Social inflation. There’s a good chance that you’ve never heard the term before. Nonetheless, it appears to be a hot topic, particularly in the insurance industry.
What is “social inflation”? It’s hard to say, because proponents offer varying notions. To my mind, the National Association of Insurance Commissioners offers about as good a start to defining it as any: It “is a term that describes how insurers’ claims costs are increasing above general economic inflation.”1
This definition has the virtue of being testable. You simply need to define what’s included in claims costs, determine the annual rate of inflation of those costs over some defined period of time, and compare that rate to some suitable measure of general economic inflation. This form of analysis is done in other economic sectors. For example, the U.S. Bureau of Labor Statics maintains a Consumer Price Index for College Tuition and Fees,2 which can be compared the CPI-U or some other measure of general inflation to determine how rapidly college costs are rising.
This definition is also helpful analytically. For example, using this definition you quickly identify three potential reasons for inflation: (1) higher settlements and judgments; (2) more frequent claims; and (3) greater litigation and other claims-handling expenses.
Contrast this with a definition offered in a Wall Street Journal article, which defined social inflation as:
an upward creep in perceptions by an injured party of what they are owed, their willingness to pursue that via the legal system, and what that means for insurance policies covering companies’ liabilities.3
In comparison to NAIC’s definition, this one is nearly useless, too vague and subjective to support research to identify the existence or extent of social inflation. How, for example, is one to document or measure the “perceptions” and “willingness” of injured parties in any systematic, objective, and reliable way?
I’m not the only one who has noticed this. As one insurance executive put it, “The concept of social inflation is hard to define, which makes it hard to find empirical evidence that supports or disproves it.”4
I agree that a failure to offer a clear, objective definition of social inflation precludes efforts to support or disprove it. But I disagree that formulating a clear definition is all that difficult.
Difficulty only emerges once you try to include some specified list of causes or symptoms in your definition. One author identifies over a dozen definitions used by others, all but half of one describe causes or symptoms rather than the inflationary phenomenon itself.5
It seems to me that any objective definition of social inflation must incorporate two elements. The first element: claims costs are increasing at supra-inflationary rates. The second element: this increase in claims costs is caused by something other than the features of the claims themselves.
The discussion below addresses each of these elements before turning briefly to one final question: Does the possibility of social inflation have any practical implications for lawyers handling individual claims?
Are claims costs increasing faster than inflation?
Are claims costs increasing faster than inflation? If you ask the insurance industry, the answer is an emphatic “yes.” Their websites point to an increase in the number of jury awards over $1 million and the increase in so-called “nuclear” verdicts.6
According to consumer advocates, the answer is a defiant “no.” As one fire-bellied author put it:
Insurance companies are very fond of increasing their policyholders’ premiums and then crafting an explanation for the hikes that fits their interests, even if it doesn’t fit the data. Their latest fable: that rampant premium increases for businesses, non-profits, doctors, and truckers among other commercial insurance policyholders are the result of a new trend the insurance industry has dubbed “social inflation.” According to this account, lawyers, lawsuits, judges, and juries are suddenly becoming more aggressive and endorsing massive payouts in court, causing insurance costs to spike. But is this story true?7
In case you’re wondering how the article answered its own question, it’s “no.”
Another article by the same group challenges the assumption that insurance payouts have increased, and attributes apparent increases in claims costs to over-reserving for losses:
For example, in the decade before . . . 2020, the [insurance] industry’s own data showed that total commercial insurance payouts had not spiked and generally tracked the rate of inflation and growth of population. In order to increase premiums in 2019 at the start of the most recent hard market, insurers used an accounting trick to inflate their “incurred losses” by increasing or padding reserves — the money set aside to pay claims — despite, at the same moment, experiencing no increase in payouts or any trend suggesting large future payouts. This “over-reserving” is part of a decades-long pattern, often politically inspired and used by insurers as a way to show poor income statements, which it then uses to falsely claim large “losses” and, in turn, to justify imposition of large premium increases.8
So, who’s right?
