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Social inflation has been a much-talked-about term in the insurance industry recently, but Heather Wilson, CEO at CLARA Analytics, says a lack of awareness among consumers is creating friction between policyholders and their insurers.

“With rising claim expenses and loss costs, there comes an increased price to customers,” she said during Carrier Management’s November Strategy Sessions webinar. “Because they really don’t understand the social inflation that’s going on behind the scenes for carriers and self-insureds, it could create some negative sentiments and some process friction between customers and their carriers because it is indirect and something that the general public may not understand.”

Heather Wilson

Social inflation refers to the rise in liability loss costs beyond what would be expected from economic inflation alone. This can occur when litigation and legal costs go up for insurers, according to a blog post on insurance software company AgentSync’s website. Social inflation can be attributed to a number of factors, such as drawn-out legal proceedings, larger jury rewards to claimants, or emerging risks such as climate, cyber or global pandemics – all three of which have presented growing risk for the insurance industry during the past several years alone.

The AgentSync blog cited a 2020 report from Geneva Association that said increasing jury verdicts, for example, are another factor in play for the insurance industry. The report said a review of U.S. cases shows that the number of jury verdicts of $20 million or more in 2019 rose more than 300 percent from the annual average between 2001 and 2010.

Wilson said another factor fueling the current social inflation environment is third-party litigation funding, as outfits like hedge funds or other firms look to capitalize on lawsuits as investment opportunities.

“There’s a dynamic that is happening right now where either hedge funds or Wall Street firms have the opportunity to invest in lawsuits, and they’re partnering with litigators and investing in these advanced analytics around third-party litigation and aggressive client acquisition strategies,” she said. “So, it’s really become a multibillion-dollar industry, this third-party funding litigation, and the kind of aggressive plaintiff strategies that are going on are really resulting in higher claim settlements in a big way.”

She said this is a dynamic that will likely continue to play out, or even grow, in 2023.

“I think that third-party litigation funding will continue to grow as a valuable investment tool and revenue source for large firms. I think it’s here to stay,” she said. “I think there’s a lot of aggressive tactics coming out of it, and it’s going to result in higher loss costs. Those legal expenses are resulting in even more increased social inflation.”

Despite these trends of recent years, Chris Bozman and Katey Walker, both senior directors with Willis Towers Watson, wrote in a 2021 article for Carrier Management that social inflation is not new. In fact, in the late 1970s and early 1980s, when U.S. inflation was averaging 10-15 percent per annum, tort costs as a percentage of real GDP were increasing at 15-25 percent per annum, they said. This ultimately led to structural changes in the insurance system, a liability insurance crisis, changes in policy forms and introductions of exclusions, and a significant market hardening in the late 1980s.

The authors went on to say that more recent social inflation challenges have come on the heels of a decade-plus of benign liability trends in lines such as general liability and medical malpractice. But sometime around 2014 or 2015, the trends began to reverse. They added that changing societal attitudes could be fueling this recent bout of social inflation as well.

The reason the term can be so ambiguous for policyholders is that it deals with the behind-the-scenes claims operations that insurance carriers typically see, Wilson added. She said that while social inflation can drive insurance costs higher, those costs are indirect and may not receive as much attention among the public as with economic inflation.

“Social inflation is looking at claims and all the costs around those claims that really a human eye doesn’t see, a consumer doesn’t see, but a carrier is seeing,” she said. “So, I think what happens is there can be some tension there with social inflation that carriers are facing.”

One way to alleviate this tension and put policyholders at ease, she said, is through education.

“I just think it all comes down to education,” she said. “Whether it’s educating around coverage, around changes in what’s happening with rates, around pricing or, if there is a [lawsuit], making sure that the adjuster is helping that injured worker or helping with that claim and helping the carrier get to the right outcome.”

She said proper education will help policyholders not only understand what social inflation is but how it can affect their rates, which could lead to more of an understanding between consumers and insurers.

“I think, at the end of the day, the carrier is feeling that pressure from loss costs, and the rate’s just going to be pushed back to the policyholder,” she said. “That’s why I think it’s important that there is more awareness around social inflation and that everything gets pushed through to consumers and policyholders through their rates. I think that’s something that they’re going to end up seeing.”

While Wilson said social inflation likely isn’t slowing down anytime soon, one positive trend she’s seen is a more coordinated response among carriers to navigate it as best as they can.

“I think that insurance carriers are really coming together,” she said. “We work with so many different chief claims officers, and I think a lot of them are coming together and coordinating around a lot of the different dynamics of social inflation. I think there’s a consortium of chief claims officers that are really trying to get a handle on all of this.”

She encouraged more carriers to coordinate their response to social inflation and arm themselves with as much data as possible.

“I think they’re doing their best to arm themselves with objective and data-driven stats to deal with each situation that’s brought in front of them,” she said. “At the end of the day, I’m so proud of our carriers that are aware of it that they’re always keeping their clients and the claimant right at the center of this.”

To hear what else Heather had to say, check out the full webinar for free on Carrier Management’s research page.