Social inflation: Hardly a match for the insurance business

In the October 2021 issue of NU Property & Casualty magazine, we paired a market update about directors and officers insurance, which one expert aptly describes as “sitting on top of” professional and management liability coverages, with a feature that explores the impact of social inflation and nuclear verdicts on the insurance industry.

Social inflation continues to be a major concern for insurers, and for a good reason. Passions can run high in courtrooms these days, and the more costly a lawsuit verdict, the more that cost will ripple through the industry and ultimately impact premiums.

Travelers says there are four factors causing social inflation, which is the push to correct societal wrongs through litigation in general and high-dollar verdicts in particular.

In a blog post on the topic, Travelers says the trend came to prominence because of growing public mistrust of corporations; increasingly sophisticated plaintiff’s attorneys; emotional juries that are swayed by arguments that trigger their drive to protect loved ones; and changes in the legal environment that have produced “a more liberal and less tenured bench at the state court level.”

That last statement strikes me as especially loaded because it links political affiliation with business and economic health, which is an “us vs. them” stance that undermines democratic discourse.

Democracy works best when all parties exhibit enough respect for one another to engage in problem-solving. The wheels start to come loose when any one side holds their own word as creed and discredits opposing or nuanced views.

Another take I’ve read on social inflation posits that millennial jurists are pushing the idea that corporations must pay for current and past injustices. This seems fishy to me, too, as not every millennial is a card-carrying liberal. What’s more, if social inflation is being driven by younger adults with evolving ideas about justice, there may simply be no stopping the eventual cultural evolution that will unfold as more millennials rise to positions of leadership and power.

One thing is clear: Social inflation’s impact is reaching further than an individual court case or insurance company. Insurance experts report that auto coverage, umbrella packages, and the excess and surplus market are all hardening as a result of nuclear verdicts.

According to PayneWest Insurance, a Marsh & McLennan Agency, “The insurance industry noted an average 17.3% increase to umbrella premiums during the first

part of 2020.” And AmTrust Financial reported that the number of verdicts resulting in judgments of $20 million or higher rose 300% between 2010 and 2019. Company executives there say insurers and producers are now charged with educating insureds about how they can best mitigate legal costs.

All this being said, the idea of social inflation isn’t new. Many insurance and finance watchers point to comments that Warren Buffett made about the trend about 45 years ago before he was the top dog at Berkshire Hathaway. Back then, Buffett was talking about asbestos litigation, which is interesting. Asbestos product manufacturing largely went the way of the dinosaurs once plaintiffs began receiving payouts for the illnesses they developed due to handling the noxious material.

Is it not a good thing that we no longer risk being poisoned by common household fixtures/?

Change is the only constant in life. While painful, social inflation may be ushering into society inevitable changes to which corporations and insurers must adjust. Because when society moves, so does insurance.

See also:

• Stemming the tide of social inflation
• Social inflation in the U.S. and globally
• TPAs can minimize the impact of nuclear verdicts in the trucking industry