Social inflation challenges continue for US casualty insurers: AM Best

Over the last decade, the severity of losses in various lines of casualty insurance in the United States has outpaced economic inflation. This trend indicates that additional factors are at play, affecting the costs of claims for both indemnity and expenses, as highlighted in a recent report by AM Best.

As per the Best’s Special Report titled “Social Inflation Remains a Thorn in the Side of Casualty Insurers,” certain lines of insurance have been significantly impacted by social inflation. The most affected areas include commercial auto, professional liability, product liability, and directors and officers liability insurance.

The severity of losses in these lines has surpassed the rate of economic inflation by double or more in many instances, with social inflation likely playing a significant role. For instance, in the product liability line, the average increase in loss severity over the past decade until 2023 was 20.4%, while the average annual economic inflation stood at 2.7%. This indicates that factors beyond economic inflation, such as societal trends and attitudes driving increased litigation and larger jury awards, are influencing claims costs in these areas.

In the occurrence liability line, which encompasses excess liability and umbrella coverage, loss severity rose by an average of 11.1% over the past decade. The increasing participation of attorneys in commercial lines is contributing to a continual uptick in claims costs, thereby adversely impacting insurer loss ratios.

Justin Aimone, Associate Analyst at AM Best, commented, “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, making social inflation tough to quantify and even more difficult for insurers to predict and mitigate.”

The report highlights research indicating a decline in public sentiment toward large corporations, enabling attorneys to leverage these shifting attitudes. This erosion of trust in major businesses, along with scepticism toward other institutions like the federal government and banks, presents a distinct challenge for insurers. Jury verdicts have demonstrated that many individuals believe companies share culpability even in instances of product misuse resulting in injury.

David Blades, Associate Director of Industry Research and Analytics at AM Best, stated, “When a nuclear verdict is awarded, it impacts not only the specific claim but also all other open claims, as plaintiffs, guided by their attorneys, pursue similar verdicts or settlements, depleting an insurer’s existing reserves.”

Blades further added, “The impact on adverse loss development then flows into pricing, as insurers adjust their view for the affected lines.”

Third-party litigation funding has emerged as a primary contributor to the escalation of social inflation, presenting insurers with significant challenges in devising pricing strategies to mitigate legal expenses stemming from the surge in substantial jury awards and prolonged legal proceedings.

The substantial financial implications of these awards can profoundly affect insurance companies operating in casualty lines and their clientele. Effectively managing portfolios and handling such claims when they arise will remain crucial components of insurers’ enterprise risk management efforts to mitigate severe losses.

AM Best asserts that companies equipped with a deep understanding of the risks inherent in their portfolios and the potential impacts of extended claim durations stand a better chance of adjusting actuarial parameters and assumptions to address social inflation more effectively.

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