Social inflation has increased liability claims in the U.S. by 57% over the past 10 years, reaching a peak increase of 7% in 2023, according to an analysis by Swiss Re.

These higher litigation costs are not only driving up claims, but also leading casualty insurers to restrict coverage, and some businesses to raise the cost of goods, the reinsurer said.

Social inflation is a phenomenon where insured liability claims increase faster than can be explained by economic factors like wages or core consumer price inflation, according to the report. Outsized awards and settlements in tort disputes are driven by various socioeconomic, legislative and litigation trends, such as legal system abuse, third-party litigation funding (TPLF) and escalating compensation verdicts.

The Rise of Social Inflation in the U.S.

Several key factors are driving the rise of social inflation in the U.S. There is an increased tendency to settle compensation claims in court, where tort law is based on precedent and cases are adjudicated by juries. TPLF is facilitating access to trials, and the legal system allows for the payment of substantial sums, particularly for bodily injury claims.

The trial bar’s use of psychology-based strategies and jurors’ attitudes toward social issues and corporations are also contributing factors, Swiss Re noted.

The impact of social inflation is evident in the numbers. In addition to the 57% increase in liability claims over the past decade, there were 27 court cases in 2023 alone that awarded compensation of more than $100 million each.

Challenges and Costs for Businesses

Rising litigation costs are creating an increasingly risky and costly environment for businesses in the U.S.

“Corporations face strong increases in legal defense costs, which usually will be passed on to consumers through higher prices,” the report stated. “Large corporations’ average defense costs increased by 10% annually between 2018 and 2023. The costs and risks of the liability regime can influence decisions about where to locate or do business.”

In the U.S., the trucking industry is one of the sectors most affected by mega verdicts, according to Swiss Re. Excess liability coverage has become unpredictable and expensive, forcing numerous insurers to either withdraw from the market altogether or drastically scale back the coverage they offer trucking companies.

While large trucking companies may be able to withstand a verdict that exceeds insurance limits, smaller companies are less likely to survive the cost of a settlement or verdict, Swiss Re stated.

Impact on Insurers

For insurers, the impact has been severe as claims costs skyrocket. U.S. commercial casualty insurance losses have grown at an average annual rate of 11% to $143 billion in 2023, surpassing the total insured losses from global natural catastrophes of $108 billion in the same year, the report stated.

“Over the past five years, U.S. liability lines exposed to bodily injury claims recorded cumulative underwriting losses of $43 billion,” stated Gianfranco Lot, Swiss Re’s chief underwriting officer P&C Re.

In response to these troubling trends, insurers have significantly reduced the capacity available to global businesses.

“The drivers of social inflation have come together to create a perfect storm in today’s liability market. Outcomes include high combined ratios and accumulation of adverse reserve development across several underwriting years. Rate increases have not compensated for rising loss costs,” the report’s authors stated.

Based on the current trajectory, the impact of surging claims growth could offset some of the industry’s earnings benefits in casualty insurance from higher interest rates within the next one to two years.

In addition to adjusting rates, insurers are also making changes to insurance programs, such as reducing the limits of liability for some covers and increasing attachment points for excess insurance and/or reinsurance, the report noted.

Signs of Social Inflation Beyond the U.S.

While social inflation is primarily a U.S. phenomenon, there are signs it is beginning to impact other countries with common-law legal systems such as the United Kingdom, Australia and Canada, where tort law is based on legal precedent. According to the analysis by Swiss Re, social inflation contributed over 10% of liability claims in the U.K. in 2023. This increase is largely due to spillover effects from the U.S., reflected in claims that a company submits to its U.K. insurer after a large compensation award in a U.S. court case.

Similarly, in Australia and Canada, the effect of social inflation was around 7% in 2023 due to an expansion of mass tort claims in those countries.

And while social inflation has not been meaningful so far in European countries like France and Germany, where tort law is governed by comprehensive civil codes and cases are adjudicated by professional judges rather than juries, that could change, Swiss Re cautioned. Significant legislative changes in E.U. product liability and representative actions directives open the door for mass tort claims to potentially expand in Europe in the future.

View the full report here. &