‘Social inflation’ is an important issue to understand, as it has a direct effect on claims-related losses and insurance costs, especially for businesses. The term refers to rising litigation costs and their impact on insurers’ claim payouts, loss ratios and, ultimately, how much policyholders pay for coverage.
Social inflation particularly affects businesses perceived as having ‘deep pockets,’ so the insurance lines most affected are commercial auto, professional liability, product liability, and directors and officers liability.
There is some evidence that private passenger automobile insurance also is beginning to be affected.
Reliably quantifying social inflation for rating and reserving purposes is hard because it is just one of several factors pressuring pricing, making it challenging to tease out its actual influence from the others.
The most meaningful way to think about social inflation and its components is to compare their impact on claims losses over time with growth in an inflation measure like the Consumer Price Index (CPI).