By Ingrid Dunlap, Risk Manager
How are people’s attitudes in society changing the future course of insurance as we know it?
WARRINGTON, PA, January 14, 2022 – A popular term that has been trending in our industry over the past couple of years is “social inflation.” Social Inflation is a concept often inconsistently defined, however, because it is such a hot topic of discussion, especially in insurance, it is vital to understand.
Social inflation is ultimately the assembly of societal and legal trends resulting in the increase of litigation. The increase of litigation often is followed by increased rates, sky-high jury awards, and legal decisions swaying in favor of the plaintiffs. A comparison that puts this into perspective is the adversary of David and Goliath. If you are not familiar with the story of David and Goliath, the narrative tells the tale of an underdog David, a young shepherd who conquers the great enemy warrior, Goliath. These characters represent those involved in modern-day litigations; the plaintiff, David, and the defendant, Goliath. The Goliaths of our modern-day saga are typically larger corporations, companies with the “big bucks.” The pattern that has been displayed is the composition of juries has an effect on who is being targeted; the corporations. Insurance professionals tend to find themselves pinned to the “bad guys” in these types of scenarios.
A common phrase that is associated with social inflation is “nuclear verdicts.” Nuclear verdicts are simply stated as the profound jury awards we now are seeing today. Nuclear verdicts can be determined if they are seen to be disproportionate and surpasses the appropriate or rational award amount. A good rule of thumb in detecting a nuclear verdict is if the award exceeds $10 million. A prime example of this is an auto claim that happened 10 years ago is now offering $300 million, even though 10 years ago the offering amount would have been $500,000.
Before diving into the impact social inflation is leaving on the insurance world, we must identify the driving factors:
- Litigation Funding
- Negative Societal Perception of Corporate Behavior
- Erosion of Tort Reform
- Desensitization of large jury awards
So how does this all impact the insurance industry? It has been indicated there is a direct impact on claims-related losses and insurance costs. The lines that have been seen to be the most affected are commercial auto, professional liability, product liability, and D&O liability (directors and officers). Some key pieces as to why insurers are being impacted are the legal system, tort reform, and the newfound accessibility to legal recourse. The overall outcome can be simply put as higher claim costs induce higher insurance premiums. The higher costs we are seeing can impact the drive for competition between insurers. It has been common in recent times some insurers are being forced to close down certain lines of business. In extreme cases, insurance companies have been seen to even go out of business due to the unanticipated costs. However, there are possible solutions to consider engaging in such as investing in seasoned/experienced underwriters to help reduce the probability for claim surprises. If you are in no place to take larger measures, starting small and working your way up can still make a larger impact in the future. Engaging in public policy debates to aid the promotion of legislative changes can help further equal opportunity between plaintiffs and defendants.
Monitoring the legal trends, and the news can be just as effective because bottom line it is about understanding the legal and societal climate we are in and expanding our knowledge on the situation at hand.
About the author: Ingrid is a Risk Manager here at KMRD. She has been in the industry since 2002 and has even developed a worldwide reputation through her international experience. As her clients’ Risk Manager, Ingrid coordinates the negotiation of coverage terms, conditions and pricing, claims and loss control services, quality control reviews of policies and endorsements, along with other important risk management services such as contract reviews, bid and accrual support, and forecasting. To learn more about Ingrid please visit her bio.
KMRD Partners, Inc. specializes in providing Risk Management, Insurance Brokerage, and Human Capital Solutions. Our award-winning team, disciplined approach, proven processes, combined with our Risk Management Portal make KMRD the leading choice for existing clients and future partners looking to improve protection and reduce the overall cost of risk. Founded in 2005 – and with over 2000 clients nationwide, 40 staff members, and three offices operating in the Greater Philadelphia area – KMRD is one of the nation’s fastest growing independent agencies with double digit revenue growth each year for over 10 years running.