By Michael Bruton | Chief Product Officer, DocLens.ai and Arnab Dey | CEO, DocLens.ai October 2022
If your business has exposure to the risk of third-party liability claims, you should be proactively implementing solutions to mitigate rapidly increasing costs. Social Inflation is the increase in the cost of resolving claims attributed to changes in the way society values those claims. Organizations with exposure to liability claims that implement successful strategies to reduce the impact of Social Inflation have a competitive advantage. In a series of blogs, we will discuss: (1) the increasing risk of Social Inflation and how to measure its impact on a claim portfolio; (2) the factors contributing to Social Inflation; (3) mitigation strategies and (4) how technology can improve execution and outcomes.
Measuring Social Inflation in a Claim Portfolio
Every claim portfolio manager should understand the degree to which drivers of loss costs impact a specific portfolio of claims.
If it not measured, it is impossible to know if mitigation strategies are working. Social Inflation impacts loss costs, and it is a function of both internal and external changes. Social Inflation is driven by jury verdicts. Although only a small percentage of claims are valued by juries, those claims set the risk and therefore the guideposts for settlement. Because parties resolve most liability claims through private settlement, costs to resolve are not easy to monitor at the macro level, and aggregated data on the increased costs linked to Social Inflation is not readily available. Moreover, the rate of Social Inflation can depend on the characteristics of the claims and the location where the claims are resolved.
Although limited, the aggregated data available supports a conclusion that Social Inflation extends across liability claim types. Because of the size and notoriety, data is available on nuclear verdicts, defined as those over $10 million. According to Advisen’s loss data, from 2015 to 2020, the median cost of jury awards that exceeded $10 million increased from $20 million to $27 million (a 35% increase). This increase far exceeds the amount attributed to Economic Inflation.
Similarly, Advisen data indicates jury verdicts for commercial auto losses over $10 million showed a gradual increase from 2010 to 2013 – with a low of $12 million and a high of $22 million – before rising dramatically in 2019 to $25 MM. Product liability verdicts have also increased. Advisen data shows the median cost of product liability verdicts over $1 million rising steadily from 2006 to 2019, with a sharp jump in severity in 2020 to pass the nuclear verdict threshold.
The impact COVID-19 will have on social inflation is still unknown. Some experts believe negative sentiments expressed toward insurers over pandemic-related coverage could lead to increasingly severe verdicts. With a backlog of files in our courts due to the pandemic, recent data is incomplete, but all signals are pointing to a continued rise in Social Inflation.
Without good, aggregated data to determine the impact of Social Inflation on a portfolio of claims, managers can “back into” portfolio specific Social Inflation rates by accounting for other factors that impact the cost to resolve. Internal changes in the mix of claims or claim handling procedures, can impact the cost to resolve. With the help of actuaries, a claim portfolio manager can understand the direction and magnitude of the impact on loss costs. A claim portfolio manager should be aware of the degree to which changes in the make-up of the claims or process and procedures for handling claims impact the cost to resolve.
According to Department of Labor data, overall, long term US average economic inflation has been 3.26%; with a 5-year average is ~2%, while the current rate is 8.26%. Moreover, certain types of goods or services may impact a specific claim portfolio. For example, medical costs and legal costs have a significant impact on the cost to resolve third-party bodily injury claims. Healthcare services and legal services costs on average increased 3.1% and 2.8% annually between 2015 and 2020. A claim portfolio manager should know the impact Economic Inflation has on the cost to resolve.
A claim portfolio manager can determine the rate Social Inflation has impacted a portfolio of claims by adjusting the rate of loss cost increase for any changes in the portfolio, claim management and Economic Inflation. For example, between 2015 and 2020, in a stable bodily injury liability claim portfolio with no significant claim handling changes, which incurs loss costs in a variety of geographic regions, portfolio managers can attribute to Social Inflation any annual loss costs increase that exceed ~ 3% (relevant Economic Inflation rate).
Unlike the case of Economic Inflation, fortunately, liability claim portfolio managers can implement strategies to mitigate the rate of Social Inflation.
First step– determine the baseline Social Inflation rate in the portfolio of claims you manage.
Next up – a discussion of the key factors contributing to Social Inflation.