Glass view of RPC building.

How will insurers respond to the growing challenge of social inflation?

Published on 27 February 2020

‘Social inflation’ is becoming a major challenge for US insurers, and its effects may soon spread to the UK, says RPC, the City-based law firm at a seminar hosted in conjunction with their US partner firm, Hinshaw and Culbertson*.

  • Social inflation means claim sizes are growing in the US – but will it spread to the UK?

Social inflation refers to the rising cost of insurance claims due to societal trends. In the US market, this has largely been driven by the following factors:

  • An increase in negative sentiment towards large corporations
  • Higher levels of compensation being awarded  
  • Broader definitions of liability
  • Increasing levels of access to litigation due to litigation funding
  • Jury trials resulting in favourable settlements for plaintiffs

The rising costs of claims has pushed up liability costs in sectors ranging from medical malpractice, D&O and general liability. Should this trend continue, the insurance market may be forced to reconsider the amount it holds in reserves to cover higher pay-outs for claims.

Simon Laird, Global Head of Insurance at RPC says: “Social inflation isn’t just a challenge for insurers with US exposures. The causes of social inflation, whilst more prevalent in the US, may also start to impact the UK.” 

“Several key factors, including the rise of litigation funding, more consumer-friendly regulation and the growth of sophisticated claims management companies are all present in the UK market just as they have been in the US.”

“There has also been a prolonged period of soft market conditions, which has shaped policy wordings in a way that increases some of the risks from social inflation.”

“Fortunately for UK exposures, some of the drivers of social inflation in the US are not factors here. Jury trials in civil claims have certainly played a key role in the trend in the US, which should reduce its impact in the UK.”

The seminar addressed the key issues that are driving claims trends and cost of claims in the US.

Adds Simon Laird: “The first thing insurers must do to manage the risk of social inflation is to understand its drivers and identify the types of claims which need to be kept under careful review for reserve adequacy. Social inflation is a general trend but it is the spikes – the one off large exposures – that are the most difficult to identify early.”

“Insurers need to continue to feed claims trends back into underwriters and policies need to be reviewed to ensure they take social inflation claims trends into account.”

*Wednesday 26th February, London