US property and casualty (P&C) insurers are facing rising challenges due to social inflation, a phenomenon marked by increased litigation, more substantial damage awards, and broader legal interpretations, according to the latest insights from Moody’s.
These factors are notably impacting commercial auto and general liability lines, with heightened social inflation expected to continue, prompting insurers to augment reserves and elevate pricing strategies.
In 2023, the US P&C industry witnessed a downturn in favorable reserve developments, with only $2.3 billion recorded, contrasting with a total industry reserve of $901 billion. The report notes that this reduction stems primarily from a modest deficiency in long-tail casualty lines noted at year-end.
Conversely, Moody’s explains that favorable reserve developments from workers’ compensation and short-tail lines, which totaled $12.5 billion, were not sufficient to counterbalance the $10 billion in adverse developments from general liability and auto liability sectors.
Moody's report also highlights the increasingly litigious environment as a critical driver of claims inflation, exacerbated by negative public perceptions of corporations, a greater likelihood of individuals engaging legal representation, and escalating jury awards and settlements.
The landscape has been further complicated by the pandemic, which altered typical claims patterns by reducing claim frequency and temporarily closing courts. Insurers are expected to respond by incorporating higher expected losses into their policy pricing and by reinforcing their reserve buffers.
The trend of adverse reserve development was particularly noticeable in personal auto insurance during 2022-23, suggesting impending impacts on general liability and commercial auto reserves. This development is critical as such trends typically unfold more slowly in long-tail lines due to the nature of claims, which are numerous, smaller, and settle more swiftly.
Additionally, liabilities for P&C re/insurers can emerge years or even decades after a policy's issuance, often taking equally long to resolve fully. Legacy liabilities, such as those related to asbestos exposure from policies dating back to the 1970s or earlier, continue to affect insurers. Emerging risks like opioid liabilities, PFAS (often called “forever chemicals”), and microplastics also pose new challenges.
As social inflation persists, US P&C re/insurers are strategizing to navigate this evolving risk landscape, focusing on long-term financial sustainability amid an environment of increasing claims costs and litigation complexities.
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