’This is not ambulance-chasing companies, it is a much bigger social drive than that and we don’t see an end to that,’ says partner
Social inflation has become a thorn in the side of casualty insurers worldwide – and continues to rise.
This type of claims inflation is defined as the increased severity of insurance claims beyond those caused by purely economic drivers.
Instead, social inflation is driven by a number of factors, including societal trends, changing behavioural norms, the greater use of the legal system and a rapid growth in settlement awards.
According to a recent Sigma report from reinsurer Swiss Re, published 7 September 2024, social inflation in the US rose by 5.4% annually on average between 2017 and 2022, while economic inflation sat at 3.7%.
And although this was once predominantly a US issue, the reinsurer noted it was now spreading to increase costs for casualty insurers around the globe, including the UK.
Swiss Re’s Sigma report noted that liability claims severity has trended significantly higher than economic factors, due mostly to a rising number of very large verdicts against commercial defendants. For example, in the US alone, there were 27 cases of courts awarding more than $100m in compensation for bodily injury claims, with the reinsurer identifying the increased use of psychology-based strategies and litigation funding by trial lawyers as an important driver.
After the US, it is other Anglo-Saxon nations like Canada, the UK and Australia that also have common law systems which are likely be most exposed to this form of social inflation.
Patrick Hayward, senior consultant and claims lead at Altus Consulting, said: “In the US, social inflation in liability claims has been the result of high awards of jury-decided punitive damages, leading to huge compensation awards and a highly litigious and adversarial environment.
“Whilst the UK does have its challenges, we have a legal system which focuses on an accurate assessment of damages, proportionality of legal costs and, where possible, settlement before court.
”There are, however, dynamics in the claimant legal sector and across the wider system that have driven the costs of liability claims beyond economic inflation.
“As a microcosm of how this has developed, we saw rapid growth in low value injury claims early in the 21st century, both in terms of frequency and severity, particularly for motor.
”The response was a series of reforms to implement a ban of sorts on referral fees for personal injury claims, reduce fixed fees which lawyers could recover and ultimately remove costs recoverability and reduce the compensation available for low value whiplash claims, such that they became much less attractive to claimants, claims management companies (CMCs) and their lawyers.”
Third party funding
According to Gordon Walker, partner at law firm HF, other legal drivers of social inflation include third-party funding and collective redress.
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He explained: “Collective redress is linked with the [growing social perception] that large corporations can do nothing but evil. People look for someone to blame for most ills and the courts are sometimes capable of helping them to do that. This is not ambulance-chasing companies, it is a much bigger social drive than that and we don’t see an end to that.
“We are also seeing large single claims coming – perhaps driven by ESG or cyber. That trickles down into the levels of the medium level claims and smaller claims and it doesn’t just stop there. Those one-off big claims highlight areas for claimant lawyers to attack. That is a very competitive environment and it is going to remain so as long lawyers are put under economic pressure.”
According to DAC Beachcroft, certain emerging risks may drive social inflation across a number of jurisdictions.
In Europe, the introduction of the new Product Liability Directive has put insurers on alert because, in the US, product liability claims form a significant proportion of mass litigation.
Forever chemicals
Another major product risk developing worldwide is that of litigation related to per- and polyfluoroalkyl substances (PFAS) and similar compounds, better known as forever chemicals. The use of PFAS in a wide range of consumer products, such as teflon, has been ongoing since the 1960s.
However, there is now significant concern over the health and environmental risk posed by exposure to PFAS. Manufacturers of products containing PFAS are already the subject of class actions in the US, despite an absence of scientific consensus on health effects.
Ian Plumley, international coverage, defence and subrogation disputes partner at DAC Beachcroft said: “It is difficult to overstate how widespread the use of these chemicals was and, by extension, the potential claims exposure.
“Traditionally the US has been the home of social inflation and the epicentre of PFAS-related litigation but, in Europe, it has been Sweden and Belgium that have taken the lead so far in tackling the impact of PFAS. The litigation that has resulted and the regulatory measures adopted in those countries will likely create more political pressure for other European jurisdictions to act.”
Other insurance lines that are impacted by social inflation include motor and aviation. In motor, the practices of credit hire and credit repair are being targeted, while Aon noted that the aviation insurance market has been significantly impacted by social inflation, with recent passenger incidents attracting widespread media attention.
All these factors are coming together to push social inflation up, leaving insurers scrambling for a response to the rising costs they face as a result.
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