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Social inflation significantly impacts on liability insurance

Social inflation, which reflects the changing views on filing lawsuits and compensation claims, is having a direct impact on the liability insurance industry due to increasing losses.

As a result, insurers and reinsurers face higher claim costs which trigger higher insurance premiums leading to greater reinsurance premiums.

While it primarily affects commercial insurance products, widespread advertising used by legal firms has increased the number of actions allied to third-party litigation financing and class action lawsuits. It all adds up to a worrying trend for the insurance industry.

Customer facing businesses such as retailers, healthcare, insurance, banking and financial services have borne the brunt of rising court awards with cover for medical malpractice, commercial auto and directors and officer’s liability (D&O) significantly affected.

While the US has generated much of the evidence of social inflation, it is having an increasing impact around the globe, including the UK, where a compensation culture has been growing. It is reported that social Inflation was a major contributor to the insurance and reinsurance industry’s worsening results in the US pre-Covid-19.

The UK and US which operate a common law legal systems, are more affected by social inflation than those that operate a civil law system. The Institute and Faculty of Actuaries highlighted that the top 50 verdicts in US from 2014 to 2018 nearly doubled from $28 million to $54million, with some being settled at $1 billion.

Mike Hudzik, managing director, head of casualty underwriting, US & Canada, Swiss Re said: “Probably one of the biggest drivers of social inflation is the general anti-corporate sentiment that exists, reaching back to the financial crisis. Since that time, there has been a greater division or separation of wealth, and there is just generally a feeling that someone needs to pay when there is some kind of damage or injury sustained, regardless of negligence.”

In April 2019, the UK Financial Ombudsman Service award limit was increased from £150,000 to £350,000. As a consequence, the Ombudsman can order insurance companies to pay up to £350,000 in compensation to consumers and businesses without any court involvement. Importantly, the rulings made by the Ombudsman are based on what it considers to be ‘fair and reasonable’ rather than precisely what is required by law.

W Denis arrange liability insurance for businesses and directors throughout the world and if you would like a quotation or to hear more about our services please contact Daniel Moss at daniel.moss@wdenis.co.uk or on 0044 (0)113 2439812

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