Perspective

The Rise of Social Inflation and 4 Steps Insurers Can Take to Combat It

March 30, 2022| By Tim Fletcher | P/C General Industry, Commercial Umbrella, Personal Umbrella | English

Region: North America

Originally published in the National Association of Mutual Insurance Companies (NAMIC)’s IN Magazine, Winter 2021. Reprinted with permission.

Insurance executives in 2016 were rightly concerned about the rise in verdicts of unprecedented magnitude and began to sound an alarm. They were responding to evidence that the pendulum was swinging toward instability and uncertainty about the threat of social inflation. They were also questioning whether any prospective premium increase would be sufficient to compensate for the spike in severity should the upward trend continue unabated.

The years since have reinforced, and in some instances amplified, those concerns. After a brief respite driven by pandemic-mandated lockdowns and societal restrictions, the torrent of multimillion-dollar verdicts and settlements resumed in 2021, Commercial Auto being hit particularly hard. Anecdotal evidence of another ominous trend has also emerged: the rural and non-coastal venues historically thought to be safe havens are now seeing the social inflation tide approaching.

To be sure, we’ve seen waves of social inflation in the past, most notably in the mid‑1980s when general liability combined ratios skyrocketed into the 150 range, causing years of double-digit premium increases and creating a coverage availability crisis for municipalities and healthcare providers that were forced to form risk retention pools and physician-owned mutual companies in response. State legislatures acted, implementing caps on non-economic damages, limiting joint and several liability, and restricting the venue shopping that many believed was playing a role in the escalation. As might be expected, a period of relative stability then ensued for policyholders and their insurers, but it didn’t last.

While the social inflation tide continues to rise, it’s clear that we’re far away from another 80s‑style surge. Things feel different this time around. COVID‑19 has caused nearly all of us to assess our tolerance for risk and the extent that we’re willing to interact socially. Millennials have now supplanted baby boomers in the workforce, bringing a whole new perspective on work-life balance, personal safety, and concentration of wealth. Social media has become the main source of information for many, and with that, the potential for misinformation and manipulation by outside forces increases exponentially. Reverberations from the Great Recession continue to be felt as multiple generations struggle to gain traction professionally and maintain a positive perception of their economic futures.

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Against this backdrop, last year Gen Re and NAMIC embarked on a comprehensive examination of social inflation from underwriting, legal, actuarial, and claims perspectives. The series seeks to ferret out the root causes of social inflation and offer practical strategies to mitigate its effects while also making some projections for the future. It concluded that not only were the aforementioned socioeconomic factors at play, new ones — such as the rise of public nuisance theories of liability, lawsuits backed by a burgeoning and largely unregulated litigation industry, and the ongoing success of reptile theory arguments that appeal to a juror’s primitive survival instincts and, some argue, suspend logic and reason — are also contributing factors. The series posited that the insurance industry – long on data acquisition but painfully short on data analysis – could benefit from advancements in artificial intelligence and predictive modeling to better quantify risk and more rapidly identify and, in theory, more quickly address an outlier case with the potential to result in a stratospheric verdict.

The joint Gen Re/NAMIC social inflation blog series and contributions from other industry observers have helped shape a growing consensus as to what may be powering the social inflation surge. Far less certain is what we should do about it. A return to a 1980s-level environment would presumably unleash meaningful reform and substantive change, but not without first inflicting a tremendous amount of economic pain.

What, then, should be done?
  • Quantify the Concern – We know the cost of social inflation will ultimately be borne by policyholders through increased premiums, higher retentions, and reduced limits. The challenge lies in being able to quantify it. Those of us in the industry gasp when we see an eight-figure verdict, but how can we help policyholders understand enough to feel likewise? How can we demonstrate the economic impact in terms understandable to the general public?

  • Inform and Educate – Litigation financing firms have been operating in the shadows for several years. As a matter of fairness, shouldn’t jurors be made aware of a funding firm propping up a plaintiff’s case in return for a hefty profit, and with it the potential for unnecessary medical treatment, inflated life care plans, and complicated and protracted settlement discussions?

  • Advocate for Reform – The insurance industry needs to help draft model legislation that establishes mandatory disclosure of third-party funding arrangements in civil litigation, bans fee-sharing agreements between lawyers and nonlawyers, and prohibits them entirely in class action suits. Other avenues include protecting tort reform in states where it is under attack and arguing for its ratification in states where it might be needed.

  • Better Evaluate Problematic Cases – It’s likely that at least a few of the mega verdicts we’ve read about recently were results of suboptimal case evaluation and preparation. Social inflation has changed the paradigm; the insurance industry must change as well. Here are some questions worth asking:
    • Are we evaluating cases promptly?
    • Is there a perspective we’re missing that could lead to a large verdict?
    • Have we considered tools, such as focus groups and mock trials, that will help shed light on a particular case’s weakness?
    • Are we confident in the capabilities of our retained defense attorneys?
    • Have we focused too much on managing expense globally over the practical benefits of investing resources into a difficult case?
    • And finally, how well have we harvested learnings from an adverse outcome and applied them in such a way that history doesn’t repeat itself?

You can find the Gen Re/NAMIC five-part perspective on social inflation on our website. Learn more to identify trends and respond: What We’re Seeing / Legal and Regulatory Implications / Economic Drivers / Claims Perspective / The Road Ahead.

This blog was adjusted slightly from the original submitted to and published by NAMIC’s IN Magazine, Winter 2021. Reprinted with permission.

 

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