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Social inflation is increasing at a precipitous rate and resulting in unanticipated costs and risks for insurers. It has pushed up the cost of insurance claims at such a speed and extent that pricing no longer accurately reflects risk.

Executive Summary

Social inflation is the rise in insurance claims costs over economic inflation, and Paul Mang, chief innovation officer at Guidewire, writes that it is creating unanticipated claims costs and risks for insurers so that pricing no longer accurately reflects risk. In this article, he discusses the main drivers of social inflation and what insurers need to do to mitigate this growing challenge.

If this persists, it could ultimately impact the capacity and even availability of whole lines of business insurance. Yet, for all the talk about it, very little is being done. Insurers know social inflation is a problem, but they are struggling to measure it and come up with a concrete response.

Social inflation is the rise in insurance claims costs over and above economic inflation. It is fueled by shifts in societal views toward litigation and results in plaintiff-friendly legal decisions.

There are two primary drivers of social inflation. The first is rooted in societal shifts that stem back to the 2008 financial crisis, which has contributed to a tendency among juries to sympathize with plaintiffs’ framing of the issues in a trial versus a corporation.

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