The United States insurance industry is grappling with a persistent wave of social inflation, with liability claims costs surging by an annual average of 16% over the last five years, according to Swiss Re Institute.
This trend far outpaces the average rates of economic inflation, which have hovered around 4%. As the economy shifts towards disinflation, the spotlight is now firmly on liability lines, where wages, healthcare expenditures, and social inflation are key drivers of claims severity.
Social inflation, a phenomenon that Swiss Re notes has been “ever present” since around 2015, remains a potent force in the insurance market. It is characterised by an increase in large verdicts and a broadening scope of mass tort claims.
Liability claims have been on an unsustainable trajectory, with a 15% increase noted in 2022. Experts warn that there is no room for lapses in underwriting discipline.
The last two years have been dominated by economic inflation, impacting personal lines insurers the most. For example, US car insurance prices increased by 19.1% year-on-year. Construction costs also peaked at 23%, driving up property insurance claims costs.
As the economy transitions from goods to services inflation, the focus is returning to liability lines. Wages and healthcare expenditures are emerging as critical drivers for claims severity.
Several interconnected factors contribute to social inflation, including changing jury attitudes, the growth of third-party litigation funding, increased legal advertising by plaintiff lawyers, declining trust in institutions, and expanding legal concepts.
Social inflation is particularly disruptive for liability insurance because it is challenging to measure and predict. It disproportionately affects long-tail lines, where even minor changes in trends can have a magnified impact.
Emerging litigation risks, such as those related to chemicals as per- and polyfluoroalkyl (PFAS) chemicals, obesity, climate change, algorithmic liability, and addictive software design, pose additional uncertainty for tort liability claims trends in the coming years.
