This article was produced in partnership with Munich Re US.
Social inflation is deemed a primary driver of escalating loss costs in the commercial liability market, and is posing a serious challenge to the US re/insurance industry and the businesses it insures.
The term ‘social inflation’ refers to the impact that societal factors – such as legal advertising, litigation funding, expanding class-action lawsuits, public distrust of corporate defendants, and so on – can have on insurance claims, jury awards, and settlements. While social inflation appears to exist across most commercial liability risk classes, it has been most prominent in bodily injury and wrongful death claims.
There are multiple factors driving social inflation, according to Michael Frantz (pictured), SVP and Head of Claims, Munich Re US. One notable factor is what appears to be the “ever-increasing aggression” of many attorneys of plaintiffs’ bar and the skills and strategies they use to litigate cases.
“In addition, the plaintiffs’ bar is largely succeeding at tapping into the general unrest that US society is facing – [using] everything from the political polarization to socioeconomic issues,” said Frantz. “They’ve become very adept at tapping into jurors’ emotions to try and make their arguments resonate. I think the plaintiffs’ bar has been far more effective in this regard to date than the insurance industry or the defense bar.”
Social inflation is not a new issue, but the re/insurance industry has been hindered in addressing it due to a lack of readily available and timely data, and the inability to segment individual social inflation factors in data that is available.
In the past 10-years, the re/insurance industry has used metrics (e.g. median damages awarded in wrongful death lawsuits) to try and gain a better understanding of the impacts of social inflation, but as Frantz put it: “The dots are not always easy to connect.” The term ‘social inflation’ is now better understood amongst re/insurers and the businesses they insure, but finding a solution to the issue remains challenging.
So far, the lines of insurance business most impacted by social inflation in the US are commercial trucking, medical malpractice insurance, professional liability, directors and officers (D&O) liability, and product liability. These lines of business are all currently experiencing hard market conditions. As insurers increase rates and restrict coverage to try and combat poor loss ratios, policyholders are essentially paying the price
“Social inflation is a factor in any area where the plaintiffs’ bar has become adept from a scientific, psychological, and social standpoint at stoking jurors’ fears, anger and other emotions,” Frantz emphasized. “For example, it’s quite common in medical malpractice cases where, real or imagined, the outcome [of a medical procedure] is not what was expected. Unfortunately, in civil cases, while it’s easy to blame the medical professional [even if] not always easy to establish the burden of proof that the medical professional was liable for the result, the plaintiff bar remains intent on bringing many of these cases and hoping they can prevail upon jurors’ emotions.
“It ties into the current societal perceptions that there’s no such thing as an accident anymore. Somehow, it always has to be somebody’s fault, and that’s something that the plaintiffs’ bar has been very good at emphasizing. They’ve managed to erode some of the historical norms or parameters [around safety, security, and reasonable duty of care] and they’re far more willing, through the trial tactics they employ to provoke the ire of the judge if they think their message will ultimately resonate with the jury.”
Insurers have several options available to help control the risk of social inflation, such as re-underwriting their portfolios, managing limits, and requiring risk adequate pricing. Munich Re US encourages firms to take a broad approach using a cross-functional team with expertise in claims, legal, underwriting, actuarial, and data analytics in order to better understand the risk and improve the commercial liability business segment.
“One thing that has hampered the insurance industry is its historical focus on controlling legal spend and defense costs. That’s a prudent and practical strategy, but at times, it seems quite ‘penny wise, pound foolish’,” Frantz told Insurance Business. “I think carriers need to recognize the necessity for appropriate investments in litigation that [are critical for] properly preparing their cases. It comes down to getting a better understanding of the psychology behind what’s driving the plaintiffs’ bar and their trial strategies or tactics, and also better preparing defense witnesses for where the plaintiff attorneys will likely try and take them.”
“We are strong advocates of mock jury exercises and trying to understand earlier on in the lifecycle of a case how the defense’s [arguments] might resonate with the average lay person. That exercise will require some upfront expense, but it will enable [insurers/defendants] to recognize what they’re up against at an earlier point in time, and how well their defense arguments and witnesses will resonate with a jury. Then they can pivot, if necessary, to use differing tactics or explore settlement at an earlier point in the case and prior to allowing a jury to price the case.”
In recent years, re/insurers and industry associations have been raising awareness about the negative impacts of social inflation. For example, the Claims and Litigation Management (CLM) Alliance launched an education campaign in 2020 to educate both insurance companies and their lawyers about the dynamics that are driving nuclear jury verdicts (which are awards of $10 million or more). The Reinsurance Association of America and the American Property Casualty Insurance Association have also become active in this space.
“Social inflation is not going away,” Frantz added. “While the insurance industry is better informed these days about how to combat this, I think we’re still behind the plaintiffs’ bar and there’s a lot more to learn.”
Michael A. Frantz is a Senior Vice President and Head of Munich Reinsurance America, Inc.’ (“Munich Re US”) Claims Department. His primary responsibilities involve ensuring the delivery of proper claims support and services for Munich Re US’ Business Development, Property, Casualty, Specialty and Facultative Underwriting operations and their customers. During his 30 years at Munich Re US, Michael has held numerous leadership roles within the claims function. With over 38 years in the re/insurance industry, Mike holds a JD from Widener University School of Law and a BS from the Pennsylvania State University. He is admitted to practice law in Pennsylvania and New Jersey.
Author: Bethan Moorcraft