Insurers’ Social Inflation Problem

Social inflation has become somewhat of a buzzword in insurance circles in recent years, especially over the past year. The phenomenon is responsible for driving up risk and the cost of claims across a range of lines, ultimately affecting insurer profitability.

But for all it is talked about, very little is being done about it. Insurers know it is there -- they can see it in their results -- but, as an industry, we are struggling to define it, measure it and come up with a credible response.

This matters because the plaintiffs’ bar is doing quite the opposite: committing significant resources to understand and exploit litigation opportunities. The insurance industry is steadily losing a battle it hasn’t really begun to even engage in.

Before we get into what needs to be done, let’s take a quick look at what social inflation is and why it is a growing problem today.

At its core, social inflation is an industry-wide rise in claims costs over and above normal economic inflation. More specifically, it is added inflation caused by shifts in societal views toward litigation and plaintiff-friendly legal decisions.