Social inflation – increasing insurance claims costs related to legislative and litigation trends – may be spreading beyond the United States, attendees were told at a webinar with the Greenberg School of Risk Management of St. John’s Tobin College of Business.
The webinar, held on February 10, was aimed to help lawyers and claims professionals understand the phenomenon, which is characterized by claims costs rising faster than general economic inflation can explain.
Annette Hofmann, Ph.D., professor of actuarial science at the Maurice R. Greenberg School of Risk Management, Insurance and Actuarial Science, pointed out that “though it is largely a U.S. issue, there are signs of social inflation in other countries with potential for further international contagion, albeit not to the same degree as in the U.S.”
She added that the impact of social inflation in the U.S. has been most evident in commercial auto liability insurance.
“Litigation finance, societal attitudes toward corporations and large jury payouts are all behind the phenomenon,” according to James Lynch, Chief Actuary of Triple-I and one of the presenters.
In his presentation, Lynch showed how incurred losses in commercial auto liability have been climbing steeply since 2010.
Lynch said Triple-I studied the link between social inflation and trends in actuarial data (rising loss development factors) by focusing on long-tailed liability lines including Commercial Auto, Medical Malpractice and Other Liability.
He said actuaries look at the pattern of reported losses – the sum of claims experts’ estimates of every known loss. Even if the ultimate amount of claims rises or falls from year to year, the pattern of emergence should stay the same. That hypothesis is at the core of standard actuarial practices.
In this case, it is increasing.
One interesting offshoot of this work is that actuaries can also predict how much in losses will be reported in any 12-month period. The chart on the right shows how actuaries analyzing countrywide data have not been able to do this in commercial auto. And this is not just happening in auto, medical malpractice occurrence, and other liability are seeing the same effect.
Lynch went on to discuss some of the potential reasons behind large jury payouts. One explanation is the darker view of life that people have. Confidence in government has plummeted, incomes and life expectancy have declined, and Google Trends indicates that searches for the word “dystopia” have increased by over 400 percent from 2005 to 2020.
In the meantime, Lynch and another presenter, Julie Campanini of Magna Legal Services, noted that huge amounts of money have been normalized by billion-dollar lottery jackpots, sky-high celebrity net-worth, and news reports of “nuclear” awards verdicts.
Other speakers included:
- Jonathan E. Meer, partner at Wilson Elser, who spoke about the state of tort reform.
- Jeff Cordray, a vice president and economist at Christensen Associates, who discussed the importance of determining economic damages, particularly when there is a potential for punitive damages in a case.