In a recent report, Morgan Stanley has shed light on the growing concerns surrounding social inflation, predicting it to be a significant headwind for the insurance industry throughout 2024.
Social inflation refers to the trend of insurers’ costs outpacing general inflation, primarily fueled by escalating litigation expenses.
Morgan Stanley’s analysis, based on the last decade of state-level civil court data, emphasises the increasing importance of newer court cases in understanding the impact of social inflation.
Despite improvements in case clearance rates, the financial institution argues that the rising jury awards and settlement amounts, particularly in the post-COVID era, will continue to pose challenges for the industry.
The report highlights two key themes that are expected to shape the landscape of social inflation in 2024.
Firstly, while the number of new cases has seen manageable growth, the focus shifts towards the escalating settlement amounts and jury awards.
Morgan Stanley notes that these factors indicate a persistent and potentially worsening scenario for social inflation.
On the positive side, the number of incoming cases in 2022 grew by approximately 5% year-on-year, with preliminary data for 2023 showing a further 7% increase.
However, it’s crucial to note that the number of cases remains below pre-COVID levels. The report anticipates this trend to persist into 2024.
However, the negative aspect lies in the noticeable increase in jury awards and settlement amounts. Preliminary data for 2023 reveals that the average jury award amount was approximately $57,000, a slight decrease from 2022 but still marking only the second year since 2012 with awards surpassing $50,000.
Average settlement amounts rose by about 3% to roughly $37,600 for total civil cases in 2023. The report attributes the high settlement rate of around 81% to companies’ desire to avoid jury trials.
Morgan Stanley suggests that the persistently high litigation costs will likely lead to a prolonged impact from social inflation, with a shift in focus towards the more recent vintage of court cases.
Despite some improvements in case clearance rates, the concern remains substantial, particularly in states like California, which has a relatively low case clearance rate of 56% in 2022.
