Insurance Markets

Taking a team approach

A reinsurer’s perspective on social inflation

Social inflation refers to the impact that a number of societal factors can have on insurance claims and is widely considered to be a primary cause for driving loss costs in the commercial liability market. Munich Re is well aware of the challenges posed by social inflation and feels comfortable that our current portfolio is being actively managed in order to stay ahead of the variety of factors contributing to the changing values of society.

22.04.2020

Since social inflation is a multifaceted issue, it is not enough for just a single discipline to analyze and determine what’s driving social inflation’s impact on results. Therefore, companies must approach the issue with a cross-functional team, pulling expertise from claims, legal, underwriting, actuarial, and data analytics departments to understand and respond to the issue.
Drivers of Social Inflation © Munich Re

Social inflation increases parameter risk around several key variables which, in turn, adds more uncertainty to underwriting. At present, (re)insurance underwriters are attempting to reduce the uncertainty and volatility associated with social inflation, in order to improve their understanding of the ultimate exposure when accepting and pricing risk.

In a reinsurance transaction, structure and terms are primary considerations for a reinsurance underwriter. It has become apparent in the market that capacity for non-proportional or excess of loss reinsurance structures is less readily available, due to the increased leverage ceded to the reinsurer because of uncertainty in ultimate loss for risks most exposed to social inflation. In contrast, the proportional sharing of risk and premium in a quota share placement better balances the risk and return and aligns interests between the insurer and reinsurer. Understandably then, when considering uncertainty associated with social inflation trends, the inclination of the reinsurance market and Munich Re is to have a larger appetite for proportional over non-proportional structures when underwriting commercial liability.

While the social inflation problem appears to exist across most risk classes, re-underwriting the portfolio, limits management, and pricing actions are options available to insurers to control risk. Insurers must also look at external factors, become more forward-thinking in terms of trends, and identify macro factors that can influence underwriting strategy. They can benefit from working with analytics professionals and data scientists who are skilled at data mining and interpreting correlations between data from new sources and market performance. Such collaboration with business partners in this regard can be an efficient and effective strategy for insurance companies to compete and improve results.

Underwriting response

Social inflation increases parameter risk around several key variables which, in turn, adds more uncertainty to underwriting. At present, (re)insurance underwriters are attempting to reduce the uncertainty and volatility associated with social inflation, in order to improve their understanding of the ultimate exposure when accepting and pricing risk.

In a reinsurance transaction, structure and terms are primary considerations for a reinsurance underwriter. It has become apparent in the market that capacity for non-proportional or excess of loss reinsurance structures is less readily available, due to the increased leverage ceded to the reinsurer because of uncertainty in ultimate loss for risks most exposed to social inflation. In contrast, the proportional sharing of risk and premium in a quota share placement better balances the risk and return and aligns interests between the insurer and reinsurer. Understandably then, when considering uncertainty associated with social inflation trends, the inclination of the reinsurance market and Munich Re is to have a larger appetite for proportional over non-proportional structures when underwriting commercial liability.

While the social inflation problem appears to exist across most risk classes, re-underwriting the portfolio, limits management, and pricing actions are options available to insurers to control risk. Insurers must also look at external factors, become more forward-thinking in terms of trends, and identify macro factors that can influence underwriting strategy. They can benefit from working with analytics professionals and data scientists who are skilled at data mining and interpreting correlations between data from new sources and market performance. Such collaboration with business partners in this regard can be an efficient and effective strategy for insurance companies to compete and improve results.

What we've learned

Munich Re is taking a proactive approach by combining resources and expertise, both internally and with external stakeholders and prominent industry organizations, to understand and address the topic of social inflation.

Munich Re’s data hunting team has been searching for additional data that can help us better understand trends in commercial liability, and then work with data scientists and actuaries to look for previously unnoticed correlations or relationships. From an actuarial perspective, the availability of new data sets and the application of new predictive methods complement our traditional models and can give additional insights to help capture the impact of current trends in pricing model parameters and reserving methodologies.

. © Munich Re

Social inflation has influenced claims handling practices as well. More frequent consideration and earlier utilization of mock jury exercises is part of a responsive strategy advocated by Munich Re’s claims team in order to better understand and evaluate possible outcomes in a trial. Mock juries provide an important opportunity to understand aspects of the liability arguments, get a sense of how the insured might be perceived by a jury, determine the current range of values for the injuries/damages at issue, and set a well-informed strategy for resolution.

Additionally, some industry associations have made understanding and getting in front of social inflation a top priority and are working to affect more transparency in litigation funding. One possible solution could be legislation that standardizes litigation funding practices and mandates the disclosure of certain terms and outcomes.

Looking ahead

Munich Re has a long-term track record of managing and responding early to the risk of change. The rise of social inflation as a loss driver has been identified and addressed through a clearly defined risk appetite and adopting coverage-specific restrictions for critical exposures within underwriting best practices.

To keep close to the social inflation topic as it evolves, Munich Re is taking a multi-disciplinary approach. Experts from across Munich Re have come together to form research groups and apply analytical processes across teams to better understand the impacts of different aspects of social inflation. Munich Re is also exploring new and non-traditional data sources—including economic data, public data, proprietary data available from data vendors, and industry reports—to help fully verify our point of view.

In conjunction with industry associations, Munich Re will continue to push for transparency and reform that addresses potentially adverse developments that arise in the insurance market. Insurance is a necessity for business and society to prosper; and ultimately, the cost of that protection needs to be sustainable for that to happen. In the long term, if not fairly addressed, social inflation may impact the availability of adequate insurance coverage, which in turn filters through society and impacts businesses and individuals alike.

Munich Re is uniquely positioned to bring our multi-disciplinary experts together to work with insurance company clients to evaluate the performance of their business and assist them with underwriting to better understand their business and address the changing risk landscape.

Munich Re Expert
Gerard Skalka
Head of Casualty, Munich Re America Inc.
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