"Social inflation" refers to rising litigation costs and their impact on insurers' damages, loss ratios and ultimately how much policyholders pay for coverage. This is an important issue to understand because – although the tactics associated with it usually affect companies that are perceived as "deep pockets" – social inflation has consequences for individuals and for companies of all sizes.
The insurance lines that are most affected are commercial cars, professional liability, product liability and board members and officers. There is also evidence that private car insurance is beginning to be affected. As increased litigation costs drive up premiums, these increases tend to be passed on to consumers and can stifle investment in innovation that can create jobs and otherwise benefit the economy.
[Förmerinformationse: Social inflation: Evidence and Impact on Property-Incident Insurance by the Insurance Research Council (IRC).]
Much of what is discussed and published about the subject has been more anecdotal than database-based. It is difficult to reliably quantify social inflation for classification and reservation as it is only one of many factors that push up prices. We have found that the most meaningful way of thinking about social inflation and its components is to compare their impact on claims losses over time with the growth in inflation measures such as the consumer price index (CPI).
It has been said that the best way to eat an elephant is "one piece at a time." Due to the diversity and complexity of the causes and effects of social inflation, we are launching a series of blog posts dedicated to each in turn. The first set of posts will take a closer look at the financing of disputes: the practice of third parties financing trials in exchange for a share of the funds that complainants can receive.
When it has been widely banned, disputes over funding have been eroded in recent decades, practices have grown, spread and become a contributor to social inflation.
[See: Dispute Financing Increases As Joint Prohibitions Disappear by Courts on Triple-I Blog]
Dispute Financing seemed like a good place to start this series on because it is a clear legal strategy with a clear history that does not involve much of the sociological features that exist in other aspects of social inflation. We will see the emergence of practice, how it came to the United States from abroad and follow its development with social inflation. We will also discuss the current state of litigation, along with ethical issues that have been raised around it in the legal community.
This series will be led by IRC Vice President David Corum with the support of our partners at The Institutes and input from our members, as well as experts outside the insurance industry. As befits all discussions on a complex topic, we look forward to your reactions and insights.
More from the Triple-I blog
What is social inflation? What can insurers do about it? . July 6, 2020)
IRC study: Social inflation is real, and it hurts consumers, businesses (June 2, 2020)
Florida dropped from the 2020 list "Judicial Hellholes" (January 14, 2020)  Florida AOB Crisis: A Microcosm of Social Inflation (November 8, 2019)