​Social inflation is among the most talked-about phenomena in property and casualty insurance and civil justice circles. There is hardly an insurer earnings call or industry conference where social inflation is not addressed. In a recent white paper exploring social inflation, R Street Institute answers four questions:

1. What is social inflation?
   
2. Is social inflation real?
3. What drives social inflation?
4. What can be done about social inflation?

Social inflation refers to factors unrelated to general inflation in the economy that underlie rising court awards. Although there are some who deny the existence of social inflation, the preponderance of evidence shows that social inflation and its effects are real.

A primary driver of social inflation is the behavior of the plaintiff bar. In recent years personal injury lawyers have effectively deployed new strategies to secure large court awards, whether through jury verdicts or out-of-court settlements. The defense bar has been slower and less successful in pushing back against large “nuclear verdicts" that are not proportional to damages. The result, historically large losses across various liability lines of primary insurance and reinsurance.

Other drivers of social inflation include attorney advertising, litigation funding, phantom damages and a defense bar on its back foot in a world of torts with swelling court awards.

The insurance industry would do well to understand the drivers and potential impact of social inflation on future financial results. Just as the plaintiff bar has deployed new and creative courtroom strategies to push awards ever higher, the defense bar and insurance defense council should respond with strategies of their own to arrest the continued inflation of awards. Failure to do so will result in impaired insurer balance sheets and higher insurance premiums for all.

Just as there are multiple drivers of social inflation, there must be a multi-pronged response, incorporating public policy action as well as defense bar retooling.

Social Inflation and Insurance

A simple working definition of social inflation is that it is insurance loss cost inflation driven by non-economic factors. Non-economic factors are distinguished from economic factors, which also affect insurer loss costs.

Known economic factors include the Consumer Price Index (CPI), supply chain constraints, medical inflation, and catastrophic injury costs. Non-economic factors, by contrast, relate to societal attitudes regarding responsibility and blame, which influence jurors' and judges' decisions and the magnitude of court awards.

For the full report on the reality and effect of social inflation, click here. 

Last Updated: March 11, 2022