Reliably answering this question requires hard data. And that is almost entirely missing from the public discussion. A few articles present rates of inflation for claim expenses or verdicts, but these claimed inflation rates find no support in the cited sources. For example, one article cites another article for the proposition that average bodily injury claims rose by 31% from 2008 to 2017.9 The cited article cites yet another article for this proposition.10 And that article cites a report without providing a link to it. In any event, it notes that average insurance payout for bodily injury claims under auto policies grew 3.1% per year, just above the inflation rate. But was this due to social factors, or might the imbalance have been due instead to the singular drop in inflation during the Great Recession and its aftermath? The article does not trouble itself with this question.
Notably, most publications treat supra-inflationary cost increases as a given. From this assumption, they rush to suggest causes or to propose solutions.11 As noted above, others seem to assume that simply by identifying potential causes of social inflation, they’ve somehow proven that social inflation exists, an obvious logical fallacy.
Those who do tackle the question almost always fall back on a handful of anecdotes concerning extremely high jury (or “nuclear”) verdicts.12 Reciting a handful of bad outcomes may make for compelling storytelling, but it is no substitute for careful, data-driven analysis.
I’ve found one oasis in this analytical desert, the above-cited article entitled “Social Inflation and Loss Development.”13 Focusing on claims under automobile liability policies, the article found evidence to suggest that the increase in claim size in three lines of insurance business, including auto policies, was lower than inflation from 2000 to 2009, and higher from 2010 through 2019.
The upshot? Increases in the costs associated with at least some claims may have outpaced inflation over the last few years. But more published research is needed to prove even that point, and the point itself is notably limited. This has consequences when we turn to the possible causes of social inflation.
If increases in claims costs are outpacing inflation, why is that?
Let’s assume, least for sake of argument, that claims costs have been increasing at supra-inflationary rates over at least the last few years. What might be the cause (or causes)?
Here the evidence is woefully lacking. One can conceive of a variety of factors that could contribute to fluctuations in claim expenses without the need to resort to social inflation as an explanation. These include economic cycles (anecdotal evidence suggests that certain claims are more likely to be brought during economic downturns); the availability of first party insurance or some other safety net; the generosity of employment policies; and fluctuations in activities, e.g., significant corporate transactions, that can lead to major claims. It is also possible that rates of change in claims costs fluctuate over time, as the author concludes in “Social Inflation and Loss Development.”14
Equally, one could posit that poor defense or insurance practices can contribute to larger claims. For example, some in the insurance industry have suggested that the insurance industry has been “hampered” by an emphasis on “controlling legal spend and defense costs,” which “has come at the expense of efforts to contain swelling indemnity numbers.”15 In other words, insurers don’t pay enough for defense counsel and consultants.
None of these factors, however, seems to garner much attention. Instead, the focus has invariably been on the fault of a number of participants in or observers of the civil justice system, as follows.
Courts and Legislatures
One target of blame for the rise in claims costs are courts and legislatures. They are responsible for the following problems (and make no mistake, proponents of social inflation identify these as problems).
Expanded policyholder rights. Three items come up in particular: “unduly broad interpretations of insurance coverage by some courts,”16 extension of insurer bad faith liability beyond “egregious” misconduct, and expanded statutory rights,17 which no doubt would include Washington’s Insurance Fair Conduct Act18 and Oregon’s Environmental Claims Assistance Act.19 The bias in these complaints is apparent. For example, where one advocate complains about “unduly broad” policy interpretations, one can point out that these interpretations are often down to ambiguities. So rather than blame inflation on poor judicial reasoning, why not blame it inflation on poor underwriting practices? My point is: Where you place the blame often depends on your biases and preconceptions.
Erosion of tort-reform, especially caps on non-economic and punitive damages. Insurance industry websites often posit this as a cause of social inflation, and one reads claims that the civil justice system is “highly flawed” and that some tort reform “would materially benefit state economies.”20 The National Association of Insurance Commissioners, meanwhile, reports that “the research on this is not conclusive.”21
Individual judges. Another target of insurer criticism are judges, who issue “more plaintiff-friendly legal decisions,” and who are “no longer content to simply ‘trust authority.’”22
The Plaintiffs’ Bar
The plaintiffs’ bar is blamed for such things as “increases in attorney advertising,” the use of “social media and analytics” to find more clients and “pro-plaintiff” jurors, and “aggressive” lawyers who “are becoming savvier, playing jurors’ emotions to make them more likely to rule in favor of the plaintiff,” regardless of the facts. Even if true, haven’t members of the defense bar also become better at these things? If not, why not?
