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Tipping the Scales: Measuring the Impact of Social Inflation

Despite the buzz, social inflation’s impact might not be what it seems

Before COVID-19 reared its ugly head in the United States, nearly all commercial property-casualty markets were hardening. A significant culprit generating media buzz during the past year is a phenomenon called social inflation.

“It is not a new term, but it does tend to gain more attention when litigation expenses start increasing rapidly,” observes Ken Williams, staff actuary for the Casualty Actuarial Society.

Reflecting changes in societal values with economic and social dissatisfaction, social inflation manifests itself in losses when juries, as microcosms of the American mood, reach verdicts more influenced by emotion than facts and logic. This amorphous variable is a force behind rising legal expenses, especially headline-making and eye-popping “nuclear verdict” awards that reach $5 million and more.

Already a major concern for commercial auto as well as other liability coverages, there is some evidence that social inflation is spreading to personal lines as well.

Reflecting changes in societal values with economic and social dissatisfaction, social inflation manifests itself in losses when juries, as microcosms of the American mood, reach verdicts more influenced by emotion than facts and logic.


While sources generally agree that social inflation exists, reliably quantifying it for rating and reserving purposes is elusive. Social inflation is one of several factors pressuring pricing, making it challenging to tease out actual influence from the others.

There has “always been a background presence of what is commonly referred to as ‘social inflation,’” offers Richard Henderson, senior vice president of the Transatlantic Reinsurance Company (TransRe). He cautions against using social inflation as a “catch-all scapegoat” for adverse results. “Social inflation should not be blamed for less-than-prudent claim or underwriting decisions,” he warns.

Understanding Social Inflation

In his 1977 shareholder letter, Berkshire Hathaway CEO Warren Buffett wrote that insurance costs were expected to rise from “a broadening definition by society and juries of what is covered by insurance policies.” He called it social inflation. More modern interpretations see social inflation as the force that enables plaintiffs’ attorneys to apply certain legal strategies successfully that appeal to jurors’ emotions to boost settlement amounts and jury awards.

Like Buffett more than four decades ago, several insurers, reinsurers and consulting firms are reporting that social inflation is a key explanation for the rising premiums leading to market hardening.

“Social inflation is pushing U.S. liability loss costs up,” according to a paper published by the Swiss Re Institute last November, “and the pain is spreading from commercial auto to general liability, D&O, and medical malpractice.” Liability coverages are especially of concern, the report observes, because they are long-tail lines where social inflation’s impact can last for multiple accident years.

The “2020 Review & Preview: U.S. Property/Casualty,” published by AM Best in March, reports that “social inflation is increasing both current year loss picks and estimates of the adequacy of prior years’ reserves for most casualty lines.” The insurance rating company expects most major casualty line results to deteriorate in 2019 and 2020.

One commonly cited courtroom tactic applied by plaintiffs’ attorneys is called reptile theory. Introduced in 2009, the idea is to inspire empathy in juries toward claimants by appealing to the primitive part of the human brain shared with reptiles.


Social inflation is not just a concern for commercial auto and liability lines. The Insurance Research Council (IRC) June report, “Social Inflation: Evidence and Impact on Property-Casualty Insurance,” offers evidence that social inflation has been creeping somewhat in personal auto. Using data from the National Association of Insurance Commissioners’ Profitability by Line by State and other reports, the IRC paper notes that private passenger auto incurred claim losses rose by 5.6% annually during 2013 to 2018 compared to the annualized consumer price index (CPI) of 1.5% during the same period. The average bodily injury liability claims payment climbed three times the amount of the CPI during 2014 to 2019, according to the report.

The line from social inflation to higher losses in frequency and severity requires running through a complex gauntlet of circumstances with various probabilities. It presumes juries are emotionally accessible to the point that they can be manipulated through plaintiffs’ attorney strategies. This causes juries to disregard facts and logic presented by defendant representatives to reach a verdict that punishes corporations by awarding claimants’ large sums of money. While this sounds like a helpless situation for insurers, there are measures they can take to reduce the influence of social inflation (see “Reversing the Trend”).

