Taking the Air Out of Social Inflation

The answer is not fear; it’s understanding and strategy

July 10, 2020 Photo

As insurance companies announce their quarterly results, more of them are referencing, and even headlining, the issue of social inflation. Steve Rich, chief claims officer at Acadia Insurance, offers a working definition: “Social inflation generally refers to the rising costs of insurance claims that are a result of societal trends and views toward increased litigation, broader contract interpretations, plaintiff-friendly legal decisions, and larger jury awards.”

The public is increasingly exposed to, and arguably becoming numb to, extraordinarily large dollar amounts: Forbes estimates Taylor Swift’s 2019 earnings at $185 million; American League baseball MVP Mike Trout signed a multi-year $430 million contract in 2019; a 2016 Powerball drawing awarded $1.59 billion; and a California jury awarded $2 billion to a couple for cancers they allege were caused by Monsanto’s Roundup weed killer. It’s easy to become numb to numbers like these, especially when large personal injury verdicts continue to mount.

While society at large, and the insurance industry in particular, will need to deal with social inflation at a macro level, it is not a ship that can turn quickly, nor is it one that even has the certainty of a turn in its course. The effects of the pandemic—and whether or not social inflation is influenced up, down, or even sideways (still there, but different)—are anyone’s guess, and there is no shortage of guessers. Likewise, sweeping societal and cultural changes increase uncertainty in the claims arena.

Dealing With Social Inflation

While not to be taken lightly or dismissed as a fad, social inflation also doesn’t need to be the industry’s bogeyman. Inappropriate fear of social inflation can actually fuel claims values. A claims department stricken with or even just influenced by fear is a compromised claims department. Social inflation must be respected, but it must be recognized, understood, and carefully evaluated in the context of each individual case.

Claims departments are the first line of defense, and are best positioned to initially understand and mitigate the risks of social inflation at both the strategic and tactical levels. Here are nine practical tips for your claims department that can help lead your company through the turbulent waters of social inflation.

1. The plaintiff’s bar is adept at deploying strategies to maximize the effects of social inflation. The claims department must likewise develop the skills for early recognition and mitigation strategies for tactics like reptile theory, litigation financing pressures, time-limited demands, and enormous future damages from exorbitant or even exaggerated life-care plan values.

There are many stories like the following one, and they represent a tough way to learn: A pedestrian using a temporary crosswalk in an urban construction zone was struck by a vehicle while crossing the street. There is no doubt that the majority share of liability fell on the operator of the vehicle that struck the plaintiff, and there was really nothing wrong with the temporary crosswalk, but the plaintiff directed her attack at the construction firm with responsibility for the site because of its deep pockets.

The plaintiff’s counsel asked questions like “You would agree that pedestrians have a reasonable expectation of safety in a crosswalk?” and “You would also agree that your company was responsible for the safe design and construction of the temporary crosswalk?” From there, the questioning only got worse, weaving a web of entrapping admissions. When defense counsel was later asked about their awareness of reptile theory and couldn’t answer in the affirmative, it was evident that the wrong lawyer was on the case.

2. Know your opponent. Does a plaintiff’s firm have a track record of especially large and, at times, unlikely verdicts? Their website will often tell you if they do. Are they a specialist in reptile theory? What is their firm’s reputation in the legal community? Do they market their skills in this specific area? Most importantly, do they reveal early warning signs of reptile tactics being used in your case, with a theme around safety, cultural issues, or societal-level justice? The same questions apply to plaintiff’s experts.

3. Match your claims talent and management oversight to new volatilities. Ensure all claims professionals are educated on social inflation and what it is; what it isn’t; and, most importantly, how to identify cases early that have a social-inflation exposure. Assign claims professionals who are experienced with cases involving elements of social inflation, and add a level of management oversight to each case for an extra set of trained eyes. Wrap it all up with an effective quality assurance program, and a “lessons learned” review process with the defense team.

4. Match your legal talent and defense-expert talent to the challenges of each case. If your opponent is a master of maximizing social-inflation impacts, a rock star of reptile theory, or a favorite of litigation funders, then you need to compete at the same level. The everyday defense attorneys from your panel might be fully capable and economically attractive for average cases, but invest in the best when you need it. Consider augmenting the team with defense lawyers who are specialists in damage mitigation and overcoming big sympathy factors and expensive life-care plans. In addition, consider having appellate counsel on the case long before it reaches the jury.

5. Assess your co-defendants. Decide if they are best as allies against reptile theory plaintiffs, or if your defense can be strengthened by positioning them as an easier target of the reptile approach. Remember, you don’t need to be faster than the bear, only faster than your fellow hiker. The same goes for reptile cases, too.

6. Develop a trial theme. What story is plaintiff’s counsel going to tell? What story is defense counsel going to tell? How can it best be delivered? Will the jury be able to follow it? Will it make sense to them? There’s nothing worse than having a defense that is technically correct and legally sound but impossible to explain to a jury. Can defense counsel not only explain it, but also make it compelling to everyday jurors who are looking for a simple, straightforward story that they can comfortably relate to, accept, and support?

7. Smartly invest your expense dollars. Mock trials and similar mock jury exercises are expensive, but they almost always tell you something you didn’t know. Don’t let your expense reduction or legal cost-containment strategies lead you to save money on expenses but bleed out on settlements and verdicts.

8. Your reserve philosophy probably doesn’t need to change, but is your reserving practice and reserving performance keeping up? Are the impacts of social inflation being appropriately considered and applied to inform sound case reserves? If not, inflationary times don’t create, but will certainly magnify, your case-reserving shortfalls.

9. Educate other internal stakeholders that the sky is not falling, but that there are storm clouds on the horizon. Engage management at all levels in an ongoing conversation about social inflation. Underwriters and actuaries need to understand the implications for loss ratios, pricing/rates, and for loss reserving, including incurred-but-not-reported considerations. Share your outcomes, good and bad, in a way that informs the organization’s strategies in all departments.

Social inflation isn’t an unknown that needs to be feared; it is a known that needs to be understood and respected. By applying a holistic strategy of awareness, recognition, and practical responses, it can be successfully managed by any claims department. 

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About The Authors
Mike Bondura

Mike Bondura, CPCU, CLU, ARM, is senior vice president, chief claim officer, for Berkley Mid-Atlantic Group, a Berkley Company. mbondura@wrbmag.com

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