Social Inflation Challenges US Casualty Insurers

A recent AM Best report revealed that social inflation has significantly impacted loss severity in key US casualty insurance lines over the past decade. The report, titled Social Inflation Remains a Thorn in the Side of Casualty Insurers, highlights the growing influence of factors beyond economic inflation on claims costs for indemnity and expense payments.

Commercial auto, professional liability, product liability, and directors and officers liability insurance are among the lines most affected by social inflation, with loss severity surpassing economic inflation rates by double digits in many cases. For example, in the product liability line, loss severity increased by an average of 20.4 percent over the past decade, compared to an average annual economic inflation rate of 2.7 percent. Similarly, loss severity for the liability-occurrence line, encompassing excess liability and umbrella coverage, rose by an average of 11.1 percent, according to Best.

"The 'social' part of social inflation refers to shifting cultural attitudes about who is responsible for absorbing risk—the insurer or the plaintiff—and these dynamics continue to evolve, which makes social inflation tough to quantify and even more difficult for insurers to predict and mitigate," said Justin Aimone, associate analyst, AM Best.

The report noted studies that have shown sentiments toward major public corporations have been on the decline, and consequently, attorneys have been able to capitalize on the shifting attitudes. This decline in confidence in big business, as well as in other institutions (e.g., the federal government, banks), is a unique problem for insurers because jury verdicts have shown that many believe a company bears some responsibility even in cases of injury due to misuse of a product, Best said.

"When a nuclear verdict is awarded, it affects not just the one claim, but also all other open claims, as plaintiffs, guided by their attorneys, seek a similar verdict or settlement, rendering an insurer's existing reserves inadequate," said David Blades, associate director, industry research and analytics, AM Best. "The impact on adverse loss development then flows into pricing, as insurers adjust their view for the affected lines."

Additionally, Best said third-party litigation funding has exacerbated social inflation by prolonging legal proceedings and driving up legal costs, particularly in excess liability, commercial auto, and general liability lines. Insurers are challenged to adapt their pricing models to mitigate these escalating costs while maintaining competitive premiums for consumers.

In response to these challenges, Best emphasizes the importance of robust enterprise risk management strategies for insurers. Understanding portfolio risks and adjusting actuarial parameters to account for social inflation trends will be essential for managing severe losses effectively.

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