‘No signs of social inflation abating’ – Swiss Re

There are “no signs of social inflation abating” despite a deceleration in the rate of economic inflation, Swiss Re’s chief economist has warned.

That was according to Swiss Re group chief economist Jerome Haegeli, who was speaking at the launch of the reinsurer’s latest Sigma report yesterday (7 September 2024) at the RendezVous-de-Septembre (RVS 2024) in Monte Carlo.

Swiss Re’s report focused on the serious impact of social inflation on the (re)insurance industry and the need to quantify it, with the reinsurer defining it as the increasing severity of liability claims beyond what is explained by purely economic factors.

Haegeli (pictured) explained that Swiss Re had quantified the rate of social inflation and indexed it at 7% and added that, while social inflation “was not new, the trend is worsening”.

The phenomenon was quantified by the reinsurer by “disentangling claims growth from other claims drivers, such as economic inflation, exposure growth and frequency trends”.

US liability claims costs have been rising faster than the rate of economic growth and inflation, with the drivers of this social inflation including societal trends, changing behavioural norms, the greater use of the legal system and a “rapid growth in settlement awards”.

Swiss Re’s Sigma report noted that liability claims severity has trended significantly higher than economic factors, due mostly to a rising number of very large verdicts against commercial defendants.

For example, in the US alone, there were 27 cases of courts awarding more than $100m in compensation for bodily injury claims, with the reinsurer identifying the increased use of psychology-based strategies and litigation funding by trial lawyers as an important driver.

Economic impacts

Although causal factors of social inflation are non-economic, Haegeli noted that the trend had very real impacts of the financial and economic performance of the markets and companies it was affecting.

He said: “There’s no question about it, social inflation creates underwriting losses and negatively impacts combined ratios.

“The bottom line is that commercial lines rate changes have not been compensating for the social inflation that we are seeing.”

The difficulty in quantifying the rate of social inflation has been a major issue here. Haegeli told Global Reinsurance: “Where you have structural change, like a change in social attitude, and a change in funding for litigation it’s very hard to pinpoint the structure of changes in advance”.

Swiss Re’s Sigma report explained that US liability lines exposed to bodily injury claims have seen profitability deteriorate over the last five years, with cumulative underwriting losses of $43bn and a resultant deterioration in the availability of capacity available to these firms.

Anglo-Saxon character

In his presentation, Haegeli also highlighted that the US “was at the centre of social inflation” but that it was also a major factor in specific other markets.

He pointed out the seemingly “Anglo-Saxon character” of this trend, with Anglosphere countries most affected, such as the UK seeing about 10% of social inflation, representing the highest level in Europe, plus high levels across the globe in both Australia and Canada.

However, he clarified that this was not to say that other European nations were not seeing this trend, with markets such as the Netherlands also seeing a growth “to a lesser degree”.

Structural differences in the legal systems of the non-Anglo-Saxon countries have also insulated these markets from the worst of social inflation, with Haegeli noting the lack of juries as particularly pertinent here.