Canadian Underwriter

4 causes of social inflation and why it’s costing your clients more

August 10, 2021   by Greg Meckbach

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Social inflation is one reason your client’s commercial rates may be outpacing the insurers’ loss cost trends, a Bermuda insurer CEO suggests.

“I define social inflation as including politicians, regulator, or courts re-defining wording in favour of claimants,” said Albert Benchimol, CEO of Axis Capital Holdings Ltd., during a conference call discussing his firm’s financial results for the second quarter of 2021.

During the call, Benchimol identified three other components of social inflation:

  • increased propensity to sue;
  • new causes of action; and
  • larger awards by courts.

Social inflation “is more of an issue in longer tail lines because it can take years to discover the loss trends are higher than you anticipated at pricing when you [originally] wrote the policy,” said Benchimol.

Axis writes commercial primary specialty and reinsurance worldwide, including in Canada. Axis reported July 27 its gross written premiums in Q2 2021, in primary insurance, were US$1.27 billion. This is a 22% rise from $1.04 billion in Q2 2020. One reason for that increase was favourable price changes in professional, property and liability lines.

During the July 28 earnings call, Benchimol suggested that premiums are rising faster than claims costs.

“I feel very very strongly that the industry is not yet in control of its loss cost trends. Until it is, and given the low interest rate, I think that we are going to continue to see some discipline for pricing ahead of loss costs,” he said.

Axis reported July 27 a 4.1-point improvement in its combined ratio, from 94.7% in Q2 2020 to 90.6% in the three months ending June 30, 2021.

“We fully expect that [pricing] levels will start to gradually come down from where they are at some point. [Premium increases] will stay double digit for a little while. At some point they will be single-digit increases, but as long as we have an opportunity to sustain pricing that is at or ahead of loss costs, we can continue to improve the profitability of our book,” said Benchimol.

“What matters to me is what we have seen up to now is only merely getting us to where we need to be right now. I think we would be deluding ourselves if we thought that the impact of social inflation will stop. Social inflation is tied to perceptions of social inequity. We know that COVID has affected people differently, that we have a K recovery. I believe that social inequity will be a clear and present danger for the industry which is why I think it is imperative that we don’t lose our discipline and price ahead of loss costs.”

In addition to US$1.27 billion in gross written premiums in insurance, Axis also reported July 27 it has gross written premiums in Q2 2021 of US$672 million in reinsurance.

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