One commonly cited courtroom tactic applied by plaintiffs’ attorneys is called reptile theory. Introduced in 2009, the idea is to inspire empathy in juries toward claimants by appealing to the primitive part of the human brain shared with reptiles. Since plaintiff’s attorneys are not allowed to use the Golden Rule in final arguments, reptile theory appeals to jurors’ emotions and fears to evoke empathy and sympathy.

“Whether reptile or simply more successfully presenting their case, or to some extent social inflation, or a combination of all three, the plaintiff attorneys have been able to tap into juror anger to create nuclear verdicts,” Henderson observes.

Since social inflation is buried in industry loss figures, sources look to other indicators of its existence and spread. One method is measuring investment in legal advertisements by plaintiffs’ attorneys. Offering evidence that attorney advertising is up in both traditional and social media, the IRC report notes that higher advertising spend cultivates positive consumer attitudes toward personal injury litigation. Thanks to plaintiffs’ attorney advertising strategies and investment, social inflation is now “wrapped in as justice,” observes David Corum, vice president of the organization.

Assured Research LLC, which started drawing attention to social inflation in 2017, points to other signs. One is the growing American dissatisfaction with the broadening gap between the rich and the poor, according to a written presentation called “Social Inflation is Back” dated in March and provided by the firm to Actuarial Review.

Gallup’s “Satisfaction with the United States” survey, which takes the country’s temperature about once a month, shows that a majority of Americans have been dissatisfied with “the way things are going” in the United States for well over a decade. This can used to vouch for how Americans feel affects juries.

Americans generally have been more dissatisfied since the Great Recession. When the economic downturn was taking place from December 2007 to June 2009, about 80% of Americans were dissatisfied with “how things were going.” In contrast, before the nation’s shutdown in February 2020, 55% of respondents indicated dissatisfaction, which was the lowest since February 2005. Not surprisingly, 66% were dissatisfied in May, when much of the country was in some form of lockdown.

The growing distrust in societal institutions is considered another social inflation indicator. Over two-thirds (69%) of Americans say the federal government intentionally withholds important information unnecessarily from the public, according to a Pew Research Center survey released in July 2019. Nearly two-thirds of Americans find it difficult to identify the truth from elected officials, as opposed to social media (48%), cable news (41%) or talking to people they know (30%), the study shows.

Given these results, the response to COVID-19 that led to an unemployment rate of about 15% could make social inflation and therefore rising litigation expenses even worse (see sidebar). When Sound Jury Consulting conducted a survey during the COVID-19 crisis in May, 65% of 1,000 respondents said they would be more likely to force an insurer to a pay a lot of money to a plaintiff, according to its “Pandemic Juries” study.

The Occupy Wall Street movement and emergence of popular so-called socialist candidates in both local and national elections reflect dissatisfaction with the status quo, says Thomas M. O’Toole, president & consultant for Sound Jury Consulting. The firm deploys multivariate analysis and predictive modeling to create damages models by identifying factors that make a case more prone to nuclear verdict.

The “me first” culture, O’Toole says, creates an extraordinary tendency towards motivated reasoning, “where our beliefs drive what we are willing to accept as ‘facts’ and ‘law.’” When jurors become “more unbound from the restraints of the law with jury instructions,” nuclear verdicts are easier to achieve, he adds.

This is backed by his company’s surveys. A 2019 survey offers that 75% of respondents indicated they would disregard the judge’s instructions and base a case on their own personal beliefs of right and wrong. Fifty-seven percent affirmed they would ignore a judge’s instructions to avoid internet research on the case if they felt that they could learn something important from it. And perhaps more disconcerting, 75% would disregard the instruction from a judge to ignore inadmissible testimony if they felt the testimony was important.

O’Toole views social inflation through the lens of behavioral economics he calls “jury economics.” He believes juries are “predictably irrational.” That is, “jurors act irrationally but you can identify trends in that irrationality,” he explains.

Quantifying Social Inflation

Finding social inflation in insurance data is like playing hide and seek. That is because its evidence is buried in overall industry figures.

“When dealing with liability insurance, one of the challenges is that societal attitudes are always evolving,” cautions Neil Bodoff, executive vice president of Willis Re. “The question is whether recent changes in societal attitudes are material enough to change the trajectory of liability claims behavior. To answer this question, we need to adopt an evidence-based framework that builds upon data and quantitative analysis.”

