Impact of Social Inflation and Mitigation Strategies

January 10, 2024

Social inflation is a notable phenomenon that is significantly impacting the insurance industry worldwide, with the US at the epicenter. We define ‘social inflation’ as the increasing trend of juries to award higher compensation payouts in liability cases.

The business lines most exposed in the US to the risk of social inflation include:

  • Liability insurance, covering businesses and individuals against financial losses arising from claims of negligence, bodily injury, or property damage. Commercial auto liability is among the sectors most affected, with the size of verdict awards growing 33% annually from 2010 to 20181
  • Professional liability insurance, covering professionals (doctors, lawyers, and accountants) against claims or malpractice or E&Os
  • Product liability insurance, covering businesses against claims of injury or property damage caused by their products

Key causes2 for social inflation include:

  • Shifting social and cultural attitudes. With the advent of social media and increased awareness of consumer rights, societal attitudes towards corporations and insurance companies have shifted, holding them responsible and accountable for accidents and injuries. Juries are more likely to award large damages to plaintiffs in cases where they perceive the defendant to be a large corporation or to have acted irresponsibly.
    ‘Nuclear verdicts’3 (verdicts of $10M or more) are on the rise, especially in state courts, and they have a fundamentally unpredictable impact on businesses, entire industries, and society at large, also because the awards primarily consist of non-economic damages, while economic compensatory damages (lost wages, medical expenses) accounted only for 14% of total damage awards.
  • Legal activism and litigation funding. Consumer advocacy groups, increased consumer protection, and the rise of litigation funding, a type of financing that allows plaintiffs to pursue lawsuits without having to pay for the cost of litigation upfront, increases both the ‘frequency’ and the ‘severity’ of cases brought to court. Judges are more open to award novel damage types and listening to new interpretations of legal doctrines, creating new legal precedents.
    Swiss Re4 sees Third Party Litigation Financing (TPLF) investments of $17B in 2020 growing to $30+B in 2030, with investment returns from TPLF outperforming other risky assets. The average IRR for personal injury, commercial litigation, and mass tort oscillates between the low twenties and mid-thirties, and costs are ultimately borne by insurers and passed on to consumers.
  • Wage and price inflation. Trends in the general price level, wage settlements, earnings, and strikes (for example, UAW). For the period Mar 2021 – Jan 2023, the inflation rate in the US has outpaced wage growth, peaking at 8.6% and coming down since. Wage growth remains robust at 5.3% in September 20235.
  • Medical cost inflation. Medical cost inflation in the United States in the 2010s has been at 4.1%6, outpacing the rate of inflation. Advances in treatments, development costs of more expensive drugs, the aging population, the rise of chronic diseases, and constraints from public health resources due to increasing levels of debt.
  • Emerging risks. New injuries/diseases, as well as scientific evidence of harmful substances and products, for example, PFAS which, are a growing concern in the liability industry
  • Law changes. States abolishing caps on punitive damages. On the opposite side, in the 1980s7, liability claims were increasing litigation claims for doctors, teachers, fire brigades, police officers, and many other professions. Tort reforms (capping non-economic damages, limiting contingency fees, and eliminating ‘joint and several’ liability) allowed losses to be reduced, but many of those reforms have been rolled back since
  • Rising costs of litigation. This includes expensive discovery processes and the cost of expert witnesses, as well as plaintiffs raising public expectations about the size of jury awards, as previously noted.

The impact of social inflation is significant. From 2015 to 2020, the median cost of nuclear verdict over $10M increased by 35% (from $20M to $27M)8. The trend is rising significantly in commercial auto ($20–25M median in 2020 over $10M verdicts) and product liability ($13–14M, from less than $5M in 2006).

The industry is keenly aware of social inflation, which remains a major headwind that continues to make it difficult to predict future claims costs9. Throughout all quarters of 2022, ‘social inflation’ was mentioned 438 times during the earnings calls of all publicly listed insurance companies in the US, suggesting it is a widespread concern.

For carriers, in particular, social inflation presents significant challenges:

  • Increased claims costs due to higher settlements and legal expenses.
  • Shrinking profit margins, with a steadily increasing underwriting ratio on liability lines of business for US insurers (from 86.2% in 2010 to 95.9% in 2022).
  • Unpredictable underwriting process, especially in lines with large claims looming and a history of nuclear verdicts.
  • Increasing reinsurance costs, given the hard market that started in 2021, which is characterized by rising rates, high volatility in investment markets, increased frequency and severity of natural catastrophes, reduced reinsurance capacity, and tightening of reinsurance underwriting standards while demand for reinsurance has been increasing
  • Capital adequacy concerns related to new types of risks (for example, cyber) and the ongoing annual updates by NAIC10 of their risk-based capital (RBC) model

Insurance carriers are grappling with significant challenges posed by social inflation. A combination of strategic initiatives and robust risk management practices can help mitigate its impact.

