Social inflation is impacting legal expenses, balance sheets and insurance premiums nationwide. Largely driven by higher jury awards, social inflation refers to rising litigation costs and their effect on claim payouts, loss ratios and coverage pricing. Though this concept isn’t new—Warren Buffet first coined the phrase in 1977— it is growing in severity, concerning business leaders and insurers across industries.
With no end to social inflation in sight, business success will depend on companies’ ability to avoid so-called nuclear verdicts and minimize claims through comprehensive risk management programs.
Driving Factors and Misconceptions
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Nuclear Verdicts: Verdicts of $20 million or more increased by 300% in 2019, leading to large losses for insurers and insureds. These enormous payouts have become so common that investors are legal pooling, investing in plaintiff cases. The backlog of cases due to COVID-19 has slowed these verdicts, but only temporarily.
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More Litigation, Class Actions: Overall, there is more litigation today than in previous years, with class action litigation alone accounting for 11.6% of U.S. litigation spending in 2020.
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Sympathetic Jurors: It’s easy to see a sizeable payout and question juror motives, but often — including the well-known 1994 McDonald’s “hot coffee lawsuit”— there are concerning details about company practices that justify the verdict.
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Broader Definition of Liability, All Companies are Targets: An expansion of how the U.S. defines liability has opened more companies to claims, not just large corporations perceived to have deep pockets. In reality, much smaller companies are also facing litigation and nuclear verdicts.
Insurance Implications
The health care industry faces frequent litigation, indicating a need for stronger loss control solutions. By far, however, the industry hardest hit by social inflation and nuclear verdicts is transportation. The American Transportation Research Institute, says average verdicts in U.S. trucking increased by 967% between 2010 and 2018, averaging $22.3 million.
Insurance lines most affected by increased litigation and social inflation are:
Improving Your Risk Profile: Recommendations
This environment requires a proactive loss control approach for the foreseeable future. Companies must develop aggressive claims management strategies and implement comprehensive loss prevention measures:
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Gather data on operations, claims and losses
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Compare loss data with peer group
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Identify vulnerabilities
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Build data-driven loss control programs
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Perform background checks on all employees
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Thoroughly document all processes and communications
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Adjust behaviors and/or processes after incidents and warning
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Identify patterns in loss and claims data revealing possible areas for larger, catastrophic losses
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Diligently measure progress on reducing claims and losses
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Consider captives if losses are significant, but manageable
By controlling risk as much as possible and investing in preventative solutions, your overall risk profile will improve, helping to reduce premiums. If litigation does arise, you will also be able to show the jury that you took all possible steps to prevent it, reducing the likelihood of a catastrophic award.
Case Study: Risk Management in Action
A Risk Strategies client headquartered in New York City sought to reduce losses and more aggressively control claims associated with their fleet of commercial vehicles and the high frequency of at-fault accidents. With several large losses in recent years, this client’s premiums more than doubled over the past two renewals. Using detailed organizational exposure data and proprietary analytics tools, we determined loss trends, then drilled down to identify root causes. We found that losses were primarily being driven by rear-end collisions resulting in third-party liability claims, injured employees, and business income losses due to vehicle downtime. Through the assistance of the loss data analytics, we were able to offer this client specific solutions that targeted their fleet safety program including new driver onboarding procedures, safety ride-a-longs, distractive and defensive driver training classes, and telematics.
In a short period, these measures helped this company significantly reduce the number of at-fault claims, reduce day-to-day operational costs, and so far, avoid any more nuclear verdicts. Effective loss control and risk management programs are not quick fixes; however, they are longer range strategic plans, (2–3-years), that steadily reduce the numbers of losses and claim costs over time.
Prevention is the Key
The future of risk requires strong risk management. Looking ahead, we see more companies investing in aggressive claims management and loss preventative solutions not just in response to social inflation, but because it helps the bottom line. If implemented broadly, over time these strategies can help reduce the size of jury awards and slow social inflation overall.
Throughout 2022, Risk Strategies experts will explore the evolving nature of risk in-depth, exploring predictions and considerations across industries. Join us as The Future of Risk series continues.
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The contents of this article are for general informational purposes only and Risk Strategies Company makes no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information contained herein. Any recommendations contained herein are intended to provide insight based on currently available information for consideration and should be vetted against applicable legal and business needs before application to a specific client.