Until then, sources point to other signs that social inflation is a growing concern. For instance, the number of tort caseloads began to rise in 2016, according to National Center for State Courts data analyzed by Assured Research. Specifically, in an analysis of 17 states representing around 33% of liability premiums, the number of tort cases rose 1.6% in 2016, 3.2% in 2017 and 1.7% in 2018. Other Liability Occurrence, a proxy for general liability, has been experiencing adverse loss development for three years, according to the Swiss Re report.

Damon N. Vocke, partner and head of corporate & regulatory insurance litigation at Duane Morris LLP, finds social inflation is a factor in the higher frequency and severity of jury awards relative to past trends, but loss data often reflects multiple causes of losses. “It is difficult to pinpoint exactly where social inflation fits in relative to rising loss trends when other factors can affect those trends beyond the blanket default to social inflation,” he explains.

There is evidence that the number of nuclear verdicts, which often have higher punitive and compensatory damages than plaintiff economic damages, are increasing.


Sources point out other contributing factors to rising losses. In a white paper published last August, “Three rising trends in D&O insurance,” Milliman notes a “staggering” 71% increase in the size of settlements for directors & officers coverage, from $1.4 billion in 2017 to $2.4 billion in 2018. Besides highlighting a “heightened awareness to social issues,” such as the #MeToo movement, the paper also points to increases in securities action lawsuits and growing cyberrisks and data protection laws.

Overall, the average liability award for personal injury claims for all P&C lines seems to ebb and flow, showing a large percentage decline from 2008 to 2010. The average award was $1,224,000 in 2007, which dropped to less than half the amount at $575,000 in 2010. However, the average award increased a whopping 36.4% to $1,847,000 between 2016 and 2017 (see Figure A).

Source: Insurance Information Institute – Median and Average Personal Injury Awards By Type of Liability

There is evidence that the number of nuclear verdicts, which often have higher punitive and compensatory damages than plaintiff economic damages, are increasing. The
American Property Casualty Insurance Association released a chart showing large jury awards above $5 million jumped from 143 cases in 2011 to 230 cases in 2017. However,

since there were 190 cases in 2010 and similar amounts in 2015 and 2016, the number of cases in 2017 might not be as dramatic as it seems.

The evidence suggests that the medical malpractice line is suffering at least in part from social inflation. TransRe reports that the number of claims with $10 million or greater verdicts has increased substantially since 2014 from an annual low of 18 cases to a high of 46 cases for both 2018 and 2019 (see Figure B).

Source: TransRe. Used by permission.

Since only a small percentage of claims — perhaps 5% — are tried to conclusion and the vast majority of plaintiff verdicts are settled or resolved for much lesser sums, a common retort is the number of large verdicts is not significant, explains Henderson. However, “the other side of the coin is that historical verdicts form a significant basis for settle/defend decisions on future claims as well as impacting settlement amounts,” he explains.

“Clearly, if verdicts are increasing in frequency and/or severity, it can make an insurer far more risk-averse and lead them to settle claims for higher than desired amounts rather than risk a trial,” he adds.

Social inflation is also cited as a main explanation for increasing commercial auto premium. However, Louise Francis, consulting principal of Francis Analytics & Actuarial Data Mining, has a different view. After studying the rise in commercial auto liability costs for her clients, she offers, “I am not convinced that social inflation due to litigation, as opposed to texting, is the main driver of commercial automobile liability trends.” Specifically, her research indicates that the causes behind higher commercial premium increases are higher frequency from greater travel with contributions from distracted driving due to texting.

Besides social inflation, there are other perennial litigation challenges threatening to pressure legal-related costs in general, such as jurisdictions or judges that commonly favor plaintiffs. The website, “Judicial Hellholes,” has been warning of specific jurisdictional areas of concern for nearly 20 years. There are also particular states, such as Louisiana, New Jersey and California, that have a reputation for plaintiff-leaning courts and judges. While most attorneys on the defense side are aware of plaintiffs’ attorney tactics, “some judges still allow plaintiff attorneys significant latitude during their questioning of witnesses,” Henderson says.

Reversing the Trend

Despite social inflation and jurisdictions and judges unfavorable toward defendants, sources say insurers can step up their litigation game. One area is improving communication.

