Social inflation has impacted many commercial insurance lines, but it has particularly affected the auto insurance market. This is primarily because of trends in the trucking sector, such as an increase in expensive lawsuits and settlements brought on by an increase in crash frequency and severity.
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In these challenging times, it’s critical for businesses to comprehend social inflation and know how to respond appropriately. For more details on the main causes of social inflation, how it is affecting the market for commercial auto insurance, and what businesses can do to alleviate related coverage concerns, read the article after this one.
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the main factors causing social inflation
Over the past few years, a variety of factors have frequently been cited as causes of social inflation problems. These elements consist of the following:
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Public opinion of corporations
Over the past decade, public trust in businesses, particularly large corporations, has significantly declined. This shift is largely due to the spread of extreme ideas on media platforms and a growing expectation for businesses to be accountable for damages, irrespective of their negligence. This has greatly influenced jury perceptions in court, with jurors increasingly siding with plaintiffs, especially against companies with tarnished reputations. Lawyers for plaintiffs often prioritize appealing to jury emotions over presenting factual evidence. This tendency is amplified by the belief that large businesses can easily afford settlements, leading to a rise in social inflation due to larger settlements and increased claim costs. This environment underscores the critical challenge businesses face in managing public perception and the direct impact this has on legal outcomes and financial liabilities.
Increased litigation, or more specifically, litigation funding, is one of the main causes of social inflation. Litigation funding refers to a third party that finances a lawsuit, receiving a portion of the settlement in return. In the past, the high cost of attorney fees often deterred plaintiffs from going to trial. However, litigation funding allows a third party to cover most or all litigation costs, leading to an increase in the number of cases filed. Litigation funding is not only becoming more widespread; it also raises the overall cost of litigation, sometimes to seven figures. This is so that plaintiffs can pursue their cases further and ask for higher settlement amounts.
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Tort reform reversals
To reduce litigation, laws are referred to as tort reform. Tort reforms are used, in particular, to stop pointless lawsuits and maintain the laws that stop unfair business practices. Numerous states have passed tort reforms over the past few decades, which have reduced the number of lawsuits and capped punitive damages. However, several states have altered tort reforms recently or have contested their constitutionality. Tort reform complicates matters because it is largely dependent on state interests, which is uncertain. Punitive and non-economic damages may be less restricted if tort reform continues to deteriorate; this could increase the cost of claims and exacerbate social inflation.
The combination of these factors has led to an increase in business lawsuits and associated insurance claims. Additionally, the costs of the settlements reached as a result of this litigation have skyrocketed, which has resulted in an increase in the number of nuclear verdicts—jury awards with fines exceeding $10 million. The median cost of a nuclear verdict rose from $20 million to $27 million between 2015 and 2020, a 35% increase, according to recent loss data from Advisen (a Zywave company).
The ongoing COVID-19 pandemic is expected to create long-lasting effects and trends, influencing future nuclear verdicts in the upcoming months and years. As a result, we will likely see an increase in the cost and frequency of these verdicts, followed by higher insurance claim costs and issues with social inflation.
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How the Market for Commercial Auto Insurance is Affected by Social Inflation
All commercial lines of coverage may experience difficulties as a result of social inflation. In particular, social inflation’s rising litigation costs frequently lead to expensive insurance claims, forcing insurers to make sizable payouts to impacted policyholders. These large payouts may have a negative impact on underwriting profits and loss ratios. Insurance companies are more likely to raise policyholders’ premium costs and impose new coverage restrictions in order to mitigate such losses.
While these issues have affected the entire commercial insurance market, social inflation has particularly affected the auto insurance sector. This is mainly because insurers had already lost money on the commercial auto market over the previous ten years. In spite of raising the price of commercial auto premiums for more than 40 consecutive quarters, starting in Q3 of 2011, commercial auto underwriters experienced underwriting losses of more than $22 billion between 2011 and 2020, according to a recent report from AM Best.
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As a result, growing social inflation concerns have only served to exacerbate the commercial auto sector’s already-existing profitability issues, prolonging the hard market and posing ongoing difficulties for both insurers and policyholders. Experts in the field anticipate that this competitive market will remain a problem through 2022 and beyond.
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Due to higher premium rates, reduced capacity, and stricter policy requirements or restrictions, the majority of businesses with commercial auto exposures—regardless of their industry or vehicle class—will likely have a more challenging renewal process. Additionally, policyholders who have larger fleets or a history of losses may see more drastic rate increases.
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When examining the factors that have contributed to the commercial auto insurance market’s persistent profitability issues and its increased exposure to social inflation, it’s critical to keep in mind that a number of trends within the trucking sector have also played a role in these market difficulties.
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In particular, industry-specific changes have led to more lawsuits, more nuclear verdicts, and ultimately higher losses for the commercial auto industry as a whole. These trends in the trucking industry include:
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Increased accident frequency—First, fatal truck accidents have increased in frequency over the past ten years, which has resulted in more litigation and related costs. According to the National Safety Council (NSC), there are now more than 5,000 fatal crashes involving large trucks annually, a 43% increase since 2010.
The National Highway Traffic Safety Administration connects these accidents to an increase in risky or careless driving practices, such as speeding, hard braking, and distracted driving.
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A more serious accident—
Road incidents have increased in severity in addition to accident frequency. The increase in fatal truck accidents mentioned earlier and the rising expense of a single fatality are two indicators of this increase in severity. The median cost of a single fatality increased by 60% from $2.3 million in 2010 to $3.7 million in 2020, according to loss data from Advisen (a Zywave company). Along with fatalities, road accidents that resulted in serious injuries have also increased crash severity. The NSC’s data showed that truck crashes annually cause 160,000 injuries. These injuries frequently necessitate numerous doctor visits, intricate procedures (such as surgery), and sophisticated treatment plans, which can prolong recovery time and have an impact on total medical expenses. In any case, more lawsuits and associated losses have increased in the trucking industry as a result of such catastrophic accidents.
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Increased violations
– Last but not least, there have been more lawsuits (and associated costs) in the trucking industry as a result of both driver and vehicle violations. These infractions may be the result of inadequate driver safety training and subpar vehicle maintenance procedures. However, The most frequent driver infractions, according to the most recent Federal Motor Carrier Safety Administration (FMCSA) data, are insufficient licensing, problems with driving records, and issues with electronic logging devices. The most frequent car violations, however, involve broken brakes, malfunctioning turn signals, and tire issues. The most common violations that have led to verdicts in favor of plaintiffs, according to the American Transportation Research Institute (ATRI), are those that involve hours-of-service regulations. Bad driver histories, fatigued driving, and the use of controlled substances while operating a motor vehicle.
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