I’ve never really understood how people can state social inflation is driving factor in increased claims severity.
Social inflation being increased litigation, increased jury awards, nuclear verdicts, and increased propensity to litigate from policy holders, but how is this stuff tracked?
It seems like any generic executive could say “We need to raise rates in part due to social inflation” and there wouldn’t be any data to back it up.
If social inflation includes changing perspectives on corporations and insurers, that implies there was EVER a time when members of a jury were all “You know, we should go easy on the big company, they’re pretty swell” When would a jurist ever miss an opportunity to stick it to the man if they could.
Which brings me here, what is the data that supports these claims about social inflation(like it’s somehow a new thing over the past 10 year, maybe we just didn’t invent a new phrase to describe an existing phenomenon.)
Any ways, social inflation, I understand conceptually what it’s supposed to represent, but for the believers out there, what the facts that can convince you?
It’s pretty easy to track this stuff. Insurance companies track how much the average claim paid severity is, then divide out what the severity usually depends on that is not social… eg medical, wage, etc. Then what’s left can be termed social. It’s not made up if there is something left.
It is beyond me how juries think, but surely at some point juries realized that sticking it to a company means sticking it to its future policyholders, if there are any, and they’ve forgotten it by now.
Social inflation is a real phenomenon. Juries certainly tend to punish certain corporations harder than small mom & pop shops, nuclear verdicts exist, etc.
That said, when measuring it, I find it is most often just an ‘all other bucket’. If you have x causes of inflation that are easily measurable (wage increases, costs of materials, etc) and those measurable causes explain 6% of a 9% increase in severity, then the other 3% must be “social inflation”, which means it might also be capturing some process variance in the deal, though over a long enough period hopefully that averages out to something small.
Thanks @Mountainhawk and @An_actuary , it sounds like you’re saying the same thing. “Social inflation” is sort of synonymous for “not attributable to specific factors inflation”.
I suppose if that’s the case then can be easier to see how your “social inflation” has changed over time by reviewing attributable vs attributable claims severity trend year over year. then you could quantify the social inflation.
Yeah because lawsuits are always for explicit amounts eg wage loss and medical and pain and suffering. So it is easy to measure the unattributable against the attributable inflation. It’s not like the underlying losses are a mystery
IMO, social inflation has been present for decades. [“We’ve always been at war with Eurasia.”] I can remember this being mentioned in the 1980s when I was in high school wrt large jury awards in medical malpractice and other major liability lines and the need to have tort reforms to rein those in. I’m pretty sure it was mentioned in the 1970s for the same thing. The question for me is why is it so different now and *how does it impact recent data so much more than prior history?" That’s where I think a lot of attention is being paid, and the presumption is it’s worse now without data to really back that up.
If one is trying to isolate the causes of general claim inflation, then MountainHawk’s approach makes sense - but one would expect to see an increase in the “all other” trend over time. It’s not clear that’s occurring. My impression has long been that claim reserving gets more optimistic the longer claims stay open, so sudden increases get explained away as “social inflation” when in fact it’s more random chance / an unrealistic expectation of the final result. Sure, it could be because of jury verdicts, but I think it’s much more lax initial underwriting / finding exposures in things that are not explicitly excluded / inflation in settlements that have a medical component, where medical inflation is rising significantly more than reported.
Yes, but also, you can look at the propensity of claims to end up in court (varies a lot from time to time) as well as the amounts awarded for “pain and suffering” and other hard-to-quantify damages.
Do you realize that the average severity for the largest casualty claims that happen in 2025 cannot really be adequately measured until 2055 at the earliest?
What’s stupid is it’s already there in the data we base our trend selections on, so we’re already freaking accounting for it in our projections. There’s nothing that’s actually accomplished with the amount of bloviating the industry does on it.
But I not infrequently hear some non-technical people talking like we can add some new ADDITIONAL factor to our calculations and processes and somehow squeeze out some extra revenue, and that’s just a waste of time and energy.
This annoys me too. When you do an indication, you look at severity trend, which includes all sources of inflation, we don’t need to overly hype social inflation like we’re ignoring it. Social inflation is already embedded as a consideration in severity trend.
I think you can gain insight into your claims practices by trying to separate social inflation vs more clearly defined sources of inflation, but it’s not like actuaries deliberately ignore causes of raising claim costs.
Making the distinction between “normal trend/inflation” and “social inflation” becomes important in a few cases.
I currently work in capital modeling. Not only do I need to account for trend when drawing information from prior experience, but I’m also tasked with opining on the variability upcoming results.
I have a model that I can use to account for changes in loss payments due to changes in inflation and other economic variables coming from the economic scenario generator I use, but I also have to do something to account for non-economic volatility in future payments AND I have to consider different elements of potential trend in building/updating that model.
Before I started working in capital modeling, I supported a sequence of niche P&C products, several of which were potentially more susceptible to social inflation concerns (c.f. my law enforcement liability comment above), and where I rarely had enough data to do my own trend analyses, and where my products were such that using (for example) ISO trend circulars was problematic.
During that past life, I had some “interesting” discussions with other actuaries at my company, who handled the more normal/mainstream products who criticized my insistence that a flat x% trend wasn’t always appropriate – that I could point to specific places where trend changed for one reason or another.
But in mass media…yes, it probably is fair to criticize the attention being given to “social inflation” as something new and distinct from traditional inflation/trend. However, we are in an environment where the P&C industry is being pressured on the rate changes being sought, and having a general umbrella term to capture specific drivers for our increased trend is useful in the public policy discussions, as well as discussions with the regulators.
I, also, often worked with data too thin to use it alone as a source of trend information. I showed management scenarios and ranges based on economic inflation with various assumptions about future social inflation. It was important to me to separate them as there are much better external sources to predict economic inflation trends than social inflation trends.