Social Inflation and the Insurance Industry

Social Inflation and the Insurance Agency 

Tropolis is an innovative insurance broker dedicated to empowering independent insurance agencies with the tools, technology, and support for accelerated growth. This article is part of a series featuring insights and stories from our valued Tropolis partners and employees.

Year after year, it seems our insurance premiums are on the rise.  Many factors are pulling strings on the insurance economy in the United States, but one of the leading forces is social inflation.  Social inflation is the rising cost of insurance claims, and the increase in claim severity, driven by social and legal factors beyond standard economic inflation.  The cause of this is multifaceted, but includes the following: 

• The industry is seeing an exponential increase in the cost of litigation fees.   
• Lawsuits are being used as investment vehicles, with private equity backed firms funding lawsuits against businesses in return for a share of any awarded damages or settlements.  
  
  

• Nuclear verdicts refer to the jury awarding $10 Million or more, often in personal injury or wrongful death lawsuits.   

• Recent data shows that US juries awarded more than $14.5 Billion in nuclear verdicts in 2023¹
• In 2023 alone, there were 27 cases against corporate defendants that resulted in verdicts of more than $100 Million – often referred to as “Thermonuclear Verdicts”¹

• Many legal firms employ tactics to play on the psychological side of the jury, often leading to emotionally driven decisions, and at times, irrational settlements. 

• There has been a growing perception that large corporations, and with the same token, their insurance carriers, should be held responsible for a wider range of losses, regardless of negligence being established.      

• 67% of jurors believe companies knowingly sacrifice safety to make more profit²
• 89% of jurors believe companies should always have to do more than just meet government safety standards²

Because of the rise in these legal costs, the insurance industry actuaries are struggling to estimate an insurance company’s future losses and adjust their risks accordingly.  The United States insurance industry saw their liability losses nearly triple between 2010 and 2019.  In the same period, the median jury verdict’s monetary award almost doubled.  This combination has been a leading driver in the increase of insurance claim costs, and ultimately, the increase of rates being passed down to the consumer. 

In conclusion, the insurance industry is finding ways to counter against the rise of social inflation.  One of these ways that has been noticed the most in the industry is the tightening down of underwriting practices.  Carriers are scrutinizing policy language and analyzing the litigations brought before them with a fine-tooth comb to ensure sound underwriting decisions.  Along with this, carriers and industry professionals are pushing for heavier regulation and limitations on non-economic damages, as well as working to fight third party litigation funding.  As the insurance market adapts over time, there will be a give and take between the carriers and defense teams specializing in maximum recovery on claims.  Strong ethics and a keen focus on changing policy language will be vital to ensure honest and fair participation in the industry, and competitive coverages and adaptive pricing models will continue drive the market.   

1. https://www.marsh.com/en/services/claims-management/insights/nuclear-verdicts-are-on-the-rise-how-can-you-minimize-your-risks.html
2. DecisionQuest National Juror Attitude Survey, 2017-2018.