Understanding Social Inflation and Reserve Development in P&C Insurance

The adequacy of reserves is crucial for the property and casualty (P&C) insurance industry, impacting profitability and solvency. Recent trends show that social inflation—rising litigation costs, higher jury awards, and broader contract interpretations—significantly affects reserve adequacy. This analysis explores adverse reserve development in the 2016-2019 accident years and its implications for future reserves.

From 2016-2019, many P&C insurance segments saw increased reserve development due to social inflation. Factors such as nuclear verdicts, third-party litigation funding (TPLF), and evolving legal tactics contributed to this trend. For instance, the Other Liability Occurrence line saw substantial increases in loss ratios, with similar adverse development in Other Liability Claims Made and Commercial Auto Liability lines.

The deterioration of reserves from 2016-2019 raises concerns about similar trends for 2020-2023 accident years. Actuarial methods relying on past loss ratios may predict unfavorable developments. Continuous monitoring and adjustments in pricing and reserve strategies are essential to mitigate the impacts of social inflation on future reserves.

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