Social Inflation: A Framework for Action

Investment Rating - The report does not explicitly provide an investment rating for the industry Core Insights - Social inflation is defined as an industry-wide rise in insurers' claims costs beyond economic inflation, driven by societal shifts in litigation attitudes and legal interpretations [4][12] - The report emphasizes the need for insurers to better understand and manage social inflation to maintain profitability and market stability [11][51] Summary by Sections Introduction - Social inflation has become a significant concern for insurers, impacting profitability through increased claims costs [2][3] Definition and Causes - Social inflation arises from changes in societal views on litigation, leading to higher claims costs without a corresponding change in underlying risk [4][6] - It is influenced by both institutional and societal factors, including new legal practices and shifts in public attitudes towards corporate responsibility [6][18] Trends and Evidence - The report highlights a notable increase in claims pursued through courts, with the US litigation rate rising to 8.9% in 2019, compared to an average of 3% from 1997 to 2018 [13] - The number of multi-million dollar verdicts has significantly increased, with a 300% rise in verdicts of $20 million or more in 2019 compared to the average from 2001 to 2010 [13] Impacts on Insurers - Social inflation can lead to a misalignment between pricing and risk, potentially affecting insurers' capacity and availability in the market [11][12] - A 2% rise in claims inflation could increase liabilities by approximately 16% for long-tail claims [12] Market Imbalances - The report identifies two key imbalances: inadequate pricing mechanisms for social inflation and insurers lagging in analytics compared to the legal system [28][29] - Insurers have historically focused on economic and cost inflation but have not adequately addressed social inflation [29][30] Framework for Action - The report proposes a framework for addressing social inflation through diagnosis, treatment, and prevention strategies [39] - Insurers are encouraged to invest in nontraditional data and advanced analytics to better understand and respond to social inflation [41][51] Conclusion - Social inflation is a significant risk that requires proactive management to ensure the sustainability of the insurance market and protect policyholders [47][49]