The plaintiffs’ bar is also blamed for an (alleged) increase in class actions. This is curious, since social inflation is generally identified as a problem with automobile liability, an area of practice not known for class action practice. In areas that are known for it, such as securities class actions, the record is mixed. According to 2021 report by NERA Economic Consulting, class actions were down 15 years ago, then went up, and then went down again, at least a little bit, in 2020.23 This comports with the fluctuating pattern in several insurance lines reported in “Social Inflation and Loss Development.”24 I have a hard time squaring these up-and-down fluctuations with some broad, upward trend that is attributable to major societal changes rather than more individualized or limited circumstances. Indeed, NERA Economic Consulting identified a number of factors that contributed to trends in securities class action litigation or that correlated with higher settlement figures over the preceding nine years.25
Juries
Jurors come in for a lot of blame too. Some insurers vaguely point to the “changing composition of the jury pool” as a cause without saying what those changes are.26 Or they claim that juries are increasingly willing to impose liability regardless of the facts or a defendant’s negligence.27 No hard data attend these claims, but I’ll note that the latter complaint was around when I got out of law school in 19-- . . . oh, never mind.28
Jurors are cited for their distrust of corporations and insurers. Social inflation advocates suggest that such public distrust can lead to jury sympathy for plaintiffs.29 That seems plausible in abstract, but supporting this claim requires hard data that show both material shifts in jury attitudes and a correlation between those shifts and higher verdicts.
“The Media”
Many articles blame social inflation on traditional or social media. One insurer complains that ideas can be shared through social media “and can affect how people feel about certain issues,” while lamenting the traditional media’s impact on the “perception of how the value of money has changed.”30
Litigation Funding
Litigation funders are blamed for increasing insurance payouts, apparently by funding lawsuits that might not otherwise have been brought (or, at least, not brought very well). One article bemoans that litigation funding allows plaintiffs to “retain the most effective (and expensive) vendors in the business, and pursue data-driven strategies,” as though this is an entirely bad thing.31 Another article by the same authors complains that litigation funding prevents better-funded insurers and defendants to leverage “unfinanced plaintiffs” to accept “attractive offers.”32
How you feel about this probably depends a lot on your abstract views on lawsuits more generally. If you view them as an essential vehicle to hold the wrongdoers accountable, then you’ll probably view the advent of litigation funding as a good development. But if you fundamentally view lawsuits as problematic and abusive, you probably won’t.
Unless a significant percentage of cases are being supported by litigation funders, it is difficult to see how it could make a sizeable overall impact.
The Welfare State
One article, published in 1989, goes so far as to suggest that social inflation is “one of the negative side effects of the development toward welfare states.”33 This is perhaps the most overly political claim about social inflation.
Conclusions on Cause
Several things stand out about this list of potential causes.
First, they consist of a variety of complaints about just about everyone involved in the civil justice system except tort defendants and their injurers. In every case, the complaint comes with some moral judgment: other parties cause social inflation because they are “entitled,” “angry,” “unreasonable,” are unwilling to follow the law.
Second, these complaints are all premised to a large degree on the presumption that when it comes to determining the reasonable value of an injury or a case, defendants and their insurers know best. Plaintiffs who disagree are unreasonable or greedy. Now, it’s true that any lawyer who’s defended cases has more than a few stories of unreasonable plaintiffs or unreasonable counsel. But the converse is true for lawyers who’ve represented plaintiffs.
Finally, these complaints are all premised on a judgment that the changes cited are universally bad. But are they? For example, are juries statistically more willing to impose liability without fault, as many allege? Or are our society’s ideas about what constitutes wrongful behavior changing? There is clear evidence of the latter. To see that one only needs to look at how prevailing standards in the workplace have changed: Behavior that once might have been viewed as innocuous is now recognized as highly problematic.
In other words, even if social inflation exists, that doesn’t mean that it’s all or even mostly a bad thing. It can be a challenge for actuaries and underwriters who are trying to calculate premium rates. But it might be a reflection that society as whole is better than it was. And we all know that better typically costs more.
What (if anything) can lawyers do about social inflation (if it exists)?
