According to global reinsurance giant Swiss Re’s Institute, the rate of social inflation is exceeding economic inflation in growing US liability claims and this has potential ramifications for catastrophe contracts, as the reinsurer explains social inflation can manifest in property natural catastrophe insurance.
This is leading to underwriting losses, heightened uncertainty and reduced insurance capacity for businesses across the world.
There are also signs of social inflation impacting the UK, Australia and Canada due to an expansion of mass-tort claims, which is a trend the reinsurer believes is likely to spread to EU countries as well.
The Swiss Re Institute‘s new Social Inflation Index shows that because of arising number of large court verdicts, social inflation increased liability claims in the US by 57% in the past decade and hit an annual peak of 7% in 2023.
Third-party litigation funding is a factor driving court awards higher, as third-party investors back litigants and law firms, resulting in higher compensation, especially for bodily injury claims, Swiss Re highlights.
Jérôme Jean Haegeli, Swiss Re’s Global Chief Economist, said, “Unlike economic inflation, there is no sign of social inflation abating. Litigation costs are rising and are now the key driver of liability claims. With businesses around the world facing rising legal defence costs, the cost of providing liability insurance has surged, particularly in the US, with the burden borne by consumers. Given these unsettling developments, we quantify the cost drivers in excess of economic inflation with our new social inflation index.”
Driving home the scale of the issue for the insurance and reinsurance industry, Swiss Re explained that over the past five years, US commercial casualty insurance losses have grown at an average annual rate of 11% to US $143 billion in 2023, exceeding natural catastrophe loss costs.
With these current trends in mind, Swiss Re warns that, “the impact of claims growth could offset some of the industry’s earnings benefits in casualty insurance resulting from higher interest rates in one to two years.”
Gianfranco Lot, Swiss Re’s Chief Underwriting Officer P&C Re, commented, “We observe continuous increases in aggressive litigation practices that are especially problematic for liability insurance. Over the past five years, US liability lines exposed to bodily injury claims recorded cumulative underwriting losses of USD 43 billion. In response, capacity available to global businesses has significantly declined, while rate increases have not kept pace with loss trends.”
Swiss Re notes that addressing social inflation could be helped by tort law reform, while transparency and regulation of third-party litigation funding is also needed.
“At the same time, insurers need to invest in risk assessment and modelling, defensive tactics and better claims management. Leveraging new technologies and improved data analyses will also help in preparing for the future claims environment,” the reinsurer said.
In a report released today at the 2024 Monte Carlo Reinsurance Rendez-vous event, Swiss Re also highlights the potential for social inflation to impact claims in other areas of insurance and reinsurance, outside of casualty lines.
While social inflation disproportionally affects the longest-tail lines, the industry has seen before how this can also impact property catastrophe reinsurance, through the claims experience in Florida and some other states following major natural catastrophe events.
Social inflation pushed up claims quantum after hurricanes in Florida, where the states legal system failed to quell litigious claims and assignment of benefits.
While those practices have been stemmed by Florida’s property insurance reforms, there are concerns over rising reinsurance claims after more recent hurricane Ian which has driven some insurers losses higher and is being put down to legal strategies that are being employed to delay timelines and boost charges by not settling early.
Other states, such as California and Texas, are also seeing heavy social inflation caused by court mega verdicts and the tactics employed appear to be spreading in some cases.
Liability lines are seeing far greater claims cost pressures than property, but Swiss Re’s report provides a cautionary warning that, “The impact of social inflation may show more in specialty lines like aviation, marine and property natural catastrophe insurance.”
The scope of large property claim events can be affected in a number of ways, such as through regulatory action that can have the effect of increasing the scope of coverage and/or contract limits beyond what was in the initial property cover, after large natural catastrophe events, Swiss Re states.
So, with social inflationary trends running high, it appears the ramifications could be broader than just the casualty and liability lines that are most obviously affected.
Which is something for the reinsurance and ILS markets to be aware of and keep an eye on when the next major property catastrophe loss events occur.
