Social inflation is widely viewed as a primary cause behind the current claims trend in the commercial liability (CL) market – an upward movement in settlement values due to widespread legal advertising, litigation funding, expanding class-action lawsuits, public distrust of corporate defendants, and other potential causes.
The issue that reinsurers and insurers (re/insurers) are grappling with is how to manage the burgeoning risk of social inflation (SI) more effectively. Re/insurers are hindered in addressing SI by two factors: 1) data isn’t readily available and 2) carriers lack the ability to segment individual SI factors in data that is available. This makes hypotheses about the extent to which SI is affecting the industry both speculative and inconclusive.
Since SI is a multi-faceted issue, it’s not enough for one discipline (e.g., the claims department) to analyse its impact on results. Re/insurance companies should consider a fresh approach: using an interdisciplinary team, sharing information and observations, and applying department-specific expertise to understand and respond to the issue.
Munich Re US took this approach to consider possible links between social inflation and the CL market and to ensure that SI impacts in loss settlement decisions are properly understood. The company formed research groups to develop best practices and apply analytical processes to better understand SI factors. The effort also added non-traditional sources – including economic, public and proprietary data from vendors, news and industry reports – to supplement available information.
What’s impacting commercial liability claims?
While legal advertising is more prevalent, and liability case settlements and trial verdicts are larger now than they were for comparable cases a decade ago, there is no data showing a cause-and-effect relationship between the two.
As for litigation funding, there is a lack of transparency in financing arrangements between plaintiffs and any organisation funding a lawsuit. The parties aren’t legally obligated to divulge what is negotiated. As a result, the industry has limited capacity to collect data about litigation funding and trial verdicts.
Insurers already have tools available – such as re-underwriting a portfolio, managing limits and making pricing changes – to control the risk of these increasing costs. But the addition of the following practices could also influence underwriting strategy: analysing external factors, being forward-thinking about trends, and spotting macro factors that can influence underwriting strategy.
Insurers have the chance now to benefit from working with analytics professionals and scientists who are skilled at data mining and interpreting the correlations between new data from new sources and market performance. In this area, collaborating with business partners can be an efficient, effective strategy to boost competition and results.
Anticipating next steps
Re/insurers industry-wide are being more proactive in understanding and addressing social inflation. Munich Re US, along with several industry groups, are taking a proactive approach to understanding and addressing this topic. We are working with prominent industry organisations to spearhead research and compare findings.
Munich Reinsurance company’s global data-hunting team has committed substantial resources to predictive analytics, searching for previously unnoticed correlations or relationships in data.
Social inflation also means re/insurers must more frequently update pricing model parameters and reserve methodologies based on current trends. Using predictive analytics methods that incorporate a new or larger data set would also be helpful. To assist clients and their policyholders, Munich Re US provides predictive analytics by evaluating performance of insurance company clients’ business, as permitted.
SI has influenced claims handling, too. Increased use of mock jury trials has helped Munich Re US’s claims team better evaluate possible trial outcomes associated with injury claims. Mock trials help a company understand liability arguments, sense how a jury might see the insured, and perceive the range of value for the injury involved.
Consequently, we believe it is important for us to take action now to help diminish any adverse impact on the industry in the future. After all, insurance is a necessity for business and society to prosper. The cost of that protection needs to be sustainable. Hard-to-quantify, runaway social inflation doesn’t allow for sustainability.
Steve Levy is President & CEO of Munich Re U.S.
Nothing presented here is intended to be legal, underwriting, financial or any other type of professional advice and the recipient should consult with its own counsel or other advisors to verify the accuracy and completeness of any information provided here and to determine its applicability to the recipient’s particular circumstances.
This piece originally appeared in Reactions.