We come to the conclusion and one final question: If social inflation exists, what are individual lawyers supposed to do about it? The only answer I can think of is this: The same things good lawyers have always done. In relevant part, good lawyers on either side of the “v.” need to value cases as early and as effectively as possible. Where appropriate, they need to explore early and efficient discovery whose purpose is to serve this valuation purposes. Finally, when these early investigative requests reveal challenges for either side, they need to explore early resolution.
And when it comes to valuing the case in front of me, I disregard broad, ill-defined concepts like “social inflation” entirely. In my own experience – yours may differ – the best way to resolve a case to your client’s advantage is to focus not on “society” around you but on the case before you.
How’s that for an idea?
1 NAIC Center for Insurance Policy and Research, Social Inflation, available at https://content.naic.org/cipr-... (last updated August 23, 2023).
2 See Data.bls./gov/timeseries/CUUR0000SEEB01?output_view=data.
3 Telis Demos, The Specter of Social Inflation Haunts Insurers, Wall St. J. (Dec. 27, 2019).
4 Jim Lynch and Dave Moore, Social Inflation and Loss Development 1 (Feb. 2022) (quoting Christopher Mackeprang, Quantifying Social Inflation–Jury Awards, Income Inequality, and the Bronx Jury Hypothesis), available at http://bit.ly/3hEToZp.
5 Id. 1-3.
6 See, e.g., Social Inflation and the Insurance Industry https://amtrustfinancial.com/b....
7 Consumer Federation of America, Unpacking the Insurance Industry’s “Social Inflation” Lie, available at https://consumerfed.org/unpack...
8 Consumer Federation of America and the Center for Justice & Democracy at New York Law School, Inventing Social Inflation 2023.
9 Scott M. Seaman & Jason R. Schulze, ALLOCATION OF LOSSES IN COMPLEX INSURANCE COVERAGE CLAIMS §19:2 (hereinafter “ALLOCATION”).
10 The Institutes, New Study finds that Auto Injury Claim Severity Pushes Insurance Costs Higher, available at https://insurance-research.org...
11 See, e.g., Social Inflation and Loss Development 4, supra note 4 (“Notably, whereas much of the discussion focuses on the causes of social inflation, considerably less time is spent examining data for the presence of social inflation.”)
12 For one example of this, see ALLOCATION § 19:2.
13 See supra note 4.
14 See supra note 4.
15 ALLOCATION § 19:3.
16 See, e.g., ALLOCATION §19:4.
17 Id.
18 RCW 48.30.015.
19 ORS 465.475 et seq.
20 ALLOCATION § 19.2.
21 NAIC Center for Insurance Policy and Research, Social Inflation, available at https://content.naic.org/cipr-... (last updated August 23, 2023).
22 William A. Bulfer & Jeff Chen, Emergency Strategies to Proactively Address and Effectively Resolve Risk, 64 DRI for the Defense No. 5 (2022).
23 Janeen McIntosh & Svetlana Starykh, Recent Trends in Securities Class Action Litigation: 2020 Full-Year Review (NERA Economic Consulting 2021), available at https://www.nera.com/content/d....
24 See supra note 4.
25 Id.
26 Social Inflation and the Insurance Industry https://amtrustfinancial.com/b....
27 Social Inflation and the Insurance Industry https://amtrustfinancial.com/b....
28 One website asserted that a cause of social inflation was “higher jury awards,” circular reasoning akin to blaming a heat wave on higher temperatures.
29 See, e.g., ALLOCATION § 19:3.
30 Social Inflation and the Insurance Industry https://amtrustfinancial.com/b....
31 Michael Zigelman & Kristina Duffy, The Impact of Social Inflation on the Liability Insurance Industry, 33 No. 12 Westlaw J. of Insurance Coverage 01 (Dec. 2022).
32 Michael Zigelman & Kristina Duffy, Considering paths to disclosure in third party litigation financing, 2023 WL 2124978 (Feb. 22, 2023).
33 John Milligan-Whyte, et. al., Transnational Aspects of Insurance and Reinsurance Insolvencies: An Introductory Overview of Selected Issues from Bermudian, American, and English Perspectives, C475 ALI ABA 237, 342 (Nov. 16, 1989).
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