Social Inflation is not going away in 2025 for most insurers, says BMO

According to a recent report from BMO Capital Markets, social inflation is expected to persist for most insurers in 2025, marking the third consecutive year requiring additional reserves.

BMO anticipates additional speed-bumps in 2025 due to lawsuit inflation trend lines moving well past 10% levels.

The report suggests that for about 33% of insurers, loss-ratio profit margins remain at risk due to the underestimation of cost-of-goods-sold in prior years.

BMO also highlights that insurance inflation remains significantly above its long-term 1-for-1 relationship with US inflation, at 60%. Over multi-year periods, higher inflation benefits insurance carriers by driving more revenues/growth, particularly for brokers who don’t have to worry about reserves.

Additionally, industry-wide return on equity remains robust (>15%), which has led to pricing falling below expanse inflation trend lines in an increasing percentage of the marketplace.

By the end of 2024, most insurers saw their reserving scores deteriorate. BMO stated, “which to us isn’t surprising given most insurers take small bites out of the reserving apple vs. wipe-out their bonus pools, and even more telling is the fact that the industry has proactively pushed the pedal on casualty insurance.”

A May 2024 BMO report revealed that companies came to the realisation that 2020-2023 vintages are slightly under-reserved, similar to older policies from 2019 and earlier. The report highlights that recent vintages also require a higher inflationary trendline factor.

A Swiss Re Institute report revealed that social inflation in the US rose 5.4% annually from 2017 to 2022, outpacing the 3.7% rise in economic inflation.

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