Claim costs have been increasing, and social inflation is a major contributing factor. But what is social inflation? Below, Travelers Insurance explains what it is, and gives us four contributing factors that lead to rising costs.
What Is Social Inflation?
Social inflation refers to the increase in claim severity above what could be anticipated under the usual scope of economic inflation and claim trends. Below are the top four factors fueling social inflation and the rise in claim costs that follows.
Four Factors Contributing to Social Inflation
1. Desensitization to Large Verdicts and Media Impact
2. Negative Public Sentiment and Corporate Accountability
3. Erosion of Tort Reform
4. Attorney Tactics and Litigation Funding
- Advertising — Attorneys are spending about $1 billion for 15 million advertisements per year in both digital and offline channels.8 In addition to bringing in more plaintiffs, these ads also have the potential to influence jury pools.
- “Venue shopping” — Using analytics to determine the locations and judges with a track record favoring more generous awards.
- Emotional appeals — Attorneys have moved beyond appeals for sympathy to stoking anger at corporate defendants by appealing to the part of the brain that prioritizes safety and survival.
- Repositioning medical results — Emphasizing results such as diagnostic imaging to focus on the worst-case scenario, often with the intent to demonstrate a need for additional procedures or even lifelong care.
Fueling even more of this activity is the growing litigation funding investment market, in which a third-party invests in specific cases, even plaintiff attorneys find too tenuous to take on, for a contingency fee. In return, the investors receive a cut of any award. This industry was valued at around $12.2 billion in 2021 and is projected to reach $25.8 billion by 2030.9
1 VGM Insurance Services. https://www.vgminsurance.com/blog/post/in-the-know-social-inflation-and-the-increasing-cost-of-large-jury-awards
2 Gallup. https://news.gallup.com/poll/270296/americans-dislike-big-business.aspx
3, 4, 5 DecisionQuest National Juror Attitude Survey, 2017-2018.
6 Roetzel & Andress // US Chamber Institute for Legal Reform // Buying the Verdict (Source:
Cohen, Gurun 2018) // IBISWorld )). https://www.nber.org/system/files/working_papers /w24542/w24542.pdf
7 The Geneva Association. https://www.genevaassociation.org/sites/default/files/research-topics-document-type/pdf_public/social_inflation_web_171220.pdf
8 American Tort Reform Association (ATRA ). https://www.atra.org/2022/02/22/study-trial-lawyers-spent-1-4-billion-on-advertising-in-2021/
9 GlobeNewswire’s Custom Market Insights. https://www.globenewswire.com/en/news-release/2022/08/29/2506137/0/en/Global-Litigation-Funding-Investment-Market-Size-Worth-25-8-Billion-by-2030-at-a-9-CAGR-Custom-Market-Insights.html
Source: Travelers Insurance