Social inflation: fact or fiction

Molly McCafferty, Senior Vice President, Regional Claims Director (Americas), Shipowners Claims Bureau, Inc., Managers American P&I Club, asks whether social inflation is really driving claims trends. She concludes that it is and that the insurance sector needs to better understand the underlying causes and seek effective solutions to this worrying phenomenon

Social inflation has become a trendy term in the insurance industry used to explain the rising cost of insurance claims, particularly personal injury claims. According to a recent study by the Geneva Association on the topic, the Insurance Information Institute (III) considers the term “social inflation” to broadly “refer to all ways in which insurers’ claims costs rise over and above general economic inflation.”

A focused approach taken from the same study suggests that “social inflation refers to legislative and litigation developments which impact insurers’ legal liabilities and claims costs.”

It is a catch all phrase that includes everything from the impact of social media, societal shifts like politics, interpretation of law, legal precedent, public sentiment and victimization to science and technology breakthroughs as they apply to medical treatment.

ESCALATING COSTS

In the last year, industry colleagues have raised the caution flag on the escalating cost of personal injury claims in the

United States.

Conferences, panel discussions and publications highlight the rising cost and discuss potential causes. The once rare settlement or jury award exceeding $1m has become ubiquitous.

The more insurers fear large uncertain jury awards and increased litigation expenses the more likely they are to consider larger settlement amounts resulting in increased settlement floors.

The more these cases settle for inflated values, the more plaintiff’s counsel will push the envelope, continuing to raise the settlement floor. As we try to understand the increasing verdicts, and settlements, we continue to second guess the result. Are these one- off “nuclear” verdicts or settlements that can be easily explained?

FACT OR FICTION?

While the American Club is smaller in tonnage than most of the other International Group P&I Clubs, its presence in the US market provides a representative sample that in scale will likely mirror other Clubs’ and insurers’ experience.

A review of the available data of the American Club for the ten-year period, 2011- 2021, revealed that the American Club reported 5,069 global personal injury (including the US) files with an average per incident cost of $40,494.30.

For the same period and within the global total, US claims represent approximately 20% of the total number of claims. The average cost per claim (CPC) of the US claim in this 10-year period is $72,970.05; approximately 80% more than the global average cost per claim.

A closer look at some of the data demonstrates the meteoric rise in values for US claims.

In 2011, the US average CPC was $45,757.57, whereas the world average cost per claim was $36,047.38 (a 26.85% difference). By 2018, the US average CPC rose to $124,025.18, whereas the average CPC for the world was $54,779.10 (a difference of 126.41%).

The US Labor Department publishes an annual rate of inflation based on the Consumer Price Index created by the US Bureau of Labor Statistics, which is widely used.

The cumulative rate of inflation from 2011 through 2018 is 11.6%. Using the Labor Department “Inflation Calculator,” the average US CPC of $45,757.57 would be worth $51,080.72 in 2018. The actual CPC in 2018 for US claims is $124,025.18, an 143% increase above the cumulative rate of inflation for the same period.

How does the 143% CPC increase compare to personal injury claims in the rest of the world?

In 2011, the average CPC of $36,047.38 would be worth $40,240.91 in 2018 using the same cumulative inflation rate of 11.6%. The actual CPC for the world claims is $54,779.10. This is a 51% increase; above the cumulative rate of inflation but well below the US rate of increase.

The starting point for the hypothesis is a basic

PERSONAL INJURY CLAIMS 2011-2021

Total claims Rest of the world (RoW) pie chart Total claims United States US Avg CPC - US

Avg CPC -RoW

understanding of injury claims, US litigation including jury trials, and the high cost of medical treatment in the US, particularly as compared to the rest of the world.

The focus of this article is to explore whether social inflation has impacted US crew personal injury claims beyond rising costs of medical care and general inflation.

In addition, the article is geared toward a better understanding of whether costs are affected by the location of the claim, the community and current events and the media’s portrayal of the events, while recognizing that many variables impact claim values.

DRIVING FACTORS

The data supports the proposition that inflation is not the primary reason for escalating values in personal injury claims. What factors are driving the increase?

Most, if not all, personal injury claims in the US are ordered to mediation or are required to hold a settlement conference before trial.

PERSONAL INJURY-AVERAGE COST PER CLAIM (CPC)

A recent settlement conference highlights the extent social inflation has hijacked the judicial system. A federal magistrate judge was acting as the mediator, as is typical practice in federal court. After the claimant crew member provided an opening statement with an inflated demand, and without consideration of liability, the magistrate advised the owner that the demand was “reasonable” and should be considered, if not accepted.

He further added a comment to the effect that the local jury pool would have no problem awarding the crew member more than the demand, irrespective of liability or comparative fault. There was no recognition for the owner’s compassionate treatment of the crew member.

The claim ultimately settled at a level below the opening demand, but the experience left a sour taste in the owner’s mouth. The owner felt bullied into a settlement at a level it may not have been obligated to pay. Unfortunately, this is not an uncommon experience for owners defending claims in US courts.

The suggestion of the jury pool mindset corroborates societal factors impacting the claim value. With mediations and settlement conferences taking place across the country in both federal and state courts, how can an owner (and in turn, the insurers) trust the judicial system under these circumstances?

What steps can and should an owner/employer take to protect themselves?

PROACTIVE STEPS

While there are no simple or definitive solutions for social inflation, there are some pro-active steps both owners and the industry can promote.

Owner/employers need to continue to be diligent and thoughtful with their safety protocols.

A generation of employees has been given trophies for participation and now must discover the benefit and rewards of hard work and a strong work ethic. Accidents will happen.

Owners must respond with compassion, transparency, and authenticity. Most importantly, they must engage their employees early and often after any accident or injury.

Our experience supports the proposition that company culture and an empathetic response will determine or direct an employee’s post injury propensity to seek counsel and “revenge” through litigation. Post injury arbitration agreements have also met with some success to limit the owner’s exposure and circumvent the potential impact of social inflation.

Owners, insurers and P&I Clubs can learn from the plaintiff bar’s success. Defence counsel prepared to meet the strategies and tactics of claimant’s counsel should be sought out and retained.

“The more insurers fear large uncertain jury awards and increased litigation expenses the more likely they are to consider larger settlement amounts resulting in increased settlement floors.’’

Molly McCafferty, American P&I Club

NEW REALITY

Defence counsel must appreciate the new reality and provide candid and realistic evaluations early in the discovery process. In favourable jurisdictions with appropriate facts, cases must be litigated. The insurance industry and owners/ operators must challenge the rapidly developing strategies of plaintiff’s counsel and not shy away from similar tactics and trying cases.

The proliferation of jury consultants and mock trials can benefit owners and insurers and their skills must be used. Higher risk cases (via injury, location, counsel etc.) should be identified and early resolution, if possible, should be accomplished before litigation ensues.

Another solution to the impact of social inflation is tort reform, though likely the most difficult to succeed within the current political environment.

Some minor success in tort reform has recently been achieved under state legislative schemes, particularly in southern states, and particularly with medical malpractice and trucking claims.

The industry must continue to promote change and educate people, potential jurors, state and federal government officials, and the judiciary.

Without a legislative or judicial re-balance, insurers will continue to increase premiums, which consumers will be forced to absorb (which feeds directly into some consumer groups’ proclamation that social inflation is a term invented by the insurance industry to let them drive up premiums).

CONCLUSION

The data provided by The American Club supports the assumption that personal injury claims are rising at a significantly higher rate than annual inflation.