Many casualty lines of insurance businesses have seen a loss severity that grew larger than economic inflation over the last 10 years, according to a report by credit rating agency AM Best.
In its “Social Inflation Remains a Thorn in the Side of Casualty Insurers” report, it was found that the lines that saw the most impact from social inflation were commercial auto, professional liability, product liability, and directors and officers liability insurance. These lines have seen a loss severity that was greater than the economic inflation rate, with some being twice as large, if not more.
According to the report, social inflation was likely to be a key factor.
“The ‘social’ part of social inflation refers to shifting cultural attitudes about who is responsible for absorbing risk - the insurer or the plaintiff – and these dynamics continue to evolve, which makes social inflation tough to quantify and even more difficult for insurers to predict and mitigate,” said Justin Aimone, associate analyst at AM Best.
The report said that there were studies in which sentiments regarding major public corporations have been declining, and lawyers have been capitalizing on this development - a lot of people believe that a firm is responsible for cases of injury because a product was misused.
“When a nuclear verdict is awarded, it affects not just the one claim, but also all other open claims, as plaintiffs, guided by their attorneys, seek a similar verdict or settlement, rendering an insurer’s existing reserves inadequate,” said David Blades, associate director, industry research and analytics at AM Best.
Another leading factor in the rise of social inflation is third-party litigation funding. This poses a challenge to insurers as they have to deal with pricing models in order to mitigate the costs that come from the outsized jury awards or legal proceedings whose resolution took longer than expected.
The report noted that third-party litigation has contributed to the worsening of loss ratios for the lines of excess liability, commercial auto and general liability, which eventually leads to consumers getting higher premiums.
In order to limit severe losses, the report noted that understanding the best way to manage portfolios will be vital to the enterprise risk management of insurers.
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