While consumers are paying close attention to inflation’s impact on their wallets, insurers should be keeping an eye on social inflation – and recognize the two are often linked.
“There’s quite a distinction between the impact of what I would call first-party inflation – the cost to replace a building or to replace property, such as an assembly line or some kind of mechanization to create a finished product – and the other side of that equation in the insurance business, which is the effect of social inflation,” said Bernard McNulty, chief agent and head of claims at Allianz Global Corporate Specialty,
“People have lost perspective about the value of a dollar. And I don’t blame them,” he said. “I lay this at the feet of social media.”
He pointed to online buzz about stratospheric salaries for sports figures and lifestyle posts that normalize extreme spending. On top of that, soaring costs for housing and necessities reinforces people’s belief that daily life has become impossibly expensive.
“Your sense of what things are worth becomes hugely skewed. Inflation then exacerbates that,” Gold added. “It’s going to impact everything when it comes to awards, and I don’t see it turning around.”
Gold referenced Moore v. 7595611, in which the parents of a 24-year-old woman who died of injuries after an apartment fire, sued and were together eventually awarded damages exceeding $1.3 million.
While he doesn’t question that amount, given it’s nearly impossible to value a human life, he said the case had “high precedential value” because the prior highest award to a parent of an adult child who’d died was $100,000 per parent. In that light, the decision sets a higher watermark.
Another driver of social inflation, said Gold, is an emerging mindset that everyone has rights, but no one has responsibilities.
“People suffer a loss, and whether it’s their fault or not they think they’re entitled to recover money,” he added. “Everything that they’re asking for is driven by the cost of things, including inflation.”
Should the social inflation trend continue, it could ultimately lead to premium hikes by insurance companies. And it will likely spur insurers to work to improve their investment returns and build reserves, Gold said. They may also try and get legislative or judicial caps for certain types of claims.
“That will at least give insurers a fighting chance on what their exposure really is,” said Gold. “And I expect they’re probably thinking in terms of trying to legislate some protection in terms of exposure, or at least limiting their exposure so they can make informed projections.”
Firms also must consider long-tail liability claims.
It’s not uncommon for a basic slip-and-fall claim that includes bodily injury to be open for three, four or five years, said McNulty. But a claim that was evaluated and reserved for in 2019 will now be impacted by both economic and social inflation in terms of a court award.
“Costs are creeping up, so what’s that 2019 claim worth now?” he asked. “There’s no question that it’s worth more.”
Such costs are far less predictable than something like a first-party construction claim, McNulty said. The real challenge for the insurance business now is predicting what might happen with third-party claims from prior years.
“If we run across a judge or jury that’s really been impacted by inflation, for whatever reason, we are going to see awards be more now than they would have been in 2019,” he said. “And I don’t think it’s as simple as 15% or 20%. It could be 50%.”
Gold agreed insurance firms that have older personal injury files in their cabinets should be reassessing what the costs to settle those claims might look like, given inflation trends since 2020.
“If the incident, injury or loss occurred more than two or three years ago, they should be going back in and making sure that they and their counsel feel their assessments are in line,” he said.