Social inflation has become the main growth driver of US liability claims, with a rising number of large court verdicts pushing claims in the US to increase by 57% in the past decade, ultimately causing them to peak at 7% in 2023, the first time seen in two decades, according to Swiss Re Institute.
With social inflation emerging as the main driver behind rising US liability claims, this has led to notable underwriting losses, heightened uncertainty, and reduced insurance capacity for organisations across the globe.
Social inflation is mostly driven by a variety of socioeconomic, legislative and litigation trends, including an increased tendency to settle compensation claims in court and is most pronounced in the US, where tort law is based on precedent and court cases are adjudicated by juries.
Jérôme Jean Haegeli, Swiss Re’s Global Chief Economist, commented: “Unlike economic inflation, there is no sign of social inflation abating. Litigation costs are rising and are now the key driver of liability claims. With businesses around the world facing rising legal defence costs, the cost of providing liability insurance has surged, particularly in the US, with the burden borne by consumers. Given these unsettling developments, we quantify the cost drivers in excess of economic inflation with our new social inflation index.”
Throughout the past five years, US commercial casualty insurance losses grew at an average annual rate of 11% to USD 143 billion in 2023, a figure that surpasses the total insured losses from global natural catastrophes of USD 108 billion in the same year.
According to Swiss Re, based on current trends, the impact of claims growth could offset some of the industry’s earnings benefits in casualty insurance resulting from higher interest rates in one to two years.
Gianfranco Lot, Swiss Re’s Chief Underwriting Officer P&C Re, said: “We observe continuous increases in aggressive litigation practices that are especially problematic for liability insurance. Over the past five years, US liability lines exposed to bodily injury claims recorded cumulative underwriting losses of USD 43 billion. In response, capacity available to global businesses has significantly declined, while rate increases have not kept pace with loss trends.”
Even though social inflation is primarily a US phenomenon, there are signs that indicate that it is impacting other countries with common-law systems such as the UK, Australia and Canada, where tort law is based on precedent.
Based on data from Swiss Re’s index analysis, social inflation contributed more than 10% of liability claims in the UK in 2023. The increase was primarily driven by US spillover effects, reflected in claims that a company submits to its UK insurer after a large compensation award in a court case in the US.
As for Australia and Canada, the effect was around 7% due to an expansion of mass tort claims. Tort law in continental Europe, on the other hand, is governed by comprehensive civil codes, and tort cases are adjudicated by professional judges rather than juries.
Importantly, Swiss Re notes that social inflation, so far, has not been meaningful in countries like France and Germany.
But, the reinsurer states that mass tort claims could wind up expanding in the EU due to significant legislative changes in product liability and representative actions directives.
Social inflation remains a crucial topic across the sector, and one effective approach to address it could come from the legal system itself, through a reform of tort law aiming at limiting the scope of non-economic damages, the Institute highlighted.
As well as this, transparency and regulation of third-party litigation funding (TPLF) could provide clarity and consistency in tightening disclosure requirements.
The Institute concludes by stating that insurers need to invest in risk assessment and modelling, defensive tactics and better claims management, and how leveraging new technologies and improved data analyses will also be crucial in preparing for the future claims environment.
The post Social inflation drives US liability claims to reach annual peak of 7% in 2023: Swiss Re appeared first on ReinsuranceNe.ws.