, with all of the data carriers have at their disposal, carriers should evaluate cases earlier than they do. While they typically do this early—“well before mediation or settlement negotiations"—the report says it should begin as soon as the claim is reported “through combinations of claim characteristics and the use of leading metrics.”
Using their data, carriers should be able to proactively identify higher-risk claims and prioritize them with their most skilled litigated claims handling employees. Questions to answer include, according to the report:
- “What are the key decision points in the evolution of a file, and how can we measure them with leading metrics?
- “Are there certain combinations of jurisdictions, plaintiff firms or plaintiff profiles that are known to drive adverse outcomes?
- “What can you learn from your quality assurance (QA) and leakage results to understand characteristics of litigated claims that lead to controllable leakage?
- “Is there a need to elevate and refresh your current QA and leakage approach to be more rigorous?
- “What factors determine adjuster skill level and case allocation?"
“Understand who your best-performing defense firms are and provide incentives for top performers to work with you.”
Insurers should use data and metrics to assess defense-firm performance, with a focus on balancing expenses and outcomes, according to the report. “For example, if one firm typically has favorable bill rates and expenses, but often unfavorable trial success, the indemnity costs likely outweigh the expense savings,” the report notes.
“Identify the right claims at the right time with the right expertise.”
Do away with touch points at arbitrary intervals (60, 90, 120 days), states the report. “These claims touch point concepts are outdated in today’s data-rich environment. Instead, flag claims throughout their lifecycle for the opportunity to proactively intervene prior to adverse development at key decision points.”
“Avoid handing defense counsel a blank check.”
The report recommends proper collaboration and obtaining justification from counsel at key decision points, while being cognizant of the rules of professional conduct. Those key decision points are:
- “The need for defense counsel. Can the claim be managed without defense counsel involvement?
- “Defend vs. settle strategy. What is the anticipated settlement figure vs. continuing to defend, and will continued activities that are driving expense create value?
- “Potential dismissal. Is there opportunity to dismiss vs. incurring additional expenses?
- “Engagement of experts. What is the value of initiating and continuing to engage experts vs. the cost?"
“Remove the noise and focus where the skill is needed.”
The focus should be on defend vs. settle strategy, case evaluation, negotiation strategy, and expense management, states the report. It adds, “De-emphasize activities that don’t matter as much to create capacity for adjusters and supervisors to focus on activities where their skills are needed throughout the claims process.”
“Establish an internal feedback loop, training, accountability and collaboration.”
The report says there should be “clear ownership of litigated claims outcomes, which includes ongoing action plans to improve such outcomes based on performance data.” Actions plans should include ongoing training even to experienced staff. In addition, plans to focus on the litigated claims process should have organizational buy-in, including the C-suite, claims leaders, actuarial, and underwriting.