GL TRENDS UPDATE
Social inflation Rising insurance claim costs due to social, political, legal and economic developments is a major risk the insurance industry will face in the immediate future. General trends driving social inflation include increased litigation, distrust for large corporations (news and social media contributing to this sentiment), growth in litigation funding, larger compensation awards, broader definitions of liability and more plaintiff-friendly legal decisions. Large public companies are particularly vulnerable to the impacts of social inflation in the product liability, D&O and E&O space (for example pharmaceutical, food manufacturers/distributors and medical device manufacturers). In Australia (like the US) there are a number of potential liabilities that will be driven largely by social inflation, for example, those related to opioids, obesity, football concussions, climate change, electronic cigarettes, weed killers and polyfluoroalkyl substances. It is expected the effects of the COVID-19 pandemic will likely exacerbate social inflation. In Australia through 2020 and 2021, staff have generally had to work from home and most of the court systems were significantly curtailed because of the lockdowns and social distancing measures. Court closures have slowed the resolution of cases and resulted in a backlog. It’s expected the backlog and delays will have an effect on the value of the cases resulting in larger settlements and judgments.
An insurer’s values, objectives, strategies, leadership, accountability, communication, positive reinforcement, incentive structures and diversity and inclusion will all promote a desirable culture leading to good outcomes. A sound culture will also contribute to an insurer’s ability to adapt to changing and stressful situations. In Australia, for example, insurers have had to deal with COVID-19 at the same time as natural disasters, including bushfires, hailstorms and floods. They adopted a number of practices to demonstrate a customer-centric culture, including proactively contacting customers and waiving some documentation requirements. Responses such as this increases public trust and moderates the impact of social inflation. Other tools to manage the impact of social inflation include the use of technology to identify emerging risks and quantify exposures, implementing trial and litigation strategies, empathetic claims handling, understanding the plaintiff’s objective / expectation early, insurer representation at trials and mediations (personalising the company), developing alternative theories of liability in the case, successfully appealing verdicts, presenting a reasonable quantum value to the Court and combatting third party funding. In Australia, a government committee has recently recommended temporary rules designed to insulate companies and their executives against class actions during the COVID-19 pandemic be made permanent. The committee was scathing of the litigation funding sector, accusing it of using the justice system for the primary motive of generating a return on investment.
There have also been two class actions that have recently been filed in Australia against insurers for failing to cover business interruption losses during extended lockdowns and we expect an increase in claims in the coming years.
Response by insurers
Insurers have been watching closely the impact of social inflation and considering the need to prepare for it. The issue for insurers with social inflation is it can take years to discover that the loss trends are higher than anticipated at pricing when the policy was originally written. Increasing premiums and expanding exclusions “is not proactive exposure management”. Further, premiums rising faster than claims costs has been linked to social inequality, which will present a danger for the insurance industry in the future in terms of public trust in the sector. There are a number of tools insurers are developing to manage the impact of social inflation. It is crucial for insurers to consider social inflation in all aspects of the business from pricing, underwriting and actuarial projections, through to case reserves and ultimately payouts of liability claims. At an organisational level, insurers have identified that promoting a desirable insurer culture leads to good outcomes for insurers and policyholders, reduces the potential for widespread misconduct and maintains public trust and confidence.
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