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April 14, 2022

From the Dais Research Team

Social Inflation

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Inflation is everywhere these days, both in and outside of insurance. But there’s another type of inflation having an oversized impact on umbrella and excess lines: social inflation.

“Social inflation” is the increasing costs of legal awards due to social pressure to award larger amounts to plaintiffs, along with the corresponding increased quantity of lawsuits. These growing costs add considerable expense to insurance claims for businesses of all sizes, particularly for umbrella, auto, and excess and surplus lines. There is a similar, but less severe, influence in personal auto as well.

As a result, insurance companies have been struggling with profitability and have been passing the resultant costs on to clients through rate increases. During the past few years, the pace of those rate increases has accelerated, and now some companies are considering pulling out of certain lines of business.

Companies can respond to this growing trend by becoming more agile and modifying their products in real-time in response to changing market conditions.

Industry Challenge

Ambulance Chasing and Social Inflation Frequency

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What: Social inflation involves many factors, making it potentially tricky to pindown, but ISO statistics show growing loss ratios since at least 2015. Larger jury awards, increases in litigation funding, and changes in public option appear to be the driving causes of the growing social inflation.

Litigation funding is particularly interesting as it’s removing a barrier that often challenges plaintiffs – now a plaintiff can get the money they need for lawyers and resources from finance companies at a low risk to themselves.  

Why it matters: Social inflation combined with traditional inflation is causing double the pressure on insurers to adapt. Many states constrain rate increases, which will force carriers to segment their books and implement new products to improve profitability. Most carriers lack this agility.

Read: Is a Wave of Social Inflation Upon Us? FAQ with a Verisk actuary.

Report

Ambulance Chasing and Social Inflation Severity

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What: The Institutes: Risk & Insurance Knowledge Group’s report on property-casualty insurance and social inflation shows a growing trend toward greater losses and increasing risks for insurers. The report covers in detail how cultural shifts, tort reform rollbacks, and increasing attorney involvement have contributed to the growing losses. 

Why it matters: The trend towards social inflation may be permanent. This means carriers riding on past reserves will eventually have no choice but to act.

Read: Social Inflation: Evidence and Impact on Property-Casualty Insurance

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