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AM Best: Social Inflation Key Factor in Rise of Loss Severity

May 13, 2024

According to the Best’s Special Report, “Social Inflation Remains a Thorn in the Side of Casualty Insurers,” the lines of business most affected by social inflation are commercial auto, professional liability, product liability and directors and officers liability insurance.

“Loss severity for these lines has exceeded the rate of economic inflation, in most cases by double or more, with social inflation likely being a key factor,” the report stated.

The average loss severity increase over the past decade to 2023 in the product liability line was 20.4%, compared with average annual economic inflation of 2.7%.

On the occurrence side, which captures excess liability and umbrella coverage, loss severity increased by an average of 11.1% in the last decade.

The increasing involvement of attorneys in commercial lines is leading to an ongoing rise in claims costs, which negatively affects insurer loss ratios, the report stated.

“The ‘social’ part of social inflation refers to shifting cultural attitudes about who is responsible for absorbing risk — the insurer or the plaintiff — and these dynamics continue to evolve, which makes social inflation tough to quantify and even more difficult for insurers to predict and mitigate,” said Justin Aimone, associate analyst, AM Best.

“The decline in confidence in big business, as well as in other institutions (e.g., federal government, banks), is a unique problem for insurers, because jury verdicts have shown that many believe a company bears some responsibility even in cases of injury due to misuse of a product,” the report added.

Third-party litigation funding also has been a factor in the rise of social inflation, contributing to worsening loss ratios for excess liability, commercial auto and general liability, leading to higher premiums for consumers.

Understanding how to manage portfolios and claims is expected to remain a critical aspect of insurers’ enterprise risk management to limit severe losses.

Carriers that best understand the nature of the risks in their portfolios and how longer durations will affect their caseloads have a better chance to make needed changes in actuarial parameters and assumptions to deal with social inflation more effectively, the AM Best report added.

Topics Trends Profit Loss AM Best

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