Social inflation has emerged as a key factor pushing up loss costs in US liability insurance and could mean “significant pain” for the market in the coming years, according to a new report from Swiss Re.
Analysts expect the issue to become an increasingly common theme in the next two years, with the impact spreading across more lines of business and inflicting financial stress on affected insurers.
Over the past decade or so, property and casualty (P&C) insurers in the US have benefitted from a relatively benign loss cost environment, Swiss Re noted.
This has been helped by limited economic inflation, favourable, frequency trends in some lines, the delayed impact from past tort reforms, as well as Bush-era judicial appointments.
More recently, however, conditions have worsened, particularly for liability lines and most clearly in commercial auto, which has seen pressure from elevated combined ratios and adverse reserve development each year since 2012.
“Worryingly for insurers, the social inflation component seems to be spreading from commercial auto to other casualty lines,” Swiss Re warned.
For example, Other Liability Occurrence, a proxy for general liability, has seen adverse reserve development over the last three years, and the price trends in this line seem to be turning up in response to the spread of social inflation.
Additionally, D&O has seen historically elevated levels of class action filings in the last year, as well as a better funded plaintiff bar and rising defence containment costs.
Rising severity is also impacting medical malpractice insurance, with the number of large jury verdicts increasing.
“In contrast to economic inflation, social inflation can have more of a disruptive impact on liability insurance because it affects the longest-tail claims and is difficult to measure and predict,” Swiss Re stated.
“With long tail lines, any change in inflation will have a leveraged impact on loss reserves, impacting multiple accident years.”
Analysts noted that further pressure points could be ahead, such as opioid litigation and reviver statutes, which could put additional stress towards adverse reserve development in the next few years.
Rising reserve and loss cost trends are starting to be reflected in premium rates, they added, but it is difficult to calculate in these gains are enough to keep up with the rising loss costs.
Meanwhile, a rising share of business is shifting from the admitted market to the excess and surplus market, and to facultative reinsurance, which Swiss Re argues are indicators of a stressed market.
