Social inflation is a phenomenon that involves rising litigation costs and claims payouts, which in turn, leads to higher premiums for policyholders. Not to be confused with general economic inflation, social inflation has a variety of causes that can be hard to predict and difficult to avoid.
From third-party litigation funding to large jury awards and changing public sentiment, there are several factors that can drive social inflation. Understanding these factors can help insurers better understand how to mitigate the effects of social inflation.
Here’s a closer look at the four primary drivers of social inflation.
What is Social Inflation?
Social inflation is a term used to describe the phenomenon of increasing claim costs and insurance premiums over time, driven by non-economic factors. It is essentially the result of external social and economic factors that increase the cost of insurance claims, making it more expensive for insurers to operate.
Social inflation impacts both insurers and policyholders by leading to increased financial risk for providers and higher premiums for consumers.
4 Key Factors Driving Social Inflation
There are a number of complex factors that can contribute to social inflation, including third-party litigation funding, higher jury awards, public attitudes, and a lack of laws that place limits on settlements.
Third-party litigation funding
Third-party litigation funding refers to the practice of investors funding lawsuits in exchange for a percentage of the award or settlement. This has become increasingly common in recent years, and it has had a significant impact on the cost of claims.
Third-party funders are often willing to invest in high-risk cases, such as class-action lawsuits or medical malpractice claims, which means that insurers may be more likely to settle rather than go to trial, driving up costs.
Third-party litigation can also lead to extended litigation timelines, leading to higher costs.
Larger jury awards
Another factor driving social inflation is the size of jury awards. Juries are more likely to award larger sums of money than in the past, partly because of a growing perception that corporations are wealthy and can afford to pay more. This perception has been reinforced by high-profile cases and media coverage, leading to a “nuclear verdict” mentality among some juries, which refers to awards that are disproportionately large in relation to the damages suffered.
Public sentiment can also play a role in social inflation. Social media and news coverage can generate public outrage and pressure on companies to compensate claimants more generously. This can lead to increased settlements or larger jury awards as companies seek to avoid public backlash.
Lack of settlement caps
Finally, a lack of settlement caps can exacerbate social inflation. In some jurisdictions, there are no limits on the amount of money that can be awarded in a settlement, which can lead to excessive payouts. Insurers may be more likely to settle claims to avoid the uncertainty of a trial or the risk of a large jury award, even if the claim is questionable.
How Social Inflation Leads to Higher Claim Costs
Social inflation drives up the cost of claims in a number of ways. When jury awards increase, insurers must pay out more money to claimants, which can result in higher premiums for policyholders. Similarly, when insurers settle claims more frequently, they may have to pay out more money than they would if they went to trial, which can also increase costs.
Social inflation can also create a ripple effect throughout the insurance industry. Insurers may become more cautious about underwriting policies, which can result in fewer options for consumers and higher premiums. This can also lead to more cases being settled out of court as insurers seek to avoid the risks of a trial.
How Social Inflation Impacts Consumers
Social inflation can also create a ripple effect throughout the insurance industry. Insurers may become more cautious about underwriting policies, resulting in fewer options for consumers and higher premiums. This can also lead to more cases being settled out of court as insurers seek to avoid the risks of a trial.
Moreover, social inflation can lead to a decrease in coverage options. Insurers may become more selective about the types of policies they offer, or they may choose to exit certain markets altogether. This can leave consumers with fewer choices and potentially higher premiums.
How to Mitigate Social Inflation
There are a few strategies that insurers and policymakers can use to mitigate the effects of social inflation. One option is to promote alternative dispute resolution methods, such as mediation or arbitration, which can help to reduce the number of cases that go to trial. These methods can also be less costly and time-consuming than traditional litigation, which can help to reduce the overall cost of claims.
Another option is to advocate for settlement caps or other limits on the amount of money that can be awarded in a settlement. This can help to prevent excessive payouts and discourage frivolous claims.
Insurers can also work to improve their underwriting practices to minimize risk and reduce the likelihood of claims. This may include increasing premiums for high-risk policies or adjusting coverage limits to reflect the actual cost of claims.
Finally, policymakers can take steps to address the underlying causes of social inflation, such as improving the efficiency and fairness of the legal system, promoting transparency in the third-party litigation funding industry, and educating the public about the true cost of insurance.
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Social inflation is a growing concern for insurers and consumers alike. It is driven by a variety of factors, including third-party litigation funding, larger jury awards, public sentiment, and a lack of settlement caps. These factors can lead to higher claim costs and insurance premiums, as well as a decrease in coverage options for consumers.
At KSA Insurance, we work with individuals and businesses in South Carolina and across the southeastern United States to help them find affordable insurance policies that protect them against a wide range of common hazards.
Contact KSA Insurance today to request a quote and learn more about our insurance products.