Social inflation is a perennial issue for the insurance industry. In recent decades, we have witnessed several inflationary surges marked by sky-high verdicts in well-publicized legal cases. And its upward trajectory shows little signs of abating, as the socioeconomic, litigation and legislation related drivers continue to drive case numbers, boost verdicts, extend legal proceedings and increase costs.
However, a combination of some relatively recent developments including the fallout from COVID-19, and the growth of third-party litigation funding, coupled with a lack of any meaningful effort to curb the rise in class actions and nuclear verdicts, has the potential to speed up the pace of social inflation considerably.
The pandemic has boosted levels of mistrust in institutions adding extra fuel to the class action fire. The insurance industry itself has come under significant scrutiny due to a perceived unwillingness to pay claims – despite this not being the case in many instances – and has been the subject of multiple business interruption-related actions.
Social inflation’s impact is further amplified by the backlog of cases currently working their way through the legal system. With law firms predicting a continuation of the upward trend in both the number and complexity of cases through 2023, the legal system is likely to come under major strain.
Further fuel from the pandemic comes in the form of the mental health crisis it has spawned. At Crawford, we are seeing an increase in claims relating to complex post-traumatic stress disorder (PTSD) and Functional Neurological Disorder, with expectations that the psychological impacts of the pandemic will continue to ripple through the legal system for many years to come.
Such developments are occurring against the backdrop of a rapidly growing third-party litigation industry. Funding of such litigation is now a multi-billion-dollar business, with Swiss Re estimating the funding pot in 2020 at approximately $17bn, a figure which has inevitably risen in recent years.
The rise of the no-win, no-fee approach to legal action, funded by colossal investment pots and driven on by the ability to target advertising via social media at key groups, communities, and individuals, is acting as a major catalyst for social inflation.
For organizations bearing the brunt of social inflation, at a time of record-breaking price inflation in many geographies, the need for a legal reset to re-introduce a degree of balance into the tort system is vital. Although the state of Florida enacted tort reform to address what many considered the most egregious litigation system in the U.S., there are not clear signs that the weighted reforms needed to rebalance the system more broadly are imminent. In fact, on the contrary, lobbying for change that could potentially facilitate more class actions and no-win, no-fee cases around the globe is on the rise.
Such an environment places additional onus on insurers to implement measures to control social inflationary impacts more effectively.
The underwriting frontline of pricing and reserving is significantly exposed to its assault. However, the heightened unpredictability of inflationary shifts means it is not possible for carriers to simply factor in an inflation-related percentage figure into their pricing and reserving models.
A much more nuanced approach which considers both the macro and micro developments is required. At Crawford, we are plugging our data analytics directly into the pricing and reserving frameworks of clients, monitoring trends from country and market level down to individual losses as well as applying predictive analytics to help introduce greater precision into the process.
Through combining our data-focused technology and breadth of specialist knowledge we are enabling clients to implement a more targeted approach to managing social inflation from portfolio management through to claims handling. This is helping carriers and corporations, for example, to spot specific components of their portfolio with the greatest potential to be inflation accelerators and take the necessary response measures.
On the claims front, action must be taken at the earliest possible stage to limit the potential for lengthy litigation and hefty verdicts. The key is preparation. The growth of the third-party litigation industry has dramatically escalated the stakes to the point that even pre litigation, the insurer can already be on the backfoot due to the power of no-win, no-fee campaigns and the pervading sense of mistrust in institutions.
Pre-nomination is a core part of this preparation. Having your team of specialist experts already in place who have a thorough understanding of every aspect of your organization down to your risk strategy and policy structure place you in a much stronger position to launch a robust defense from the start.
Deploying data analytics and predictive modelling is key to deciding whether to litigate or settle claims, and understanding which companies, lawyers and specialists to use in court. It also helps root out potential fraud which during this time of economic uncertainty and the threat of recession is on the rise.
With social inflation set to continue to rise for the foreseeable future, it is a business imperative that companies prepare for harder times to come. From introducing more stringent measures to manage social inflation in the underwriting environment, through to building stronger defense platforms and data-driven arguments, carriers must address this industry challenge head on.
However, there are steps that can be taken to ameliorate social inflation’s micro effects, but without concerted action to tackle the fundamental challenges within the legal system, the market treadmill of social inflation and ever-increasing verdicts countered by reserve strengthening and premium rises will continue.
