Risk & Business Magazine JGS Insurance Spring 2020 | Page 8

SOCIAL INFLATION
RISE
THE
OF
SOCIAL INFLATION
Y
ou can call it the latest
buzzword or an emerging
trend in insurance, but
with certainty, “social
inflation” is on the rise
and a primary driver for the tightening
insurance marketplace. The rise of social
inflation has ultimately led to increases in
commercial insurance premiums, more
expensive litigation, and higher claims
costs. The impact has been significant
in four commercial insurance product
lines: Commercial Auto, General Liability,
Directors & Officers, and Umbrella.
Unfortunately, even higher premium rates
may not be enough to offset some of the
loss trends. The question is: What is social
inflation and how is it causing these issues?
Jargon aside, social inflation in the context
of insurance is a term used to refer to the
rising costs of insurance claims primarily
driven by “nuclear” verdicts. This results
when jury awards are astronomically
greater than anticipated. The term first
came into use during the 1970s when
losses for the industry were surging.
Warren Buffet then coined the term
in a letter to investors, defining social
inflation as “a broadening definition
by society and juries of what is covered
by insurance policies.” Today the
definition can be expanded to include
the increasing use of trials, the growing
trend of third-party litigation funding, the
accessibility and analysis of attorney data
and strategies, and new perspectives of
social responsibility along with the anti-
corporate sentiment.
The concern it brings for insurance
companies is the difficulty in forecasting
these social trends and accounting for
them properly in underwriting and pricing
8
risk. It directly impacts Commercial Auto,
General Liability, Directors & Officers, and
Umbrella because these are the insurance
policies with higher policy limits. All these
casualty lines have longer “tails,” meaning
it takes years for these claims to develop
before insurance companies are able to
determine if policy premiums at issuance
of the policy term were adequate. The
opioid crisis offers a good example of
these type of claims, as these claims have
been brought against pharmaceutical
companies for the “harmful” role they
played in the opioid crisis in the last 15
years. Hence, any upward trend in social
inflation will not only have an impact on
current loss reserves but also on reserves
for all historical open claims, which can
result in underfunded reserves.
A form of social inflation that is being
pointed to as a large area of concern is
large jury awards against large companies.
Recent verdicts for pharmaceuticals,
manufacturing, and trucking companies
have resulted in verdicts ranging from $10
million to $100 million. These verdicts
will quickly erode the primary insurance
policies and hit the umbrella liability.
These verdicts and the cases that lead
to them have been driven by efforts of
lawyers, doctors, and marketing firms who
seek to fund litigants, in many cases. This
is not inherently a bad thing, but the risks
are obvious.
Social events, such as perceived injustice,
are another driver. The #MeToo
movement, income inequality, and similar
issues often drive the perception of what
and to whom things are owed. The rates
on some loss-impacted accounts have
experienced increases of almost 75 percent,
with percentage increases in the teens
for liability policies covering executives
at big companies. Issues resulting from
some verdicts in court cases have even led
insurance companies to restrict policy
limits altogether in some areas, some of
which include truck fleets that have been
sued by accident victims.
Social inflation is very real and very
concerning for all. That concern is not
only founded in reality, but it stands to get
worse over time. +
BY: GWENYTH P. LUU, CLCS
DIRECTOR - COMMERCIAL LINES
JGS INSURANCE
Gwenyth Luu helps organizations
improve their bottom line and lower their
total cost of risk by implementing the
JGS Proactive Service Platform. The JGS
Proactive Service Platform is an inclusive
strategy that focuses on primary cost
drivers of a risk management program.
Gwenyth helps businesses understand
all of their potential and actual costs
and liabilities, execute an actionable
strategy, and deliver superior client
service and support. The JGS Proactive
Service Platform is driven by continuous
strategy and service delivered on a daily
basis throughout the year. The service
platform includes risk control strategies,
claims advocacy and management,
contract reviews and insurance program
design reviews.