Best’s Special Report: Social Inflation Remains a Thorn in the Side of Casualty Insurers
May 09 2024 - 9:51AM
Business Wire
Loss severity for several U.S. casualty lines of insurance
business has exceeded economic inflation over the past decade,
suggesting that other factors are influencing claims costs for
indemnity and expense payments, according to a new AM Best
report.
According to the Best’s Special Report, “Social Inflation
Remains a Thorn in the Side of Casualty Insurers,” the lines of
business most affected by social inflation are commercial auto,
professional liability, product liability and directors and
officers liability insurance. Loss severity for these lines has
exceeded the rate of economic inflation, in most cases by double or
more, with social inflation likely being a key factor. For example,
the average loss severity increase over the past decade to 2023 in
the product liability line was 20.4%, compared with average annual
economic inflation of 2.7%. On the other liability – occurrence
line, which captures excess liability and umbrella coverage, loss
severity increased by an average of 11.1% in the last decade. The
growing involvement of attorneys in commercial lines is leading to
an ongoing rise in claims costs, which negatively affects insurer
loss ratios.
“The ‘social’ part of social inflation refers to shifting
cultural attitudes about who is responsible for absorbing risk -
the insurer or the plaintiff – and these dynamics continue to
evolve, which makes social inflation tough to quantify and even
more difficult for insurers to predict and mitigate,” said Justin
Aimone, associate analyst, AM Best.
The report notes studies that have shown sentiments toward major
public corporations have been on the decline, and consequently,
attorneys have been able to capitalize on the shifting attitudes.
This decline in confidence in big business, as well as in other
institutions (e.g., federal government, banks), is a unique problem
for insurers, because jury verdicts have shown that many believe a
company bears some responsibility even in cases of injury due to
misuse of a product.
“When a nuclear verdict is awarded, it affects not just the one
claim, but also all other open claims, as plaintiffs, guided by
their attorneys, seek a similar verdict or settlement, rendering an
insurer’s existing reserves inadequate,” said David Blades,
associate director, industry research and analytics, AM Best. “The
impact on adverse loss development then flows into pricing, as
insurers adjust their view for the affected lines.”
Third-party litigation funding also has been a leading factor in
the rise of social inflation, and insurers have been challenged in
using pricing models to mitigate legal costs arising from the
growing number of outsized jury awards, or owing to legal
proceedings that are taking longer than expected to be resolved.
Third-party litigation funding is contributing to worsening loss
ratios for excess liability, commercial auto and general liability,
leading to higher premiums for consumers.
The high financial awards can have a significant impact on
insurance companies writing casualty lines and on their clients.
Understanding how to best manage their portfolios—as well as
managing such claims when they do occur— will remain a critical
aspect of insurers’ enterprise risk management to limit severe
losses. AM Best believes that companies that best understand the
nature of the risks in their portfolios and how longer durations
will affect their caseloads have a better chance to make needed
changes in actuarial parameters and assumptions to deal with social
inflation more effectively.
To access the full copy of this special report, please visit
http://www3.ambest.com/bestweek/purchase.asp?record_code=342703.
AM Best is a global credit rating agency, news publisher and
data analytics provider specializing in the insurance industry.
Headquartered in the United States, the company does business in
over 100 countries with regional offices in London, Amsterdam,
Dubai, Hong Kong, Singapore and Mexico City. For more information,
visit www.ambest.com.
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Justin Aimone Associate Analyst +1 908 882 1595
justin.aimone@ambest.com David Blades Associate Director,
Industry Research & Analytics +1 908 882 1659
david.blades@ambest.com Christopher Sharkey Associate Director,
Public Relations +1 908 882 2310 christopher.sharkey@ambest.com
Al Slavin Senior Public Relations Specialist +1 908 882 2318
al.slavin@ambest.com