R Street study: Insurers need “more aggressive strategies” to combat social inflation
A new study from R Street has concluded that unchecked social inflation could become a “self perpetuating phenomenon”, with the think tank urging insurers and defence counsel to deploy more aggressive strategies to push back on tactics violating existing norms of courtroom behaviour.
“If unchecked, social inflation, driven by the myriad factors discussed in this study, will become a self-perpetuating phenomenon that sends improper signals regarding the value of damages to jurors, judges and defendants,” the study concluded.
It added: “This will lead to higher insurance premiums, financial strain on insurers, depletion of municipal resources and disincentives for businesses to take risks. This hidden ‘tort tax’ benefits no one except plaintiff attorneys and their clients who engage in practices that lead to social inflation.”
The study was authored by Jerry Theodorou, director of the finance, insurance and trade policy program at R Street Institute. Theodorou is a former director of insurance research at Conning, and also previously worked at AIG in a variety of roles.
Two broad responses; three specific courses of action
R Street suggested that there are two broad responses that need to be pursued to combat the perpetuation of social inflationary pressures.
One is to influence the development of public policy at the state and federal levels to reveal and control excesses.
The second is for “insurers and defence counsel to adopt and deploy more aggressive strategies that push back and formally object to tactics violating existing norms of courtroom behaviour”.
The study identified three specific courses of action.
The first is pursuing public policy education and advocacy to push back against litigation finance, anchoring and phantom damages in state capitols.
The second is creating broad-based coalitions that go beyond insurers, insurer associations, tort reform organisations and chambers of commerce. “These should include credible business and municipal employees who represent those who would be harmed,” the study said.
The final course of action is defence attorneys aggressively pushing back against use of anchoring and emotional appeals with objections citing violations of the Rules of Evidence and other checks on excessive non-economic damages.
Use of social inflation as a term explodes
R Street noted that the term social inflation was first encountered in Berkshire Hathaway’s 1977 letter to shareholders, in which Warren Buffett referred to it as “a broad definition by society and juries of what is covered by insurance policies”.
The study said the term “hibernated” until a 2010 white paper on social inflation by reinsurer PartnerRe, which stated that social inflation has led to a profusion of court awards that are out of proportion to actual damages sustained.
Since then there has been a “veritable explosion” in the frequency of the term’s use, the study said.
R Street stated that social inflation is not universally agreed upon, and that some believe it simply does not exist.
“Social inflation is neither a hoax nor the latest insurance industry buzzword, but it is also not just another hard market phase of the insurance cycle,” the study stated.
To back up the argument that social inflation is real, R Street pointed to drivers including structure and strategy changes in the plaintiff bar, attorney advertising, litigation funding, phantom billing and the weaknesses of the defence bar.
The 2001 to 2009 era of tort reforms, as well as a change in the pleading standard, created headwinds for the plaintiff bar, which responded with a change in strategy.
This included employing effective use of human psychology through reptile theory, psychodrama, anchoring and replacing sympathy for the plaintiff with anger at a “faceless” corporate defendants,
Today’s plaintiff bar is also characterised by a cooperative model where attorneys share strategies, information and witnesses, R Street said.
The think tank also pointed to medical malpractice attorneys responding to tort reforms by moving to practice areas where large awards were more readily attainable, such as commercial auto liability litigation and D&O liability litigation.
R Street pointed to a variety of data to show the impact of social inflation.
This included Swiss Re reporting that the median cost of the top 50 bodily injury claims had risen from $28mn in 2014 to $54mn in 2018.
In addition, Zywave-owned data provider Advisen found that the median cost of a single-fatality award in 2001 was $1.45mn but has shot up since 2015 to $3.85mn in 2020.
Advisen data also suggested that the average cost of a gender/sexual discrimination and harassment case from 2017-2019 was $2.6mn, an 86 percent increase from the $1.4mn in the three years prior.
The median cost of a jury award over $10mn has also increased by 35 percent between 2015 and 2020, from $20mn to $27mn, while the number of cases with verdicts over $20mn rose from 89 in 2017 to 102 in 2019, according to Advisen figures.
(Re)insurers have made recent comments about the impact of social inflation on third-quarter earnings calls, the study noted.
RenaissanceRe CEO Kevin O’Donnell mentioned social inflation seven times on its Q3 earnings call, stating “social inflation will continue plaguing the industry and priceinflation will increasingly push up loss costs”.
The Hanover commented that “we’re assuming social inflation is there. It hasn’t gone away. The large cases are just delayed”.
Travelers CEO Alan Schnitzer stated on the insurer’s call: “I think of social inflation as being driven more by things like aggressive tactics by the plaintiffs’ bar and advertising and litigation finance and things like that.”