WHAT IS SOCIAL INFLATION?
We have been hearing about it for years. But what exactly is it and what are the implications to the insurance industry? Social inflation happens when juries and courts increasingly side with plaintiffs in claims. As a result, the cost of “compensating” an injured party for their loss, is outstripping economic inflation as well as increasing costs associated with trends such as changes in weather and regulatory environments. This leads to rising litigation costs, increased awards, increased expenses and ultimately reduced loss ratios.
HOW DID WE GET HERE?
In many ways, the current environment is a result of a perfect storm. There are many concurrent trends that bring us to the environment of social inflation. Some
of these trends include public attitude, desensitization to large jury awards, and litigation funding.
Public Attitude
The uptick in social inflation is strongly influenced by an anti-corporate sentiment that has built up over recent years. Many individuals do not trust corporations and assume all decisions are made purely for profit. In addition, jurors are increasingly likely to believe the individual over the corporation regardless of the facts of the case. Even when facts support the corporation, jurors may now tend to believe that the corporation can afford to pay. Individuals are more likely to hire an attorney and file a lawsuit.
The rise and ubiquitousness of social media has further fueled changes in public attitude. Social media many times emphasizes gaps in wealth distribution which may lead to an increase in beliefs about entitlement to awards. This may in part be a result of increased perceptions regarding the gaps in wealth distribution. Social media also serves as a platform for powerful advertisement by plaintiff ’s attorneys designed to sway public opinion.
Desentization to Large Jury Awards
We live in a world of “monopoly money”. As the news of more and more large awards is spread, people lose sight of the true value of the award; “a million dollars isn’t a million dollars anymore”.
Litigation Funding
Lawsuits are expensive. Litigation financiers are companies who agree to cover
all or part of the costs associated with litigation in pursuit of a claim. Because
the cost of ongoing litigation is no longer carried by either the attorney or the plaintiff, there is no incentive to settle suits expeditiously.
IMPLICATIONS OF SOCIAL INFLATION
Social inflation first and most obviously impacts the price policyholders must pay
for insurance. Carriers must take rate increases to address overall increases in loss settlements, defense costs and expenses as well as claims handling costs.
Social Inflation has disrupted our industry’s data, metrics and forecasts. Secondly, social inflation can lead to carriers being more conservative in underwriting
and ultimately cause a reduction in insurance availability. Carriers may
respond by requiring sub-limits for certain exposures as well as entirely exclude others. Carriers may also become much more conservative in risk selection overall.
RESPONDING TO SOCIAL INFLATION
Social inflation has been an “emerging issue” for over a decade and it doesn’t look
to be ending soon. So can carriers and agents respond to and mitigate the impact
social inflation has on their business and their customers? The following can help:
Sound Risk Management and Underwriting
A sound risk management program can help combat social inflation and other exposures. Solid underwriting and risk analysis is the best way to prevent a claim
and the potential for a lawsuit.
• Risk Assessment: Work with your clients to identify, mitigate and prevent losses
• Provide appropriate limits of insurance: An analysis of the appropriate limits
based on current claims and jury trends should be completed. It may be time for the policyholder to consider obtaining an umbrella policy
• Review Coverages: A thorough risk review may identify coverage gaps
Claims Partnership
In the event of a claim, a positive claims experience can many times prevent a loss
from even going to suit.
• Claims should be reported promptly
• Agents and claims professionals should partner to facilitate communication and
manage the customers expectations and comfort with claims practices
• Claims customer service should be of the
highest priority
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