The phrase “social inflation” has been appearing in the insurance world more and more often – but what does it mean, in particular, for the Professional/Financial Lines sector?
Social Inflation generally refers to the noticeable rise in insurers’ liability costs above and beyond acceptable annual cost-of-living inflation. Because these costs don’t appear on any of the usual state-of-the-economy media reports, the resultant increases in insurance costs can often be perceived by customers as unexplained at best, unfair, or punitive at worst, and are equally a constant concern for insurers trying to maintain profitability.
Although in the UK insurance market social inflation has been regarded as relevant to claims generally how does it affect claims against professionals, directors, and financial institutions?
The claimant cohort is always looking for profitable markets and Professional/Financial lines is not a market that will escape their search for margin. In the United States social inflation is fuelled by more and more generous jury damages awards obtained by the Claimant bar playing on the increased distrust and antipathy to corporations and the perception of corporate greed. Thankfully we don’t appear to have that exact problem in the UK as we have no jury in civil matters. However, we have historically seen what is perceived to be lenience to Claimants, especially where any doubt in outcome is encountered. We see this as more prevalent in recessionary or economically difficult times and this will increase damages awards.
No doubt there is an increased distrust/antipathy of the corporate world and Insurers are seen as part of this leading to a greater likelihood of a more generous approach to awards.
In the Professional/Financial lines sector increasing litigation costs undoubtedly contribute to social inflation, with long-drawn-out, document-heavy, proceedings increasing the cost of claims to insurers.
In addition, hedge fund managers and financial-market players are funding litigation in large claims often targeted at professionals seen as a possible money-making opportunity. A recent Insurer survey concluded that over 65% of the worldwide claims they dealt with were fuelled by third-party funders. Funders are showing signs of moving into lesser-sized claims and this can only serve to drive up both cost and claim settlements.
Claims farmers targeting specific claim areas are always more active in a recessionary/economically difficult market, often operating in smaller-level claims, but having an incremental impact on the costs of claims generally.
Cybercrime has changed shape over the years, with the masterminds understanding that bigger targets mean bigger rewards. They target large professional organisations holding massive databases, thus incurring ever higher costs to prevent, protect or insure data infrastructure and confidential records. Medium-sized enterprises are increasingly targeted amplifying the increase in this area of claim costs.
We’ve seen the recent effects of the global COVID-19 pandemic on friends and family – but it also impacted businesses and corporations, who called upon their insurance cover to assist with business losses.
The geopolitical instability in Eastern Europe has caused a massive domino effect for many businesses, including construction and construction professional businesses, placing pressure on material costs and delays due to already-stretched supply lines.
And while some insist it’s “not a thing”, you only have to look at recent satellite images of Europe’s ski resorts to understand that climate change will have an increasing impact on business sectors and will drive future claims. ESG claims and allegations of “greenwashing” are only going to add to the costs of social inflation on claims.
Over time, these increasing costs will likely further harden the insurance market, with carriers possibly looking to impose higher customer excesses or even decline to offer cover in certain sectors or tiers. And a hard market and higher costs – especially in the litigation and cyber sectors – will likely provide a breeding ground for internal corporate fraud.
What should the defendant’s lawyer’s response be? We must help to ameliorate the effects of social inflation by working hard (and efficiently) to reduce damages driven up by social inflation and by providing Insurers with solutions to claims where social inflation is a factor.
Leverage of legal developments. The courts from time to time re-assess the law on liability and causation (for example the recent Manchester Building Society decision) and defendant lawyers need to work on ways to leverage these decisions to their advantage (although that may not be easy in the Manchester Building Society case!).
The courts are constantly reviewing rules to speed up the litigation process and to make it more efficient. Cost budgeting, limits on the size of witness statements and the disclosure menu and ancillary reforms to the disclosure process are all measures that defendant lawyers need to embrace and enforce.
Predictive analysis (1). To ameliorate the social inflation effect on costs, more than ever, Defence lawyers must help insurers assess the sweet spot for settlement and which claims are likely to move from the initial settlement phase to litigation
Predictive analysis (2). Insurers need to be given methods of identifying fraud and reacting effectively. At Crawford Legal Services our fraud team is constantly, and successfully, working to provide these solutions.
Trend Analysis. More than simple provision of MI, lawyers must collaborate with Insurers to assess the effect of social inflation trends and identify emerging risks. This is best served by monitoring trends across jurisdictions; something that we can achieve with our global coverage in the legal and adjusting spheres.
Reserving adequacy. Individual claim reserving is always crucial, but lawyers need to be aware of the need to ensure adequacy of reserves in the light of social inflationary pressures by reacting to particular problem areas (such as the increased costs of material in construction claims) and by regularly discussing the effect of social inflation on sector reserving with Insurer clients
Gordon Walker, Head of Professional Indemnity and Financial Risks at Crawford Legal Services says
“While educating consumers to what’s contributing to social inflation can only be a good move, there’s more that must be done, especially in the field of Professional Indemnity. This is an opportunity for businesses and carriers alike to focus on their cover and to consider an integrated claims response to social inflation and future threats. As part of Crawford & Company, my team is uniquely placed to take a 3600 view of Profin and Financial Lines cover and how we can work with Insurers to ameliorate the problem of social inflation.”