What's Driving Social Inflation?

Changes in the litigation environment, shifting public opinion, medical inflation and emerging risks are producing lots of so-called nuclear verdicts.

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KEY TAKEAWAYS

--AI and advanced analytics can help to identify claims that may be at risk for litigation or other escalation, before they get out of control.

--Where adjusters in traditional claims management systems revisit cases from time to time, AI is at work 24x7.

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Inflation is very much in the news these days, as the cost of virtually everything seems to be on an upward trajectory.

From an insurance industry perspective, though, inflation is a multifaceted problem; in parallel with broader economic trends, social inflation is driving up the cost of claims, pushing premiums higher, making it more difficult to accurately price risk and leading to higher costs for virtually everything we buy.

Consider the trucking industry. In 2021, jurors in Florida awarded a record-setting $1 billion to the family of an 18-year-old tragically killed in a multistage accident involving two trucking companies. Needless to say, that verdict made headlines, but it's not an isolated incident.

Between 2010 and 2018, the number of so-called nuclear verdicts or megaclaims increased by an alarming 235%. During that same period, the average seven-figure verdict in the trucking industry grew from $2.3 million to over $22 million, a nearly tenfold increase in just eight years. Megaclaims in the trucking industry are getting a lot higher, and there are a lot more of them.

This level of inflation is unsustainable. It's driving up premiums, and the costs must inevitably be absorbed into the prices that trucking companies charge their customers to transport products. Virtually every product we buy at the local supermarket or big box store is going up in price, partly because sellers must absorb the cost of higher premiums. For consumers, it's a hidden cost, but we're all paying for it.

What's Driving Social Inflation?

This trend can be attributed to four root causes: a high-stakes litigation environment, shifting public opinion fueled by increasing divisiveness, medical cost inflation and newly emerging risks such as public health emergencies and geopolitical strife.

High-stakes litigation has played the most prominent role. Plaintiffs' attorneys have stepped up their game, using every tool at their disposal to aggressively push for higher verdicts. Plaintiffs' attorneys are also investing heavily in tools like advanced analytics, doing everything they can to ferret out intelligence that might tip the scales in their favor.

Courtroom strategy has changed, as well. Plaintiffs' attorneys have shifted away from trying to win the sympathy of jurors, finding that they can often be more successful by appealing to a jury's inherent anger and distrust of large corporations. Fear appeal is undoubtedly playing a role in nuclear verdicts.

Another factor is the industrialization of claims litigation. In recent years, a new class of businesses has emerged, offering advance payments to plaintiffs in exchange for rights to recovery. That raises the stakes considerably, combining a powerful profit motive with a highly organized class of professional investors, attorneys and case managers. According to Bloomberg, the litigation funding industry is currently managing $12.4 billion of investments. Well-organized attorneys are industrializing the litigation process, and smart money is expecting a return on those investments.

Medical cost inflation is also a significant factor. New drugs and advances in medical treatment are pushing prices higher, while the costs of malpractice and liability insurance are exerting upward pressure, as well. Recently, a shortage of skilled labor has also contributed to medical inflation.

See also: What to Do About Rising Inflation?

What Can Insurance Carriers Do About Social Inflation?

Let's take a look at what carriers can do about this. For starters, they can step up their game with respect to intel. Artificial intelligence (AI) and advanced analytics can help to identify claims that may be at risk for litigation or other escalation.

Every claim is a moving target, of course, evolving as a claimant's medical condition changes, as attorneys get involved and even as public opinion shifts. Where traditional claims management methods require adjusters to revisit each case periodically, digesting new material as it becomes available, technology offers a more agile (and far less tedious) alternative. AI is at work 24x7, monitoring incoming claim data in real time, alerting case managers promptly and increasing the likelihood of resolving high-risk claims without ever going to court.

AI technology also offers a way to help prevent claims from escalating in the first place. Matching injured workers with the best health care provider for their specific case, for example, yields a win-win-win situation. Workers achieve better medical outcomes, employers save money and get valued people back to work faster and carriers resolve claims at a lower cost.

Public policy may have a role to play in stemming the tide of social inflation, but it takes considerable time and effort to produce results through legislation. In the absence of widespread public awareness and pressure, political solutions to the problem seem unlikely.

That leaves individual carriers to repeat the mantra, "work smarter, not harder." Innovation offers a path to dampen the impact of social inflation, and AI technology has delivered very impressive results to date.

As first published in WorkCompCentral.


Heather Wilson

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Heather Wilson

Heather H. Wilson is chief executive officer of CLARA Analytics

She has more than a decade of executive experience in data, analytics and artificial intelligence, including as global head of innovation and advanced technology at Kaiser Permanente and chief data officer of AIG.

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