As if the Florida insurance markets don’t have enough challenges, there’s a relatively new concept causing concern here as well in the rest of the country: social inflation. In fact, some insurance industry experts list it as one of their main concerns in 2023.
What is social inflation?
Social inflation describes the impact on the cost of insurance claims caused by rising litigation costs. These costs are different from those related to traditional inflation—things like material costs, labor prices, or supply chain issues. One example of the impact of social inflation: According to a report released March 6, “U.S. commercial auto insurance liability claim payouts increased $30 billion more than would have been otherwise expected between 2012 and 2021 due in part to social inflation.”
The primary factors influencing social inflation include:
- Runaway litigation—insurance companies face a much higher than normal number of lawsuits.
- “Nuclear” verdicts—an increase in huge jury awards.
- Litigation funding from third parties—third parties provide legal funding to clients and their attorneys in exchange for a share of a winning jury award or arbitration, often resulting in legal proceedings that take longer than expected (another driver of social inflation).
- Rollback of tort reform which placed limits on non-economic damages.
The use of the word “social” indicates that the attitudes of society play a role. Negative attitudes of the public toward corporations, a desire to “see someone pay” when an accident occurs, and the ability of plaintiffs’ attorneys to play on the sympathies of a jury all affect litigation costs. At this time, social inflation is primarily affecting commercial auto insurance, professional liability, product liability, excess liability and umbrella policies, and increasingly, personal auto insurance.
How does social inflation affect you?
As we’ve seen in the Florida homeowners insurance market, the actions of some affect what we all pay for our insurance. Social inflation makes insurance cost more because it inflates the cost of claim payouts. It likely also increases the costs of goods and services, because when businesses have to pay more for insurance coverage, they pass some of that cost on to their customers.
Insurance companies have tools to plan for factors influenced by traditional inflation, but social inflation is unpredictable and hard to foresee. If social inflation continues for a significant amount of time, insurance companies may not be able to keep premium increases in line with the rising costs of claims. This threatens the solvency of insurance companies, and in some instances, results in insurance companies deciding not to write certain coverage at all. This makes it harder for you to get the insurance coverage you need.
What can be done about social inflation?
Insurance companies have become more aware of social inflation, and are doing what they can to mitigate its effects, including improving risk management practices, educating the public, and advocating for more transparency around third-party litigation funding.
As an independent insurance agency, Lakewood Financial partners with multiple commercial and personal lines insurance carriers, and monitors insurance markets for current trends. If you need a quote for commercial auto, personal auto, homeowners insurance, commercial liability, or any other form of business or personal insurance, please give us a call at 941-747-4600, or contact us online. Because we’re independent, we have much more flexibility in finding insurance coverage tailored for your specific needs.