Jury remains out on social inflation as rates rise after years of decreases

Business Insurance
Sunday, March 1, 2020

By Judy Greenwald and Matthew Lerner

Social inflation, the term used to describe rising jury awards and settlements, is one of the principal drivers behind recent increases in insurance prices, according to insurers.

After a prolonged period of rate decreases prior to last year, underwriters are imposing rate hikes and cutting back limits in response to escalating claims costs, they say.

Some observers, however, say social inflation is a convenient phrase used to justify higher premiums and that there is little evidence to support insurers’ claims.…

Tough to prove

Some observers say, however, there is little evidence to support insurers’ argument that awards and settlements are rising significantly.

A report on the property/casualty insurance sector issued by Standard & Poor’s Corp. in January states that while social inflation “is the new-again buzzword in the P/C sector,” there is “limited evidence of liberalization of the tort system expanding the size of the litigation economy.” 

“If social inflation is leading to a rise in exaggerated damages, then perhaps a more appropriate way to characterize tort reform is tort lethargy,” says the report. 

Tracy Dolin, New York-based senior director and sector lead, North American insurance ratings at S&P global ratings and one of the authors of the report, said of social inflation, “This is not new. It’s the cost of doing business.”

S&P is trying to gather data on the issue, she said. 

The “very limited” data available is “skewed towards the large nuclear award sizes, and that only impacts a subset of insurers, not to mention a number of those defendants may even self-insure,” Ms. Dolin said.

“It’s all been anecdotal at this point,” she said. “We think part of it is an excuse where there has been pricing complacency for a number of years. There has to be a catalyst to raise pricing, and it’s not replenishment of capital.”

Joanne Doroshow, executive director of consumer rights group the Center for Justice and Democracy at New York Law School, said that while there have always been large outlier jury awards, which are generally later pared down by the courts, there is no overall increase in awards.

“Social inflation is basically a meaningless term,” she said. “This is entirely about (the industry) trying to trigger a hard market, and it’s just a lot of public relations rhetoric that is not supported by the industry’s own data, or by any litigation data that we’ve seen.” 

After experiencing average rate decreases for 13 or 14 years, insurers are trying to raise premiums, Ms. Doroshow said.

“They have apparently now decided now’s the time to start price gouging businesses again on their rates, and they’ve made up an excuse,” she said.

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