On average, social inflation in the U.S. rose by 5.4% annually during 2017-2022 and reached around 7% in 2023, a 20-year high, according to Swiss Re Institute’s latest sigma research report, “Litigation Costs Drive Claims Inflation: Indexing Liability Loss Trends.” Economic inflation, on the other hand, was 3.7% on average.
The researchers define social inflation as “the increasing severity of liability claims beyond that explained by economic factors.” While economic inflation has impacted claims costs in property and motor insurance, social inflation has fueled liability claims costs. Swiss Re Institute constructed a Social Inflation Index to quantify the claims driver.
Drivers of Social Inflation
“Unlike economic inflation, which is decelerating, social inflation shows no signs of abating,” states the report. “The drivers of social inflation include societal trends and [behavioral] norms, leading to greater use of the legal system and rapid growth in settlement awards.”
Furthermore, liability claims severity has trended significantly higher than economic factors, due mostly to an increasing number of large verdicts (also known as nuclear verdicts) against commercial defendants. The share of verdicts larger than $50 million quadrupled since 2010. “The U.S. legal system can generate outsized awards in the settlement of tort liability disputes, particularly related to bodily injury claims,” the report explains. “In 2023, there were 27 cases of courts awarding more than $100 million in compensation. Very high trial verdicts have been fueled by trial lawyers’ increased use of psychology-based strategies, digital media advertising, and litigation funding.”
Other drivers include juror attitudes toward economic inequality and negative views toward corporations, growth of litigation funding, an expansion of legal concepts, and technology and data analytics, states the report. The research also points toward potential new areas of litigation, including “the use of ‘forever chemicals,’ obesity, and algorithmic liability, among others, [which] could broaden liability claims in the years to come, in all jurisdictions.”
Insurance Implications
“The drivers of social inflation have come together to create a perfect storm in today’s liability market. Outcomes include high combined ratios and accumulation of adverse reserve development across several underwriting years,” according to the report. “Rate increases have not compensated for rising loss costs. The five-year average (2019-2023) direct combined ratios (via exposure to bodily injury claims) have been 105% for other liability occurrence, 109% for commercial auto liability, and 106% for medical malpractice. Cumulative underwriting losses for these three lines over the same period were $43 billion.”
Furthermore, “underwriting losses and heightened parameter uncertainty have led to reductions in insurance capacity and changes to insurance programs." For example, the report continues, “global casualty insurance capacity was $2.2 billion in 2018. By 2020, this had fallen to $1.4 billion. This decrease was mostly related to reductions in the availability of certain types of cover, reportedly ‘because of the volatile nature of the U.S. litigation environment.’”
Insurers are also making changes to insurance programs, such as “reducing the limits of liability for some covers and increasing attachment points for excess insurance and/or reinsurance,” states the report. “Median limits purchased for liability towers—or stacked liability insurance programs—declined by an average of nearly 25% in nominal terms and 46% in inflation-adjusted terms between 2014 and 2023, a period of increasing loss costs. Within these programs, insurers generally cover smaller limits as well. This could potentially boost reserve adequacy, as insurers may be quicker to record a loss at policy limits in case reserves (reducing the amount of adverse reserve movement). However, it could also increase claims cost growth as insurers might place less emphasis on individual claims [defenses].”
Tackling Social Inflation
“The U.S. is expected to remain the epicenter of social inflation due to unique societal, economic, and legal factors,” states the report. “However, other countries, such as Australia, Canada, the U.K., and parts of continental Europe, show signs of potential liability claims growth driven by factors such as third-party litigation funding and expanded collective redress.” Overall, “social inflation remains a concern globally for individuals, businesses, and insurers alike.”
Researchers, however, do not believe the elevated claims growth is sustainable, despite higher interest rates, as they believe the impact of social inflation will outweigh the benefit of higher interest rates on casualty lines in one to two years. “Calls for action include tort reform, regulation on the use of third-party litigation funding, in particular around disclosure rules, risk mitigation at the corporate level, and, in the insurance industry, use of new technology and data analytics to improve underwriting discipline and claims management, and more proactive preparation of [defense] cases.”
CLM Expert Weighs in
“As the article points out, the steady rise of social and economic inflation naturally has produced increased insurance premiums,” says Sloan Abernathy, partner, Deutsch Kerrigan, LLP. “A number of state legislatures have responded to this trend by passing tort-reform legislation aimed at reducing premiums by tackling some of the underlying root causes attributed to nuclear verdicts, such as litigation funding, reptile strategy, and the scope of available damages.
“Some states, including my home state of Louisiana, have passed multiple tort-reform bills over the last five years in an effort to expedite the desired effect of reducing statewide premiums. Given social and economic inflation have steadily continued to grow, as pointed out by the authors, more tort-reform legislation can be expected. One also can predict that jurors may become more wary of returning oversized awards due to their own cognizance of the attendant effect on insurance premiums in their jurisdiction (and their own pocketbook).”