“On the claim/legal front, many are of the opinion the plaintiff’s bar is more cohesive and communicative with each other than the defense,” Henderson says. “This in and of itself can lead to more and larger settlements and verdicts, and is not necessarily part of social inflation.”

O’Toole reports seeing defendants’ attorneys that just don’t quite have the skill and talent to be persuasive in front of jurors. When attorneys fail to connect with and effectively communicate to jurors, he explains, they cede control to the corrosive influences that drive nuclear verdicts.

One way to improve communication is recognizing that the average juror’s learning style has changed, O’Toole explains, while the presentation style of defendants’ attorneys has largely remained the same. Insurers should also reconsider the wisdom of hiring less expensive legal representatives, he suggests. “The truly effective trial attorneys are going to charge more and have no interest in negotiating lower rates,” he observes.

Insurers, as an industry, should also address systematic influences. Rising litigation costs from lawsuits pushing beyond the four corners of policies signal the need for litigation reform.

In the 1980s, the federal and state legislatures passed laws to limit tort suits. Since then, new laws and legal precedents have reversed course in some areas. The response to
COVID-19 is also introducing a new flurry of lawsuits and potential state law changes, which could motivate an appetite for tort reform (see sidebar).


While eye-poppingly large jury verdicts and the social inflation explanation for rising premiums have gained media buzz, quantifying their impact on losses and premiums remains elusive. The good news is that insurers are not powerless against social inflation. By improving their litigation game and advocating for tort law reform, insurers can curtail social inflation’s impact.

Actuaries also can play a critical role in identifying and measuring the effect of social inflation. Applying data analytics to address litigation expenses and social inflation is one potential way forward. Given the unknowns surrounding the effect COVID-19 will have on litigation, insurers need actuaries more than ever.

Annmarie Geddes Baribeau has been covering insurance and actuarial topics for nearly 30 years. Find her blog at


The COVID-19 Effect

Since social inflation was reportedly a growing problem before COVID-19 arrived at America’s shores, it will be a larger challenge going forward. A widening gap between the rich and poor, higher unemployment and loss of employer-sponsored health plans are likely to release even more dissatisfaction from Pandora’s box to the jury box.

“Now there is a new paradigm,” says Damon N. Vocke, partner and head of corporate & regulatory insurance litigation at Duane Morris LLP. “I think what is going to happen is a perfect storm of preexisting social inflation coupled with catastrophic public health and economic disaster.”

“We are at the tip of the spear,” he continues. “It will take years to play out and I think insurance companies will be trying to grapple with loss exposures because there are so many unknowns of how these cases will be resolved.”

As for the cases and legislation being introduced to assure business interruption coverage for the pandemic, he says that the industry is unified against them, but results in the courts will differ. “There will be accelerated pressure to find recoveries as a lot of businesses go under,” he says. The pressure could last into 2021 as tens of thousands of businesses may fold before economic normalcy returns, which is likely on hold until an effective vaccine can be developed and distributed.

He expects property insurers to be most affected by COVID-19, but there are also general liability exposures. Businesses with public interfaces have higher risk exposure, Vocke explains, because people can claim that they picked up the coronavirus from such establishments.

“Jurors will feel sympathetic,” he predicts. Part of the unknown is whether and to what extent legislators pass laws providing liability immunity for businesses that comply with public health recommendations and whether waiver forms will be enforced.

COVID-19’s impact on litigation is not clear. Although plaintiffs’ attorneys are filing lawsuits, there is a chance for temporary liability protections due to the exceptional situations presented by the response to COVID-19.**

In May, the business community, including the U.S. Chamber of Commerce and dozens of organizations, wrote a letter to Congress requesting liability protections for the following qualifying exemptions:

  • Organizations working to follow applicable public health guidelines against COVID-19 exposure claims.
  • Health care workers and facilities providing critical COVID-19-related care and services.
  • Manufacturers, donors, and distributors and users of vaccines, therapeutics, medical devices and supplies critical to the COVID-19 response.
  • Public companies targeted by unfair and opportunistic COVID-19-related securities lawsuits.

As long as it continues to harm people, COVID-19 is likely to affect insurers for years to come.