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US social inflation amid the COVID-19 recession here to stay, says Swiss Re

9th December 2020 - Author: Charlie Wood

Global reinsurer Swiss Re expects social inflation to continue pushing up loss costs in US excess liability and reinsurance.

Swiss ReAnalysts note how social inflation has spread across commercial casualty lines in recent years due to non-economic drivers that include the trial bar’s use of psychology-based strategies, litigation funding and inequality.

The effects of social inflation are said to be felt most heavily in the US due to a rise in nuclear verdicts, mostly driven by outsized awards for non-economic damages.

For general liability, Swiss Re says the probability distribution of losses has become more skewed towards large claims rather than a trend of accelerating average claims severity.

In commercial auto, professional liability and product liability lines, average claims growth has accelerated and exceeds economic activity as measured by nominal GDP.

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Swiss Re expects economic drivers of claims inflation, such as consumer price inflation and wage growth, to be lower than recent pre-COVID 19 trends for next year.

However, this relief is only expected to be temporary while there’s slack in the economy and inflation risks are rising in the medium term.

The current crisis is expected to amplify rather than alleviate the societal factors in play, such as economic, educational and health inequality.

Without a broader policy reset to reduce inequality, Swiss Re analysts believe social inflation is here to stay.

From an insurance industry perspective, investments into forward-looking liability exposure management and product innovation will need to be more prominent, alongside adapting their defence strategies.

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