Insurance carriers in the US have been developing different strategies to fight social inflation, some of them helping to mitigate risks ex-ante, some mitigating the risks ex-post:

  • Pricing. Charging higher premiums for policies that are more likely to be affected by social inflation, such as liability policies
  • Underwriting. Selecting risks that are less likely to be affected by social inflation, especially avoiding policies that are more likely to result in large jury awards, such as policies for high-risk businesses, products, or individuals
  • Claims management. Using claims management to reduce the size and number of jury awards:
    • Early intervention: Intervening early in claims to try to resolve them before they go to court. This can be done by negotiating with plaintiffs and offering them fair settlements
    • Vigorous defense: Defending claims vigorously in court. This includes using experienced defense attorneys and challenging plaintiffs’ claims aggressively
  • Data analytics. The large investments in analytics capabilities and data science is undertaken by many carriers can help them identify trends in social inflation and develop appropriate strategies both in pricing and underwriting
  • Public policy advocacy. Advocating for public policies that would reduce social inflation, such as caps on punitive damages and reforms to the litigation process
  • Education. Educating the public about the issue of social inflation, for example, by publishing articles and blog posts about social inflation and by hosting conferences and symposiums on this topic for businesses and other groups

In our experience as claim auditors and consultants with multiple carriers and reinsurers working across admitted and specialty lines, including general and professional liability, asbestos, environmental, toxic, and construction, we recommend additional risk management measures for both insurers and reinsurers:

  • Review of counsel effectiveness. Considering quantitative and qualitative measures when selecting panel counsel and assessing their effectiveness, including:
    • Claims outcomes (claims settlement ratios, average claim costs, litigation win rates)
    • Cost-effectiveness (hourly rates, billing practices, litigation costs)
    • Client satisfaction (measuring feedback from policyholders)
    • Expertise and experience (related to the type of claims handled)
  • Risk management process to mitigate Losses and ALAE. Loss and Allocated Loss Adj Expense (ALAE) mitigation is at the heart of the value creation process for insurers against social inflation. This includes:
    • Assessing their own legal bill review capabilities
    • Having an effective platform to manage litigation expense
    • Developing a process that incorporates early warning systems to identify and triage high-value claims and assign high-value claims to their best handlers
    • Having trial-ready counsel readily available
  • Conduct a holistic analysis of all stakeholders. Considering all the stakeholders can lead to the discovery of alternative resolution (ADR) methods to resolve claims without going to court, can offer a less expensive and time-consuming alternative than traditional litigation, or at least mitigate the impact of legal expenses incurred.
    • All indemnitees and claims contributors
    • Arbitration alternatives, as well as the chosen venue
    • Litigation financiers, both in formal and informal discovery
  • Develop a robust governance process. Governance is a structural element of best-in-class insurers' risk management process, especially when involving senior management.
    • Involvement of senior management and decision-makers
    • How to address instances leading to early detection
    • How to address authority discussions
    • How to conduct mock juries, focus groups, and pre-trail assessments
    • Determination of range for expected values of outcomes in claims

Social inflation is a secular trend and will remain a significant challenge for insurance carriers for years to come. Only a combination of strategic initiatives and robust risk management practices can help carriers and reinsurers navigate these perilous seas.


To continue the discussion on Social Inflation with one of our experts, please contact us at info@alangray.com

1 Triple-I (iii), Social Inflation: What it is and why it matters, Aug 2022

2 The Geneva Association, Social Inflation: Navigating the evolving claims environment

3 US Chamber of Commerce Institute for Legal Reform, Nuclear Verdicts: Trends, Causes and Solutions

4 Swiss Re Institute, US litigation funding, and social inflation, Dec 2021

5 Statista.com, Difference between the inflation rate and growth of wages in the United States from January 2020 to August 2023

6 Kaiser Family Foundation, Oct 2020

7 Swiss Re Institute, 1980s: risk management and the liability crisis

8 VGMI, Median Cost of Large Jury Awards, Advisen’s loss database

9Letter to shareholders, 2022, Warren Buffett

10NAIC, Property and Casualty Risk-Based Capital Working Group, June 2023

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