Social inflation contributed to a $30 billion increase in commercial auto liability claims between 2012 and 2021, according to an updated study published by the Insurance Information Institute (Triple-I) in partnership with the Casualty Actuarial Society (CAS). became. Most of the increase for the entire period under review is due to the newly added years 2020 and 2021 to the dataset.
Findings from the research report Social Inflation and Loss Development – An Update suggest that social inflation may be responsible for losses increasing by as much as 18-20% over the last 10 years, although other factors play a role could play. The results also indicate that social inflation as a loss driver could outpace inflation in the overall economy by 2% to 3% per year. The actuarial models in the paper assume that the risk in commercial motor liability insurance will grow at the same rate as the economy as a whole in the long term. The updated research supports the conversations Triple-I and its industry partners have had over the past several years to raise awareness of the phenomena and drive solutions. Both Triple I/CAS papers on social inflation were authored by actuaries James Lynch and David Moore.
On the trail of social inflation in commercial motor vehicle liability
Analysts in any industry can rely on economic indicators and established quantitative methods to adjust for cost increases caused by general inflation in the economy. According to the definition cited as the basis for the paper, the expansionary scope of social inflation may pose a more complex challenge for insurers because it “may encompass all ways in which insurers’ claims costs rise above general economic inflation, including shifts into societal inflation Preferences about who is best able to absorb risk.” The impact of some potential factors, such as B. increasing court rulings and sprawling litigation, can be dynamic and unpredictable, making effective risk mitigation tactics difficult.
Still, insurers must strive to offset rising claims costs, and those efforts may include finding a way to map out the footprint of social inflation. So rather than attempting to deconstruct the components of social inflation, this 2022 CAS Triple I collaboration update continues to focus on tracing evidence, identifying the potential impact on losses over time, and potentially finding clues who could establish a connection to the perpetrators. Accordingly, research continues to focus on loss severity and examines the increase in loss development factors over time.
The research raises questions and highlights an emerging reality
As in many industries, the COVID-19 pandemic is challenging longstanding methods and conventional forecasting assumptions. Claims incidence relative to the overall economy fell sharply in 2020 and remained flat in 2021, although driving appears to have returned to pre-pandemic levels. However, the severity seems to have increased significantly.
Enter loss triangles – a traditional actuarial tool that allows comparison of loss metrics across years and shows how losses evolve over time. As in last year’s publication, researchers used this tool to examine damage evolution patterns of net damage paid and defense and containment costs (DCC). The analysis suggests that while the pandemic has dramatically hampered the ability to file new litigation for a short period of time, it could also have more lasting effects by hampering the timely, and therefore less expensive, resolution of outstanding claims.
Even as social inflation amplifies losses for commercial motor insurance, existing methods of determining where general inflation ends and social inflation begins may become less reliable. The newly added data not only covered the pandemic shocks of the shutdown, but also extended to the economic recovery and was affected by much that has come with it – demand booms, tight supply and labor resources and of course the eventual rise in consumer price index (CPI) for all urban consumers. In 2021, the CPI rose an impressive 4.7 percent, the fastest rate of inflation growth this century. These and other changes in the economic environment may have dampened the effectiveness of the testing and modeling framework. In any event, claims expenditure calculations showed that, for the first time in ten years, actual outflows were less than expected outflows in 2020 and 2021, reversing observations in the previous paper on the reliability of traditional actuarial estimates.
The importance of understanding social inflation
It’s important to remember that although insurers are often called upon to help businesses and communities recover from natural disasters or other unexpected events, social inflation is arguably a man-made crisis that is already in the market plays a big role. A 2020 study by the American Transportation Research Institute found that jury verdicts increased 33 percent annually from 2010 to 2018, as headline inflation rose 1.7 percent each year and health care costs rose 2.9 percent each year over the same period rose.
With losses growing much faster than premiums, insurers can use any combination of methods to contain costs, including limiting the amount of coverage offered, increasing premiums, or discontinuing certain types of coverage. For policyholders who need to mitigate their commercial motor liability risk, expensive coverage or a lack of coverage can threaten the ability to remain competitive or even continue to operate, particularly for companies in low-margin industries.
Unprecedented times require new ways to collect and review damage data. The paper draws on new ways of using old-school methods and discusses how the reliability of some metrics could be improved by using other data sources. A The same researchers’ paper made similar observations for the area of liability for medical malpractice. Key takeaways from the findings of these papers, along with a new research group on social inflation, may be useful to explore actionable strategies such as: B. the containment of protracted legal disputes.
For a brief summary of social inflation and other helpful resources on how it can affect insurers, policyholders and the economy, visit our knowledge center. Social inflation: difficult to measure, important to understand.
