- Social inflation is contributing more to the rise in US liability losses than economic inflation, rising to 7% in 2023 for the first time in two decades
- Social inflation proves to be the main cause of the increase in US liability claims, leading to underwriting losses, increased uncertainty and reduced insurance capacity for companies worldwide
- Signs of social inflation impacts in the UK, Australia and Canada due to the increase in class action litigation; this trend is also likely to spread to EU countries as litigation funding becomes more accessible and product liability and collective redress are expanded through case law reforms
Zurich, September 7, 2024 – Social inflation has become the main cause of the increase in US liability losses, as the Swiss Re Institute’s new Social Inflation Index shows. Mainly due to the increasing number of high damages verdicts, social inflation has led to a 57% increase in US liability losses over the past ten years, reaching its highest annual value of 7% in 2023.
Social inflation is a phenomenon observed since the 1980s in which insured liability losses rise faster than can be explained by economic factors such as wages or core consumer price inflation. This is caused by various trends in socioeconomic development, legislation and litigation, such as the increasing tendency to settle claims in court. This is particularly pronounced in the United States, where tort law is based on precedent and trials are decided by juries. In addition, third-party litigation funding – where plaintiffs and law firms can finance their litigation with the help of an investor – makes it easier to access litigation, and the legal system allows for high amounts of compensation, especially in personal injury cases. In 2023 alone, courts awarded plaintiffs in 27 cases over $100 million each.
Jérôme Jean Haegeli, Global Chief Economist at Swiss Re: “Unlike economic inflation, social inflation shows no signs of slowing down. Legal costs are rising and have become the most important factor in the development of liability claims. As legal defense becomes more expensive for companies worldwide, liability insurance costs have soared, particularly in the US, and consumers are bearing the burden. In light of these worrying developments, we are now quantifying the cost drivers beyond economic inflation with our new Social Inflation Index.”
The increased cost of claims not only leads to higher risks and costs for companies, but is also a problem for insurers. Over the past five years, US industrial liability insurance losses have increased by an average of 11% annually to reach USD 143 billion in 2023 – far more than global insured natural catastrophe losses, which totaled USD 108 billion in the same year. According to current trends, the impact of rising liability insurance losses could cancel out the positive effect of higher interest rates in one to two years.
Gianfranco Lot, Chief Underwriting Officer P&C Re at Swiss Re: “We are observing a continuous increase in aggressive litigation practices, which are particularly problematic for liability insurance. Over the past five years, US liability lines that cover personal injury have recorded underwriting losses totaling USD 43 billion. As a result, the capacity available to companies worldwide has fallen sharply, and premium increases have not kept pace with loss trends.”
Although social inflation is primarily a US phenomenon, there is evidence to suggest that it is spreading to other common law countries such as the UK, Australia and Canada, where tort law is based on precedent. Swiss Re’s index analysis shows that social inflation contributed more than 10% to liability losses in the UK in 2023. This increase is due to US rulings having a spillover effect: this effect occurs when companies that are found by a US court to pay high damages claim against their UK insurer. In Australia and Canada, the effect was around 7% due to the increase in class actions. In continental Europe, by contrast, tort law is regulated by civil codes and tort cases are decided by professional judges rather than juries. In countries such as France and Germany, social inflation has not played a major role so far. However, far-reaching changes in product liability and representative action directives could lead to an increase in class actions in the EU as well.
Combating social inflation: a joint effort
An effective approach to combating social inflation could come from the legal system itself: by reforming tort law to limit the scope of non-pecuniary damages. Greater transparency and regulation of third-party litigation funders would provide clarity and consistency in tightening disclosure requirements. At the same time, insurers must invest in risk assessment and modeling, defense tactics and better claims management. The use of new technologies and improved data analytics will also help prepare for the future claims environment.
Social Inflation Index – Methodology
To measure social inflation more accurately, the Swiss Re Institute has developed a “Social Inflation Index”. Real GDP growth as an indicator of the growth in exposures and actuarial assumptions for the frequency of losses were subtracted from the growth in losses. The result is an indicator of the severity of losses. For economic inflation as part of social inflation, the macroeconomic cost drivers with the highest correlation to the severity of liability losses were selected and a weighted average of the loss variables was calculated, reflecting the respective strength of the correlation. All variables were analyzed in the form of a moving average over three years.
How to find this study:
Die Publikation «Litigation costs driving claims inflation – indexing liability loss trends» des Swiss Re Institute kann here can be downloaded.
