Social inflation has become the industry’s most talked about subject in recent quarters. The frequency and severity of tort claims has increased, and insurers have had to add to prior-year reserves and to re-evaluate pricing and capacity to reflect altered loss expectations.

Executive Summary

The conditions underlying social inflation will plague the P/C insurance industry for the next few years, warn William Wilt and Alan Zimmerman of Assured Research. Prior-year reserves will have to be reviewed, pricing will have to be adjusted to reflect future loss expectations, and they expect a contraction in capacity as some insurers pull away from the market and higher loss reserves create the need for a greater level of allocated capital.

It’s not over. We believe the conditions underlying social inflation will plague the industry for the next few years.

The most obvious implication of rising social inflation for P/C insurers is that prior-year reserves will have to be reviewed and pricing will have to be adjusted to reflect future loss expectations. But prices don’t adjust in a vacuum, and we expect there will be a contraction in capacity as some insurers pull away from the market and higher loss reserves create the need for a greater level of allocated capital.

Settlement strategies will also have to be reconsidered as defendants and their insurers, by extension, shy away from the unpredictability of jury trials. We expect that even companies that have heretofore avowed to fight existing claims will ultimately begin to consider settlements.

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