Actuaries spend a lot of time analyzing trends in loss costs, and social inflation makes up a significant component of these trends. According to Risk and Insurance, social inflation has increased liability costs by 57% over the last 10 years.1
At the 2024 CAS Annual Meeting, the session “Navigating Social Inflation” tackled four key contributors to this phenomenon of increasing insured liability claims costs, at a pace that cannot be explained only by standard economic inflation factors such as wages and medical costs.
The first contributing factor is shifting attitudes of jury members. Evidence of this is seen in a survey of jury-eligible people who were asked to explain how they would respond to hypothetical scenarios.2 The survey found that 77% of jurors believe in using punitive damages to “punish” a corporation, up from 69% prior to the pandemic. When asked, “In a lawsuit between an individual and large corporation, which side would you probably tend to lean in favor of?” Sixty percent of participants responded they would favor the individual (as opposed to favoring the company or having no opinion), compared to only 33% just five years ago.
Second, plaintiff-friendly judicial developments contribute to social inflation by establishing precedent and case law that allow plaintiffs to win increasingly larger awards. Legislation can also contribute to these developments. In 2022 California increased the limit on non-economic damages afforded by the Medical Injury Compensation Reform Act from $250,000 to $750,000 for non-death cases and to $1,000,000 for wrongful death cases.
Third, regardless of the jurisdiction, plaintiff attorneys’ strategies continue to evolve. Attorneys are investing significant amounts into advertising, particularly during daytime television. Another strategy that claims adjusters have noticed is that attorneys will withhold medical information needed to adjust the claim, later inundating the insurance company with masses of records all at once. The impact of new strategies is magnified because they are readily shared across the plaintiff’s bar and become commonplace quickly. This component of social inflation is primarily what is driving the impact in personal lines auto, where the large jury verdicts historically associated with social inflation would be capped by relatively low policy limits. However, a new strategy that increases medical payments across many thousands of claims, albeit only marginally, will still result in a significant financial impact to insurers.
Social inflation impacts traditional reserving techniques when we see patterns elongate on occurrence-based liability lines. This can make it appear as though things are improving, but really the development just hasn’t hit yet.
The final contributing factor that the panel discussed was third-party litigation funding. Currently, only five states (Indiana, Louisiana, Montana, Wisconsin and West Virginia) require disclosure when a third party has provided litigation funding. This makes it difficult to assess the impact of these arrangements. Legislative reforms to require these disclosures would allow insurers to capture data on the payout judgments associated with these cases. Other potential reforms include placing limitations of the involvement of third-party funders (e.g., prohibiting a funder from setting the amount that a plaintiff can settle for) or limiting the payout that these investors can earn from each verdict. However, driving momentum for any legislative reforms will be a fool’s errand without sufficient data to back up the recommendations, which will only become available when disclosure of third-party funding becomes mandatory.
Actuaries must be aware of the impacts of social inflation not only in their reserving work, but also in pricing. Social inflation impacts traditional reserving techniques when we see patterns elongate on occurrence-based liability lines. This can make it appear as though things are improving, but really the development just hasn’t hit yet. Incorporating social inflation in pricing requires actuaries to not only look at historical experience but also to look ahead and pay attention to what is going on in the changing environment. One panelist, CAS Fellow Kimberly Guerriero, shared her experience in working with captives and performing retention analyses to help them understand which options can help them achieve a better price in the reinsurance market.
It is critical for society to understand that this is not a problem isolated to insurance companies because the cost of social inflation will make its way into the premiums of all insureds. When the tactics driving these increases in insured liability losses are seen as a consumer problem, solutions such as legislative reforms become more of a possibility to flatten these trends.
1 https://riskandinsurance.com/social-inflation-drives-57-surge-in-us-liability-claims-over-a-decade/
For additional reading
Dixon, Lloyd, et al., “What Is the Evidence for Social Inflation? Trends in Trial Awards and Insurance Claim Payments.” Santa Monica, CA: RAND Corporation, 2024. https://www.rand.org/pubs/research_reports/RRA2645-1.html.
“New Joint CAS and Triple-I Report: Increasing Economic and Social Inflation Continue to Influence Costs,” https://www.casact.org/article/new-joint-cas-and-triple-i-report-increasing-economic-and-social-inflation-continue.
Erin Olson, FCAS, is the lead actuary in auto pricing modernization at USAA and the CAS Vice President-Engagement.
