June 2021

Developments in Social Inflation

By Anthony Cappelletti


A term that comes up frequently in general insurance is social inflation. It is an important concept when considering the cost of liability insurance. Social inflation may be broadly defined as the amount that liability claim costs are rising above the rate of general economic inflation. There have been documented periods of significant social inflation in the past (1980s and 1990s) affecting products liability, professional liability, and medical malpractice insurance. Unanticipated persistent social inflation can cause insurance products to be underpriced and claims reserves to be inadequate. During this time of pandemic lockdowns, and an increasing awareness of social injustices, I thought I would delve into whether or not significant social inflation can be expected in the near future. 

The Causes of Social Inflation

While the broad definition is simple enough, it doesn’t do enough to explain what social inflation is. For that, we need to look at what causes social inflation. The root cause of social inflation is an increase in the litigiousness of society. So, one may then ask: What causes society to become more litigious? For that, there are a several potential causes. It may be caused by shifts in the composition of juries to those more favorable to plaintiffs with regard to finding defendants liable and with regard to amounts awarded. It may also be caused by shifts in the judiciary where judges are more willing to rule with the plaintiffs’ bar when there are legal disputes. These factors may increase litigiousness on their own. There is also increased and aggressive advertising from attorneys seeking plaintiffs. This further increases litigiousness. These factors appeared to be the reasons for increased litigiousness that caused periods of social inflation in the 1980s and 1990s.

More recently, other factors have contributed to society becoming more litigious. One of these is the concept of litigation funding. In the past, some class actions were not brought forward because the initial outlay of expenses for the plaintiffs’ bar were too great to put at risk for an uncertain reward. The concept of for-profit litigation funding involves the plaintiffs’ bar seeking investors to fund the initial outlay of expenses in exchange for receiving a share of any awards in a successful case. This has enabled many cases to move forward that would otherwise have not in the past. Another recent factor is the increasing use of jury consultants in which the plaintiffs’ bar makes extensive use of experts to assist them in forming a jury more favorable to the plaintiff’s case.

Finally, another recent factor is the influence of social media. Social media has the ability to shape perceptions and attitudes. It also has the power to move issues forward that may not have otherwise garnered attention. Social media may expand views of consumer victimization and an anti-corporate attitude. It may also shift attitudes that if someone suffers an injury, someone has to pay. This has the potential to fuel social inflation.

Social Inflation’s Affect on General Insurance

Social inflation mainly affects the casualty lines of business in general insurance. General liability, products liability, professional liability, and medical malpractice have all had claim costs rise above the rate of general economic inflation at certain periods of time. But they are not the only lines affected. Social inflation also affects commercial automobile, directors and officers (D&O), errors and omissions (E&O), and workers compensation. Furthermore, awards often exceed the primary policy limits so claims also go into umbrella and excess liability policies. 

Casualty lines are long-tailed lines of business. Trends in ultimate claims cost take many years to become apparent. If trends from social inflation are not anticipated, insurance products will be underpriced, and reserves may become inadequate. However, there are ways for the actuary to detect this type of inflation before too many years go by. One of the these is to review loss development patterns. Under periods of social inflation, loss development factors are no longer stable but tend to be increasing over time for the same age of development. Another way is to look at claim frequency. While total claim costs for a given accident year can take many years to settle, claim count estimates can be more reliable sooner than claim amount estimates. Claim counts rising above expectations could be an indicator of social inflation. Another consideration would be to look to statistics from court awards.

Current Environment and the Potential for Social Inflation

Recent statistics from court actions suggests that social inflation may be occurring in the U.S.[1]

  • The median award from the top 50 verdicts in the U.S. increased from $27.7 million to $54.3 million over the period 2014 to 2018.
  • Likelihood that a U.S. company will be named in a securities class action was 8.9 percent in 2019—nearly triple the average rate of 3.0 percent for the period from 1997 to 2018.
  • From 2015 to 2019, the median award for cases with a single fatality in the U.S. has more than doubled to over $300,000.
  • Total class action settlements in the U.S. increased over 10 percent from 2019 to 2020 ($2 billion to $2.3 billion).

It must be noted that statistics from court actions must be considered carefully. This is because not all insurance claims stem from court awards. Many are from settlements that may occur before a suit is filed with the courts. Also, there is no central database for awards from all courts and court awards may be reduced on appeals. Care must be taken when compiling statistics from the different courts. Furthermore, types of court actions in the system can affect the statistics (e.g., higher frequency lower severity automobile property liability awards versus lower frequency higher severity medical malpractice awards). Effects of frequency and severity should be closely reviewed in conjunction with the types of court actions.  

COVID-19 and Social Inflation

The COVID-19 pandemic has affected many people and many businesses globally. The business of insurance has definitely been affected. During lockdowns, many claims were made for business interruption and cancellation coverage. Many insurers contested business interruption (BI) claims based upon policy interpretations (e.g., if disease is an excluded peril, then BI from COVID-19 is not covered by the policy, or BI coverage is for BI Claims resulting from physical damage to property and COVID-19 did not cause physical damage). Claimants have brought cases against insurers where their BI claims have been denied. From the cases that have been resolved by the courts, results have been mixed and it is highly dependent upon policy wording as policies are tailored to the individual insured.

Also during lockdowns, traffic volume was greatly reduced. The frequency of automobile liability claims has decreased with this reduction in traffic volume.

The question now is, will the COVID-19 pandemic have any influence on social inflation?

It will take time to determine whether or not COVID-19 will influence social inflation. When looking at the statistics, great care will be required. For example, one will have to filter out the frequency of BI claims for COVID-19 as they will show an increase due to the pandemic and not due to social inflation from the pandemic. However, it is a possibility that legal judgements in BI cases may be more unfavorable to insurers than in prior years due to social inflation.

During the pandemic, many court cases have been delayed. For those that have been brought forward, many have been conducted in virtual sessions. This is likely affecting how cases are being resolved. Plaintiffs’ bar tends to prefer jury trials as awards tend to be much higher with a jury. However, with courts running virtually, jury trials are not always an option. Plaintiffs now face a much longer road to a trial with these delays—especially if they wish to hold out for a jury trial. This puts pressure on plaintiffs to attempt to settle now instead of having a long wait for an uncertain award. This should result in lower than expected settlement amounts. From this, we should see a decrease in claims severity for general insurance lines of business that have been affected by social inflation over the past few years. This could reverse recent effects from social inflation.

Another factor to consider is jury attitudes after the experience of the COVID-19 pandemic and associated lockdowns. The lockdowns saw many small businesses suffer financially or cease operations. Many jury members may have become unemployed or know of someone that became unemployed due to lockdowns. It is possible that the anti-corporate sentiment that fueled a certain amount of social inflation may be reduced as juries may not have the same level of anti-corporate sentiment since corporations provide employment opportunities. Of course, this is all conjecture. It may be many years before we know the real effect that the COVID-19 pandemic is having on social inflation.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.

Anthony Cappelletti, FSA, FCIA, FCAS, is a staff fellow for the SOA. He can be contacted at acappelletti@soa.org.


[1] Source of the first three statistics is “Social Inflation: Navigating the evolving claims environment” published by The Geneva Association, December 2020. Source of the fourth statistic is from “Trends driving social inflation” by Larry Crotser, April 12, 2021, Insurance Coverage Law Center