Policyholders Are Not To Blame For Social Inflation

Law 360
Saturday, November 19, 2022

If consumers want to understand why the price of groceries and other staples has been rising for billions of people around the world, they can read any number of studies and articles about economic inflation published by such eminent institutions as the International Monetary Fund the Federal Reserve, the National Bureau of Economic Research and the Brookings Institution.
But when consumers of insurance wonder why premium increases for some products are wildly outpacing economic inflation, they may well be told by their insurers or brokers that so-called social inflation is at least partially to blame.
A quick internet search reveals that social inflation is primarily a creature of publications and studies associated with property and casualty insurance companies, their trade groups and, increasingly, their law firms. Consumers can also easily learn that these rate increases are being imposed amid record profitability for some of the largest P&C insurers.…
Additionally, the Consumer Federation of America and the Center for Justice & Democracy at New York Law School jointly published a white paper responding to insurance industry data assertions about social inflation.
The study's authors included a former Texas insurance commissioner and federal insurance administrator under two presidential administrations, as well as an appointed member of the Federal Advisory Committee on Insurance, which advises the U.S. Treasury Department's Federal Insurance Office. Their findings included:
At the time of publication, the P&C insurance industry was sitting on over $800 billion in surplus (assets in excess of liabilities), more than at any time in history, representing quadrupled profits since 1994 and a 5,000% increase over the past 60 years. The authors characterized the current surplus as "obscenely excessive."
"Social inflation" is an industry-created marketing term referencing supposedly spiking litigation, jury verdicts and insurance claims trends that are not actually supported by credible data.
After accounting for reasonable adjustments based on the Consumer Price Index and population growth, losses across all lines of P&C insurance cumulatively stayed essentially flat between 1999 and 2018 while premiums have gone up and down in sync with the insurance industry's economic cycle.
D&O insurance was a major target for rate increases in 2020, despite the fact that shareholder class action filings remained flat from 2017-2019, the average settlement value in 2019 was the lowest in a decade, alleged investor losses in filed cases decreased by 45% from 2019 to 2018, and 2019 saw the fewest shareholder litigation settlements of the decade.
Generally, the P&C industry inflates its reported losses by manipulating its claim reserves at key moments to justify rate hikes, while also lowering tax liabilities. The reserves are later released into profits by insurers.
In short, the social inflation factors cited by the industry have not put it in any kind of financial peril.
In general, the P&C industry operates according to a "little recognized economic cycle, created by anti-competitive — yet legal — underwriting practices, unique and opaque accounting policies, and virtually unchecked power because of the generally weak regulation of insurance rates."
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