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The Jury’s Out: Social Inflation Is on the Rise

How social inflation is ballooning into every independent insurance agency.
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What happens in court does not stay in court.

Social inflation, shifts in social attitudes that cause a hike in liability expenses for insurance companies, is ballooning into every insurance market and independent agencies and their clients’ wallets.

Social inflation happens when juries and courts increasingly side with plaintiffs in claims against corporations, which in the insurance world leads to rising litigation costs and their impact on insurers’ claim payouts, loss ratios, and, ultimately, how much policyholders pay for coverage, according to the Insurance Information Institute.

The causes of this complex phenomenon are many, but Mike Hudzik, Swiss Re’s head of casualty underwriting for the U.S. and Canada, explains that the key contributing factors have been long in the making.

“This uptick in social inflation is strongly influenced by an anti-corporate sentiment that has built up in the population coming out of the financial crisis, which was almost 10 years ago,” Hudzik says. “During that period, the division of wealth in our country also separated quite a bit, and that also adds to the general angst. Companies, especially ones with large corporate risks, are seen as bad actors and making huge profits while some parts of the population struggle from a wealth perspective.”

Another strong contributor is the coming-of-age of millennials, who are currently the largest segment of the population, according to the Pew Research Center, and are a highly influential part of juries.

“In general, millennials have a tendency to focus on that anti-corporate sentiment, the feeling that somebody has to pay,” Hudzik says. “Their influence on juries leads to outcomes that are different than what we’ve seen before.”

Meanwhile, social media strongly influences the general social opinion. “With 24-hour, rolling news, people are constantly bombarded with issues, mainly problems, that are announced and magnified over and over again,” Hudzik explains. Other aspects include an increase in plaintiff lawyers, an increase in legal advertising, and the rise of litigation funding, in which third parties fund claimants’ legal fees to get a share of the damages.

Social inflation’s impact was first felt in the commercial auto market. “Pretty much anything corporate related to automobile accidents, damages, injuries—that’s where we started to see it first,” Hudzik says. “Where it bubbles up, especially from the commercial auto side, is the umbrella and excess liability arena. We’ve seen it really make an impact where we have portfolios from seeding companies that have concentrations of large corporate risks: the really big carriers, the household names.”

Social inflation didn’t stop at the large corporations, a development that cause many by surprise. 

“Middle market business and even small business to some degree has also seen an uptick,” he says. “We’re seeing the impact of social inflation even in what we would have originally thought of as benign markets.”

Despite the far-reaching effects of social inflation, Hudzik is hopeful that the near future will bring a plateau to the eye-opening numbers. “We’ve seen from 2014 to 2018, if we look at a collection of the largest 200 excess liability claims that flow through the market during that time period, that the median has grown from $27 million to $54 million,” he says. “That’s a doubling of severity over five years.”

“In response, the industry has started to take strong action with significant rate increases, reduction of limits offered, other term and condition changes and excluding certain perils,” Hudzik adds. “That might help the results overall, but the jury is still out on this increase—no pun intended.”

Whatever the future brings, Hudzik emphasizes that independent agents need to increase their awareness on social inflation to be prepared for if, and when, it impacts their clients.

“Independent agents should certainly have an awareness of social inflation because they very well could see increase in prices in the business they’re selling to clients,” Hudzik says. “By understanding all these factors, agents will be able to better prepare their clients for possible changes down the road.”

AnneMarie McPherson is IA news editor.

Tuesday, June 2, 2020
Commercial Lines