“Claims inflation for the commercial liability business will increase through 2020, although it was accelerating even before the coronavirus pandemic hit. This trend, known as social inflation, ….”
SOCIAL inflation is claim inflation (for commercial insurance lines?) ?!
” …has led the insurance industry to reduce capacity and increase prices to try and re-establish profitability and prevent reserving deficiencies.”
No, the insurance industry does not decrease capacity in response to CLAIM inflation. There are several ways to address CLAIM inflation. Some insurance companies will decrease offerings such as limits and coverage options. Those changes are mistakenly assumed to reflect capacity changes. They are underwriting preferences that mitigate the risks assumed by insurers in line with their appetite for risk assumption. The capacity is re-directed to others exposures that allow the insurer to meet their survival and stability goals.
CLAIM inflation is addressed by economic means and underwriting criteria. Social inflation is only one component of CLAIM inflation.
“Social inflation has been caused by higher frequency of litigation, a broader definition of what constitutes a liability and juries that enact more plaintiff-friendly legal decisions.”
This is correct. The opening paragraph incorrectly equates CLAIM inflation with SOCIAL inflation. And frequency of litigation is partly, if not largely, caused by political shifts in jurisdictions. But, that’s a trivial remark. It’s equivalent to saying the Earth’s climate is changing. But it’s not like saying MAN alone is the only reason for climate change.
“The pandemic will reinforce this hardening market trend as substantial additional losses occur. On a global basis, price increases may reach double digits in commercial liability, driven mostly by D&O. Besides rate actions, underwriters will further tighten risk selection practices, and policy terms and conditions to include pandemic exclusions across a broad swath of coverages.”
Ugh! … where do I begin to respond?
The pandemic is an aberration, such as a very large natural catastrophe loss. It will momentarily affect rates and capacity assigned to certain lines, geo sectors (jurisdictional segmentation, not geo-physical segmentation per NatCats). Wiser insurers with high levels of capacity may not raise rates by double digits in order to retain its current preferred portfolio and perhaps attract desirable risks exiting other carriers that panic by severely raising rates.
The paragraph excerpted from the article does have the key actions that will occur; i.e. the underwriting tools of risk portfolio management. Further, and to clarify; risk selection shifts will largely occur through coverage changes in the short term and risk portfolio shifts to more favorable political / judicial zones over the long term.
The trouble with social inflation is that sooner or later, juries and judges are going to run out of other people’s money. You can only pull on that teat for so long before you kill the cow.
“Claims inflation for the commercial liability business will increase through 2020, although it was accelerating even before the coronavirus pandemic hit. This trend, known as social inflation, ….”
SOCIAL inflation is claim inflation (for commercial insurance lines?) ?!
” …has led the insurance industry to reduce capacity and increase prices to try and re-establish profitability and prevent reserving deficiencies.”
No, the insurance industry does not decrease capacity in response to CLAIM inflation. There are several ways to address CLAIM inflation. Some insurance companies will decrease offerings such as limits and coverage options. Those changes are mistakenly assumed to reflect capacity changes. They are underwriting preferences that mitigate the risks assumed by insurers in line with their appetite for risk assumption. The capacity is re-directed to others exposures that allow the insurer to meet their survival and stability goals.
CLAIM inflation is addressed by economic means and underwriting criteria. Social inflation is only one component of CLAIM inflation.
“Social inflation has been caused by higher frequency of litigation, a broader definition of what constitutes a liability and juries that enact more plaintiff-friendly legal decisions.”
This is correct. The opening paragraph incorrectly equates CLAIM inflation with SOCIAL inflation. And frequency of litigation is partly, if not largely, caused by political shifts in jurisdictions. But, that’s a trivial remark. It’s equivalent to saying the Earth’s climate is changing. But it’s not like saying MAN alone is the only reason for climate change.
“The pandemic will reinforce this hardening market trend as substantial additional losses occur. On a global basis, price increases may reach double digits in commercial liability, driven mostly by D&O. Besides rate actions, underwriters will further tighten risk selection practices, and policy terms and conditions to include pandemic exclusions across a broad swath of coverages.”
Ugh! … where do I begin to respond?
The pandemic is an aberration, such as a very large natural catastrophe loss. It will momentarily affect rates and capacity assigned to certain lines, geo sectors (jurisdictional segmentation, not geo-physical segmentation per NatCats). Wiser insurers with high levels of capacity may not raise rates by double digits in order to retain its current preferred portfolio and perhaps attract desirable risks exiting other carriers that panic by severely raising rates.
The paragraph excerpted from the article does have the key actions that will occur; i.e. the underwriting tools of risk portfolio management. Further, and to clarify; risk selection shifts will largely occur through coverage changes in the short term and risk portfolio shifts to more favorable political / judicial zones over the long term.
The trouble with social inflation is that sooner or later, juries and judges are going to run out of other people’s money. You can only pull on that teat for so long before you kill the cow.