The Insurance Research Council (IRC) recently examined the phenomenon of social inflation in an effort to understand its scope and effect on the rising costs of insurance claim losses (found at: https://www.insurance-research.org/sites/default/files/news_releases/IRCSocialInflation2020.pdf). Through its examination, the IRC concluded that social inflation is having a “direct and significant impact on liability insurance results, generating rapid increases in insurance claim losses.” The well-researched white paper noted that these losses are out-pacing economic inflation and is likely attributable to multi-dimensional factors.
It is no secret that verdict and settlement values have been trending upward. We previously reported that there have been five times the number of $20 million-plus verdicts in the past five years when compared to the previous five-year period. The primary concern, of course, is that these “nuclear verdicts” are substantially out of sync with an injured person’s actual economic loss. This trend has understandably sparked concern and interest across many industries to recognize why it is happening as well as to understand the potential ramifications of this uptick.
The IRC recently examined this issue and published its findings in a white paper entitled Social Inflation: Evidence and Impact on Property-Casualty Insurance. Specifically, the white paper discussed the uptick through the lens of social inflation, which is generally understood to be the growth of litigation liability risks and costs. The IRC identified and examined a number of factors in leading to its conclusion that social inflation is real and on the rise, including:
- Rise in property-casualty insurance losses across multiple sectors over the past ten years (e.g. commercial auto claims, medical malpractice claims, products liability claims, etc.);
- Societal attitudes concerning income inequality, deteriorating public confidence in big business, higher degrees of individualized anger or outrage, and potential increase in feelings of entitlement;
- Judicial tort reform roll back whereby eight state supreme courts have overturned caps on non-economic damages and other related tort reform measures;
- Legislative expansion of liability, including increasing exceptions and durations of statues of limitations;
- Increased monetary incentives for plaintiff law firms to spend big on advertising (noting that return on investment could be as high as 4-6 times investment costs);
- Growth of third-party litigation funding entities which alter the incentive for a plaintiff to settle early and for a lower amount; and
- Rise of “nuclear verdicts” itself, which may normalize the expectations of plaintiffs and plaintiffs firms for a higher recovery.
While the actual impact of these factors require further study, the IRC white paper highlights an important lesson: any attempt to slow, or even reverse, the trend of exceptionally high verdict values will likely require a multi-dimensional approach aimed at shedding light on the negative societal consequences of their increased growth, as well as working to educate legislative and judicial authorities of these effects with the hopes of obtaining legitimate reform measures.
Another key take away from the IRC study is that the acknowledgment of higher liability costs incurred by insurers will undoubtably lead to higher premiums paid by the everyday consumer and business for necessary and mandatory insurance coverage.
Jason Benkner
Email:jbenkner@pooleshaffery.com
Phone
San Diego: 619-400-4852