Social inflation: turning the tide with advanced analytics
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Social inflation generates plenty of industry buzz these days, and rightfully so. It's driving up the frequency and severity of large liability claims and threatening the long-term sustainability of vital insurance products. But it doesn't need to be this way. To understand why, let's start with the bigger picture.
Not to be confused with economic inflation, social inflation refers to the sharp recent increase in the number of verdicts exceeding $10 million. But in truth, it can apply to any inordinately high jury award that's out of proportion with the facts in a case.
While hardly new, social inflation has been gaining traction over the last three years. In 2019, for instance, there was a 300% increase in the frequency of verdicts exceeding $20 million compared to the annual average from 2001 through 2010.
Within the past 24 months, there has also been an astonishing surge in multibillion-dollar awards – including a $301 billion verdict against a small local sports bar for allegedly overserving alcohol to a customer involved in an automobile accident.
Unchecked, social inflation will push up claims costs to the point where pricing no longer accurately reflects risk – putting pressure on insurer profitability. Ultimately, social inflation could impact capacity and even the availability of coverage across entire lines of business.
Many factors are propelling this phenomenon. Look at the societal shifts that took root in the wake of the 2008 financial crisis, which fomented distrust toward large businesses. This has contributed to a tendency among juries to sympathize with plaintiffs and deliver many shock verdicts.
But the most profound changes have occurred within the legal sector itself. An increase in third-party litigation funding, for instance, has allowed hedge funds and other financiers to invest in lawsuits in exchange for a percentage of any settlement or judgment – driving up the frequency of large claims.
Lawyers and consultants have also invested heavily in robust data, analytics, and other technologies to identify and exploit liability opportunities and find potential new clients and favorable jury members via social media. Where has it left insurers? Playing catch-up.
As an industry, we acknowledge the problem of social inflation and have begun to look for solutions. However, our response falls far short of our adversaries in the legal profession. Insurers are masters of understanding most claims trends, but we currently lack the right data, tools, and insights when it comes to broader litigation trends.
To maintain a healthy, functioning insurance market, we must address this gulf. Insurers must become well-versed in social and legal trends and view social inflation as a peril that can be analyzed and even predicted in much the same way as traditional risks such as natural catastrophes. Through the application of advanced data and analytics, I believe we can turn the tide.
To do this, we must first reframe social inflation as human risk. While traditional risks require data sets based on past records, modern insurance platforms enable the use of nontraditional data gathered from real-time data feeds such as Internet activities, social media, smart sensor technologies, and more.
As outlined in a new industry white paper, these and a myriad other data points provide insights about human behavior that can be analyzed at scale to build a predictive social inflation model.
By using advanced analytics, insurers can measure social inflation, appropriately price for social inflation, take remedial actions where necessary, and take on the plaintiffs lawyers that are currently winning the technological arms race. Letting social inflation run unabated isn't an option. The time to act is now.
