A recent study by the Geneva Association on the subject of "social inflation" addresses the challenges of defining and quantifying the phenomenon. More importantly, it addresses the issue of what insurers and reinsurers can actually do about it.
"Social inflation is a term commonly quoted in insurance debates but it is often poorly defined or at best only loosely explained," the report begins. By and large, it refers to "all the ways in which insurers' claims costs rise beyond general economic inflation."
Actuaries usually notice such an increase in claims costs "superimposed inflation", the study says, but their measures may not adequately account for advances in medical technology, which create new therapies, change treatment costs and increase the life expectancy of severely injured people, as well as others considerations.
More narrowly, the report states, “social inflation refers to legislative and litigation developments that affect insurers' legal liabilities and claims costs.
The definitional difficulties are well illustrated in the presentation below from the study.
Understanding what drives these costs – and whether they are temporary phenomena or long-term trends – is crucial to satisfying insurers' exposures satisfactorily and enabling them to pay claims.
Key drivers, possible solutions
Recovery in damages Reforms stemming from previous insurance availability and affordable crises have been implicated by some to drive social inflation. The report states that all such correlations are weak at best.
More significantly, according to the study, the judges' and the jury's attitudes shift in ways that are favorable to the plaintiff; growing anti-corporate bias; and aggressive tactics used by the complainant's lawyers, including third party funding.
What can insurers do to combat social inflation? The report proposes four focus areas:
- Engage in the public policy debate to promote legislative changes that further level the playing field between plaintiff and defendant;
- Become better at defending against aggressive and increasingly well-armed plaintiffs' lawyers;
- Upgrade insurance to reduce the chances of surprises. "Insurers need better early warning systems," the report said, building on information from their entire organizations, their own and competition responsibilities, and data from social and digital media.
- Develop products with an eye to mitigating social inflation. Given the extent of potential liability exposures, the report states that “joint venture arrangements” for sharing risks between reinsurance companies can help maintain and even extend the limits of insurance. Parametric insurance can also play a role.
More on social inflation, from the Triple-I blog
LITIGATION FINANCING RISKS AS A COMMON PROHIBITION OF JUDICIALS ARE PREPARED BY COURTS
SOCIAL INFLATION BUSINESS AND COFFEE 1919 LITIGATION FINANCING.